Business | General
Waiting for the crowds
Dressed in a garish blue-and-white striped shirt as he stood near the beginning of Hong Kong Disneyland's Main Street, USA, on Monday, February 19, Bill Ernest might have been mistaken for one of the park's characters rather than its managing director.
- The Telegraph Group Limited
- Published: 00:00 March 1, 2007
Dressed in a garish blue-and-white striped shirt as he stood near the beginning of Hong Kong Disneyland's Main Street, USA, on Monday, February 19, Bill Ernest might have been mistaken for one of the park's characters rather than its managing director.
"Isn't this great?" he beamed: "It's a beautiful day, and the crowds are coming."
As the man in charge of Disney's Hong Kong operation spoke, a steady stream of families and young couples swept past him on their way to the rides of Tomorrowland and Fantasyland. Among them, the usual paraphernalia of Disney characters posed for pictures with excited children, while a trio of oversized pigs scampered around, a reminder of celebrations to welcome the Chinese New Year. For the first time in six decades, China is celebrating the advent of a Year of the Golden Pig, an event thought by astrologers to herald great fortune.
Ernest could be forgiven for hoping Disney will be able to grab its share of luck in the coming months. Since the park opened in September 2005, visitor numbers have fallen far short of the original estimates.
Earlier this month, in a generally upbeat set of quarterly results for the Magic Kingdom, the California-based company revealed for the first time just how far it remains from realising its ambitions in China.
In a little-noticed section of its filing to the US Securities and Exchange Commission, the company said that poor attendances and lower-than-expected guest spending at its Hong Kong park meant it would not meet commitments to its commercial lenders without a sharp upturn in visitor numbers.
"Hong Kong Disneyland intends to seek further covenant waivers or other modifications to its loan arrangements," it read. It went on to warn that the park may "need to refinance the commercial term loan" [of £150 million] if its syndicate of banks decides to accelerate the repayment timetable.
It was not the kind of admission Disney wanted to be associated with what could one day become one of its biggest global markets.
"This is a seasonal business," insisted Ernest. "Our busiest periods are our fiscal third and fourth quarters [April to September], and we have resolved the problems we experienced early on."
He added that the park had seen "steady growth" in visitor numbers during the preceding month, aided by changes to ticketing arrangements. "The week before last, 66 per cent of our guests were from the mainland, which is higher than last new year and above average for the year," he said. "That is good news."
But he declined to say whether the park would reach its daily capacity of 34,000 during the Lunar New Year period.
As lunchtime approached, large areas of Hong Kong Disneyland were conspicuously free of visitors. The Jungle River Cruise, one of the park's main attractions, sailed past virtually empty, and queues for popular rides, such as the Space Mountain roller-coaster, were as short as 10 minutes.
Disney officials insisted the lack of queues was partly the result of more efficient management; certainly, the tourists inside the park were not complaining about their smooth passage around it.
"This is my first time here and it is very impressive. You do not need to wait a long time to experience the rides," said Yau Kau-shen, who was visiting with her boyfriend.
Ernest, along with other Disney executives, might have considered that something of a mixed blessing. Almost as soon as it opened its doors for the first time nearly 18 months ago, Hong Kong Disneyland resembled a case study in public relations disasters.
Hiccups
Allegations of sweatshop labour, an embarrassing row over plans to serve shark's fin soup in its restaurants - quickly abandoned - and a ticketing fiasco this time last year, when visitors climbed over fences to avoid long queues, saw a torrent of press criticism in Hong Kong and mainland China.
In its first year, the park attracted 5.2 million visitors, 400,000 short of its target, and many of those who did come complained that it was too small and had little to excite those unfamiliar with Disney's cast of characters.
"People would point out to us that they had not grown up with our movies, or with our retail products. So much of what was here or in our marketing was not relevant to them," said Ernest.
Poor marketing is, he hopes, a thing of the past. Ernest has parachuted in a Disney veteran from America to take charge of advertising, which targets young adults in wealthier southern China.
But the biggest controversy associated with Disney's first Chinese theme park has been a political one. Under the agreement signed in 1999 between the company and the Hong Kong government, Disney secured a HK$6 billion (£392 million) government loan repayable over 25 years at a sharp discount to the base rate.
On top of the loan, the government forked out HK$16 billion for land reclamation and redevelopment, while Disney pays £61 million ($119 million) a year in rent, and is understood to benefit from a series of management and performance-related fees. In return, it owns a 43 per cent share of Hong Kong International Theme Parks Limited, the holding company for Hong Kong Disneyland, with the government holding the balance.
Both Disney and the government declined to comment on the arrangements, citing 'commercial confidentiality'. However, there are suggestions that the government - which denies it - or Disney may now be seeking to offload some of their stakes to an outside investor, as laid down in the original shareholder agreement, which states that Disney must retain at least a 33 per cent stake.
The speculation has been fuelled by the potential need for Disney to refinance its commercial loan - not yet drawn upon - from an unidentified syndicate of banks.
"It's basically a case of lightning striking twice," says one financier, in reference to the financial problems which dogged Disneyland Resort Paris.
In 1994, the parent company of the French attraction was forced to restructure its debts and ultimately brought in Saudi Arabia's Prince Al Waleed as an investor.
Disney now owns 39.8 per cent of Eurodisney SCA, which, despite signs of a turnaround, remains laden with debt of almost £1.3 billion.
Implications
There are broader implications for Disney from the performance of the Hong Kong theme park than just its financial health. From the outset, executives at the business's Burbank headquarters viewed Hong Kong Disneyland as a springboard to promote awareness of the Disney name among the mainland Chinese population and cement ties with Beijing.
"The last thing they want is a turkey which undermines their whole China strategy," says the banker.
When Bob Iger replaced Michael Eisner in October 2005 as Disney's first new chief executive in 21 years, he was quick to set out his vision for the world's most famous media company. The company's priorities would be to focus on content, technology and international growth. "If there's one part of the group that's right at the bullseye of those three things, we're it," said Ernest as he stood in Hong Kong Disneyland last week.
Disney's quarterly earnings, announced earlier this month, revealed that profit had more than doubled from the comparable period last year. Buoyant sales of DVDs of hit films such as Pirates of the Caribbean: Dead Man's Chest, and a strong performance from the Disney Channel network were among the catalysts. Just a couple of years earlier, before Iger took the helm, earnings growth like that seemed a far-off dream. The latter stages of Eisner's tenure were dogged by shareholder unrest and lacklustre performances in Disney's consumer products, parks and resorts, and media networks divisions.
Despite the turnaround, China remains something of a problem.
True, Disney is making inroads in live entertainment and film production and distribution on the mainland. It also reaches TV viewers hungry for Western content through Dragon Club, a Disney-branded programming stream shown in conjunction with state broadcasters.
But Beijing's unremittingly strict stance on foreign media ownership remains an obstacle to what would be its most important step there: the launch of a Disney-branded television channel. The Chinese government is also taking a more sober view of foreign internet content, a stance that is hurting overseas media companies such as Disney. Rampant piracy in China is another major headache.
On top of that, long-heralded plans for a Disney theme park on the mainland have been - at the very least - delayed by Shanghai's on-going, and widening, investigation into the alleged misuse of state pension funds.
Billions of dollars are said to have been splurged on unauthorised property developments, and with the sacking (and in some cases, arrest) of some of the city's top officials, major real estate and foreign investment commitments have been sidelined. "The changes up there have been big ones. We think a decision [about a Shanghai Disneyland] is unlikely for some time," said Ernest.
As for Hong Kong's Disney theme park, the original deal with the government envisaged an expansion that would see it draw in 10 million visitors annually by 2020. Three new attractions will open this year, including a parade called Mickey's Waterworks.
"Hong Kong Disneyland is providing a halo effect on building the Disney brand in China," says a company spokeswoman.
Even so, that number looks a long way off. With much of the rest of the Magic Kingdom seemingly firing on all cylinders, Ernest might want to hang on to those three lucky pigs a little while longer.
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