In April 2011 in Shanghai, Disney Resorts made its official arrival in the city. The multinational entertainment company broke ground on a new resort site on the outskirts of Shanghai, marking the occasion with a celebration that included a choir singing in both English and Mandarin and Mickey Mouse dancing onstage in a traditional Chinese costume.
"This is a defining moment in our company's history," said Disney CEO Robert Iger to a crowd. The new park, he promised, would be "both authentically Disney and distinctly Chinese."
Disney's arrival is the most high-profile example of a theme-park boom taking place in China. The government officials and Disney officers that grabbed shovels on that afternoon were at the center of a trend that has new parks opening in cities all over China and, according to analysts, attracted a total of over 100 million attendees in 2011.
"There has been amazing growth in the Chinese theme park market," says John Gerner, the founder of a U.S.-based consulting firm called Leisure Business. "The government is encouraging domestic consumption — and when [consumers] spend more internally, one of the things they spend on is leisure."
Theme park development, says Gerner, tends to follow the growth of the middle class. With more disposable income, people have become more interested in spending on leisure and entertainment. The rule, he says, applies to growth in the middle class not only nationally but regionally within a given country. "If a market can support a theme park, then you can be sure that it has a pretty good middle class," he says.
Gerner'shypothesis is supported by climbing park attendance numbers in China. The country's middle class has expanded rapidly in the last two decades, and in 2011 alone, six major theme parks opened across the country, many in smaller, second-tier cities. These included two water parks, two sea-life parks and theme parks in the cities of Qingdao and Changzhou, a neighbor to Shanghai. By the year 2020, analysts expect theme park attendance will double to more than 200 million each year.
The rush to build new theme parks and capitalize on this new market, however, is no measure of the quality of parks that are opening. Many parks are still not turning a profit and many are aging quickly, without any reinvestment from park runners. As Disney and other international parks arrive, however, analysts expect that China's theme parks will have to improve to compete. When Disney opens in 2015, a new and improved theme park boom is expected.
The Township Model
China's first theme park opened in the early 1990s, added to residential developments as a bonus — an extra attraction for the city's new residents. "[Developers] had the idea of building a town, and decided to include a number of theme parks to anchor the development," says Chris Yoshii, the global director of the consulting group AECOM. "That township model has caught on. It has been replicated in China and to some extent in South East Asia."
The attraction of combining a residential and commercial development with a theme park, Yoshii says, has to do with the intensive capital requirements that come along with theme parks. Parks are attractive to local governments because they can attract tourism and encourage locals to spend their disposable income within the city. A successful park, however, requires infrastructure and a large initial investment. "A lot of the cities themselves don't have money to invest themselves, but they do have land," says Yoshii. To get their theme parks, cities will offer land to developers willing to include a theme park in their plan. This way, Yoshii says, "The city gets what they want without putting out much money. All they have to do is issue land approvals."
In turn, a developer can include residential and commercial units in their theme park "township." These aspects of the development offer a quicker return on investment. "They can use the residential element to pay for some of the infrastructure costs," says Yoshii. "And at the end, you have a park that is generating a good return while some of the capital has already been paid back."
While the majority of theme parks in China are built this way, the formula does not always produce stellar results. In some cases, developers have not delivered on their promise to develop a theme park and have focused instead on residential and commercial real estate alone. In others, the theme park is an afterthought –poorly put together, poorly maintained and poorly run.
"Surveys show that the majority of theme parks [in China] have been loss making," points out Michel Brekelmans, the co-head of L.E.K. Consulting's China operationsbased in Shanghai. Local governments will often offer land at a steep discount to developers who include a theme park in their plan. "Not surprisingly, many of these parks have ben unsuccessful and leave visitors with a disappointing experience," Brekelmans says.
China's earliest parks were intended to present China to foreign tourists. These include the parks Splendid China and China Folk Cultural Village. Soon after, a park called Window of the World opened in Shenzhen, offering visitors a look at theworld-the pyramids, the Eiffel Tower-on a small scale. China's largest theme park chain, Happy Valley, opened its first park in the 1990s, offering a more Western-style format, introducing its own characters and dividing the park into different themed areas.
While Happy Valley has been successful and expanded, the majority of parks opening in China are either animal themed or loose adaptations of existing theme parks. According to Brekelmans, the majority of new parks will present visitors with an amalgamation of thrill rides, roller coasters and Ferris wheels. "More recently local operators are realizing that theming … is a key factor in marketing the park and creating the overall experience," he says. "We're seeing more attempts to come up with original concepts."
Although Brekelmans believes the majority of new parks opening in China are still poorly planned and unlikely, in the long run, to succeed, he also sees changes in the market. With the arrival of Disney and other multinational projects, he says, more expertise and dedication is being shown across the board. "A wave of [joint ventures] with foreign players is entering the market, bringing with them the skills and concepts to succeed in China," he says. "Slowly local players are learning lessons, and many smaller upstarts have exited the market."
Disney is not the only multinational theme park company to arrive in China. DreamWorks recently announced they would be investing more than $3 billion in a dining, shopping and entertaining district that will include theme park attractions based on some of the animation studio's popular movies. Both companies are entering the market in joint-venture structures, partnering with the Chinese state-owned enterprise Shanghai Shendi, in Disney's case, and China Media Capital, Shanghai Media Group and Shanghai Alliance Investment Ltd., in DreamWorks' project.
While the presence of international players may drive some domestic theme parks out of business, Yoshii says in the past, the arrival of Disney Resorts in international markets hasactually boosted the theme park market overall. "When parks like Universal or Disney open, they raise the standards of what people in that market consider a good theme park environment," he says. At the same time, the arrival of a Disney park helps familiarize people with what a theme park experience entails.
"Americans are very familiar with theme parks," points out Leisure Business's Gerner. "Walt Disney was very smart when he worked out a deal with the ABC TV network to do a show." The Disney show helped promote the theme park to its audience, educating them on what to expect from the Disney experience. "Outside the U.S., a lot of people don't really know what theme parks are, and it takes quite a bit to educate them," he notes. "This is not in any way a formal education, but by hearing commercials and news stories people get a better understanding."
This education process happens faster when there is a major resort entering a market. For these reasons, Gerner says, the arrival of Disney typically leads to an increase in the number of theme parks in a market. In Japan, for example, the opening of Tokyo Disney led to a wave of new theme parks, many of which are still very successful.Disney's high ticket-prices also have a tendency to buoy the rest of the market, says Yoshii. "Disney is going to come in at the highest price, and that has a bit of an umbrella effect," he notes. "They can raise their pricing a little bit and still be under Disney. Overall, it's a positive impact."
Shanghai Disney is expected to anchor an entertainment district that will fit the pattern of other Chinese theme parks. The Disney resort will include a theme park, an entertainment district, a shopping district and restaurants. Shanghai Shendi, says Yoshii, will be responsible for the residential and other development around the Disney resort.
As more multinationals arrive, adapting to the Chinese market has been a priority. Disney has emphasized the fact that their park will incorporate Chinese cultural elements to the traditional Disney fare. Modifications to the design of the park have been announced in public, including the elimination of "Main Street," a central feature in all other Disney resorts, and the inclusion of the largest storybook castle in the world.
Chinese audiences, says Yoshii, do demonstrate different preferences from their Western counterparts. "It's less about the thrill roller coaster in China," he says. "There's a very strong preference for shows. Chinese audiences tend to like music and dancing and animal shows. These are more passive attractions."
While multinational operators are trying to adapt to Chinese consumer habits, Brekelmans believes that China's theme park developers are slowly becoming more creative and savvy about the market, adding their own cultural flavor to home-grown parks. "We are seeing attempts to come up with original concepts based on Chinese culture and history such as Ming dynasty parks or The Monkey God," he says. "These could be hugely successful if executed to high operational standards, as they would enhance the overall experience and customer satisfaction which would drive return visits and merchandising sales."
Part of the learning curve, he adds, is the realization that smart marketing and well-placed reinvestment provide an important boost to theme park revenue. Spending on retail and concessions make up an important part of park profits. "Besides ticket revenue, themeparks also need to drive value by getting people to open their wallet for drinks, food and merchandising," says Brekelmans. "Creating a strong themed experience is critical in this respect."
Globally, the most successful parks also continuously invest in new attractions, opening a new ride or a new show on a regular schedule. "For theme parks to be successful on their own, it's critical to drive repeat visits," Brekelmans says. This means re-investment, offering new attractions that can bring visitors back for their second, third and fourth visits. "In China, this does not necessarily mean coming up with a new attraction every two years, as these can be highly risky and capital intensive investments," Brekelmans says. "China has a great tradition in staged acrobatic performances, for instance, and these could be a great draw for people if done well and to a high standard."
While many of the parks opening today are buoyed by growth in the market overall, Brekelmans believes the operators who understand these dynamics have a better chance at survival in the long-term. And, while many of today's new parks will close, China's theme park boom isn't expected to slow down any time soon.
"There will likely be another wave of development after Disney's arrival," says Gerner. "That wave may include more foreign brands, but it will continue to boost the domestic brands as well."