Buyout of Kinoplex a sign of boom in Russia's movie business

By bne IntelliNews December 6, 2007

Ben Aris in Moscow -

Simon Dunlop

What do you do when you are poor, depressed or the weather is rubbish? Cinema is one of those little luxuries that everyone can afford and in Russia, where the weather is usually bad and there is not much else to do in most regional cities, movie-going has been booming.

The trouble is Russia's movie theatres are mostly clapped out Soviet-era halls with none of the mod-cons available in the West. True, the Soviet authorities made sure there was at least one cinema in any urban settlement of any size, but they were mostly used for propaganda purposes and little has been done to make them more comfortable since.

That is changing fast. Simon Dunlop is an ebullient Englishman and well-known Moscow entrepreneur. He first arrived in Russia in 1992, when still in his 20s, with a container of Marlboro cigarettes and a brief from his boss, British entrepreneur Tiny Rowland, to see if he could sell them without getting ripped off, like most other foreign businessmen trying to get a toehold in the Russian market. The cigarettes took only a few days to sell, but unusually Dunlop hung on to the money and almost immediately ordered 20 more containers. The business flourished and Dunlop was soon snapped up by Phillip Morris.

Dunlop went on to build a multi-billion-dollar, fast-moving consumer goods business before finally tiring of the tobacco industry and moved on. Following a successful spell as a snack food entrepreneur building one of Russia's leading snack companies, Dunlop looked around for something new to do and founded a private equity group targeting the Russian consumer sector, their first investment being in the cinema operation business.

"It's the classic Russian story: rising consumer spending power, inadequate and out-of-date services in the face of high demand," says Dunlop. "The wealth of Russia is not the oil in the ground but the pennies in the pockets of the more than 142m people."

Russian movies

Russia's movie industry is not growing: it is reviving. The Soviets may have made exploding tellies, but the films they showed on them were world class. Russia is, after all, the home of Latvian-born Sergei Eisenstein, who revolutionised the movie-making business in the 1920s and was a favourite of Stalin's, also a movie buff. Eisenstein's "Battleship Potemkin" rocked the cinematic world on its release in 1920 and helped found a huge Soviet film industry centred around Mosfilm and Lenfilm. At its peak, box office sales in Soviet Russia were higher than those in the US (although worth less), says Dunlop.

"One of the things that is unique about this business in Russia is that unlike the other countries of the CIS or Central Europe, Russia already has a long and rich tradition of filmmaking," says Dunlop. "There has been a vacuum in the Russian industry for most of the last decade, but it is now starting to rapidly fill in."

The collapse of the Soviet Union forced a decade-long hiatus on the Russian movie industry, but it has come bouncing back with a vengeance in the last few years. A total of 13 Russian-produced films were released in 1997 - including "Hi Fools, Thief and Princes of Beans" - that brought in a total of $6m at box offices and grossed a paltry $38,462 on average, according to Kinobisinessmagazine.

Last year, some 80 Russian films were made including the runaway successes "Day Watch," a sequel to the 2004 vampire flick "Nightwatch," which grossed $20m by itself. Indeed, "Nightwatch" was so successful it was picked up by Fox Searchlight Pictures and translated into English for an international audience. On average, Russian films were taking in about $1.5m at the box office in 2006 and the total box take leapt to $420m. Russian films have already overtaken Hollywood as top box office earners in Russia: the top three best-selling films of all time in Russia are "9th Company," "Turkish Gambit" and "Nightwatch" (in that order), which beat out "Lord of the Rings 3," "Terminator 3" and "Troy" as the best-selling foreign films.


With serious money arriving in the movie industry, Dunlop raised a significant tranche of capital this year to effect a buy-out of Kinoplex, which together with fellow shareholder and Managing Director, Andrei Orekhov, they plan to develop into Russia's premier regional cinema operator. They have not been sitting on their hands.

"We already have four complexes and five opening in the next 12 months, in Yekaterinburg we have two and we will open another one in 2009. We have the leading venue in Volgograd with another one slated to open next year. We also have a venue in Togliatti and we have openings planned in Samara, Ufa and Novosibirsk next year... We plan to add more than 35 screens per year over the next five years," says Dunlop.

The group is finalising additional funding which will secure their development plans through to the end of 2009 establishing it as one of the fastest-growing operators in Russia. And these are no "Red Star" entertainment centres either. Costing about $7m a piece, Kinoplex's cinemas are purpose built as the anchor tenant in the shopping malls mushrooming all over Russia. The company has ignored Moscow and St Petersburg, the biggest cities in Russia, to focus exclusively on the bigger regional cities where growth is fastest.

Like with so many "catch-up" industries in Russia, the company is leapfrogging over the standards of Western cinema's and going straight to state-of-the-art picture and sound systems. Each Kinoplex has at least eight screens with the best equipment available on international markets, ergonomically designed chairs (including love seats in the back row for couples), micro-climate control and every other mod-con you can think of. New venues are equipped to handle digital movies, a direction that the industry is now moving to, as well as video conferencing equipment, which can link all the company's cinemas for corporate events.

The competition

Kinoplex is not the first into the cinema operator's business. Maybe the most famous cinema in Russia, after the Kino teatre Rossiya on Pushkin Square, is the Kodak Kinomir, just around the corner on Tverskaya in central Moscow. Arguably the first modern cinema to be set up in Russia shortly after the 1998 financial crisis, Kinomir is owned by Paul Heth and his Rising Star Media. Heth now works with Scandinavian developer Ikea Mega that has a total of three venues in Moscow and two in St Petersburg, but it is rolling out new venues very slowly.

In all, there are less than 1,100 screens in all of Russia of which about two-thirds are modern, but mainly concentrated in Moscow and St Petersburg. There should be, given the size of the population, four times that number.

The market leader is Karo Film with 130 screens around the country, half of which are multiplex and half traditional Soviet-era screens. Oligarch Vladimir Potanin's ProfMedia is also a big player in this game with the cinema subsidiary Cinema Park and screens in Moscow and St Petersburg and some regions. Although Karo Film is the biggest operator in Russia today, it still only has an 8% market share.

"There are very few players in a massively under-serviced sector. With the growth potential for cinema operators we expect that in 4-5 years this will be a very valuable business," says Dunlop. "A mid-sized cinema operator in America has more screens than all the screens in Russia."

Kinoplex's full monty

Cinemas are a very attractive anchor tenant for mall developers, as they bring in the traffic that allows the mall to charge more rent on the shops that fill the galleries. Kinoplex follows this idea to its logical conclusion. In addition to the movie screens, the company offers the whole gamut of an evening out: the cinemas incorporate a bowling alley, a gaming café with giant screens and a food court. The ancillary businesses also help smooth out the cash flows, which are inevitably somewhat dependent on how good the films are. "Kinoplex becomes the premier venue for an evening out for the whole family. You can catch the latest movie, have dinner and then go and shoot some pool," says Dunlop.

And with so few top-quality operators in Russia, the economics of the relationship between operators and movie distributors is very different to that in, say, the US. "In America there are so many screens that the ball is in the distributor's court, who typically takes 90% of the ticket sales in the first week. The operators don't mind so much as they can make as much on the popcorn and Pepsi sales as they do from ticket sales. But in subsequent weeks, the split can move to as much as 80:20 the other way as the distributor wants the film to play as long as possible," says Dunlop. "But in Russia the distributor is struggling to find screens on which to play his film so the ticket sales split is closer to 50:50 from the start."

Kinoplex is already looking to the future - digital. One of the main costs an operator has is the distribution costs of physically getting a roll of film securely from Los Angeles to Krasnoyarsk. Each print costs about $2,500 to produce and transport, which limits the cinema to having approximately 30 films in its repertoire.

However, within the next year or two distribution companies will make the move to digital distribution, which cuts this cost to almost zero - a huge boon in a country that covers 11 times zones. "It will have a dramatic impact on the business. If you remove the distribution cost then instead of being limited to a couple of dozen films a month you can choose from a catalogue of literally hundreds. It means that you can cater to the niches and fill the quieter patches during weekdays by doing a retrospective on a director or a series of classics back-to-back," says Dunlop.

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