Beverage pricing: They're still not listening

^ I can buy that. But what measure would you use to judge " how the business would be able to perform going forward?"

Predicting the future is very tricky business. The National Weather Service millions of $$$ in equipment, highly educated people and they still have problems saying if it will rain tomorrow.

If CF's EBITDA had held steady--and remember it had been growing every year--the distribution would exisit, parks would not be put of for sale, etc. As you point out, the company you worked for did not have problems "until 2001 when everyone stopped buying advertising" at which point the decline in EBITDA probably reflected the company's problems very accurately.

We can agree that various decisions made by CF have NOT maximized EBITDA. (And I will leave the increased admission vs decreased food & bev prices, the increased attendance/lower per cap vs fewer people having more money pried from their pockets, etc to others. Cue Gonch :)) But I think it is safe to say that until the Great Recession hit, CF was chugging along adequately. And that's not being fanboy--it reflects fiscal reality. The Great Recession hit everyone--and a company with $1.77b in debt has less room for error than one with $400m in debt.

Anyone can grow EBITDA buy overpaying for an acquisition, which is your point. But CF had--until the Great Recession--enough cash flow to pay interest, maintain their distribution, and make $75m in capex and still have $55m per year to pay down debt. ($1.7b divided by $55m per year would retire debt in 30 years, not accounting for the decreased interest expense as debt is paid down.) CF's mistake appears to be using short term financing instead of 30 year bonds to acquire PP.

Interesting, though. If you assume that CF never purchases PP and that its EBITDA grows from $190m to, say, $230m and it pays out $100m (I think the actual number was like $98m) in distribution and that its interest expense was about $30m per year that would leave about $100m for capex & debt repayment. Let's assume $50m in capex & $50m in debt reduction. The Great Recession hits and lowers EBITDA by 15% to $195m and all of a sudden there is only $65m to cover $50m in debt repayment & $50m in capex. Not that much different from post PP.

CF took a hit, no doubt about it. But most of it came from the Great Recession, only some of it from management. Again, not fanboy--management had grown cash flow even after the PP acquisition.

Now for opinion. DK was obsessed with acquiring King's Island. That caused him to overpay. Of course, CW looks like a gem--and CF has grown its attendance already (it drew 3.6m people before the Great Recession). If I305 and I grow attendance at KD & Carrowinds that acquisition could turn out quite nicely. If nothing else, it would prove that at some parks putting in a hyper does grow attendance. But, as Gonch has said, CF & KI are about as big as they are going to get. Again, just my opinion.

Few random thoughts with respect to the last several posts.

I think that rather than looking at straight EBITDA, its better to look at the coverage ratios. Debt (senior or total) to EBITDA and fixed charge coverage ratio (fixed charges to EBITDA). You can look at debt coverage ratios that a given industry has been able to support historically. That will raise concerns if a company overleverages leverages its EBITDA. With fixed charge coverage ratio you can see how well the company is able to cover its fixed charges (which depending on how you define it, include interest on debt, required principal payments, scheduled or required capex, dividends/distributions and any other payments that the company has to make). If a company has the ability to manage its fixed charges somewhat, a decrease in EBITDA can be managed as well. But if there is no way to reduce fixed charges, large decreases in EBITDA can be disastrous. Having cushion in your coverage ratios also helps in an economic downturn.

I always viewed the Paramount acquisition as a way for Cedar Fair to diversify away from the core market of Cedar Point. Population and economic growth in Michigan and Ohio (particularly northeast Ohio) has been minimal at best over the past 10+ years particularly relative to other parts of the country. Population growth creates built in growth with little cost. Without it, you depend on capital improvements pretty much exclusively to grow. Others who are spending money and have population growth will grow faster and more easily. Without the current economic problems, the debt related to the Parmount acquisition isn't nearly as problematic as it is with it. But that is always a risk when you make an acquisition that is looking long term.

Forecast from Cedar Fair at this point (in its first quarter earnings release) is EBITDA of $320-340 million for 2010. Based on where the economy is now and the fact that the operating season for the seasonal parks will be over essentially in 5 months which leaves little time for improvement (particularly with respect to jobs), that guidance seems optomistic to me. But hopefully they will get there.

I agree that there is too much focus on the short term rather than the long term. And that is true in business, politics and just about every facet of the world.

If you decrease the selling price for a product/service, you should sell more of them. But that doesn't mean you will make more profit as a whole. Cedar Fair's goal is to maximize profits not necessarily maximize hotel room occupancy, per cap spending or attendance. They could have cut room rates, food/drink prices or ticket prices. But it is not the case that those changes would necessarily have resulted in more profit. So that they didn't take those actions doesn't mean that they don't understand the concept of demand as a function of price. They just decided not to take that route as the way to maximize profits. They may have been right or they may have been wrong. But there is no test case and the dynamics of running a business like CF is such that its difficult to one or more decisions impacted financial results with certainty.

Captain Hawkeye said:

RideMan said:
Why is Cedar Point attendance declining?
--Dave Althoff, Jr.

The city of Detroit used to have over 1.2m people, now it's about 900,000. Having your #2 draw lose 25% of its population probably had an impact.

DING DING DING!!! We have a winner! :)

And now, for the 200-point follow-up... How should CP react to a situation where their primary market and existing customers' budgets are shrinking?

If you guessed "increase soda pricing", no points this round.

Has the Detroit metro area lost population? City of Cleveland has lost population but the metro area has had modest gains. People have moved out to the suburbs.

Need more info to answer your 200 point follow-up.

Yes, it has. I don't have the hard data in front of me, but as someone who's been here through it all, the news stories have been numerous. The suburbs here, like most places as hard-hit, are frighteningly under-populated.

If you need more info, you're doing it wrong. :) Seriously... less people to sell things to, and those people have less discretionary income. The solution(s) is ridiculously obvious. Or it should be.

djDaemon said:

If you need more info, you're doing it wrong. :) Seriously... less people to sell things to, and those people have less discretionary income. The solution(s) is ridiculously obvious. Or it should be.

Not really. Lets say you have to make $100 a year selling lemonade, you were able to sell 100 cups last year (for a $1 each). This year I'm telling you, you will only be able to sell 80 cups, but you still need to make $100.

And the CF apologist speaks... :)
I'd ask why you presume to make the same profit selling 80 cups to the region hardest-hit by unemployment.

Seriously, you cannot just boil this down to an 11th-grade math story problem and pretend you have all the answers.

I'd presume to make the same profit because I have earned my monopoly and basic economic principles (supply and demand) are severely compromised because of it.

None of us have all of the answers.

I don't think you understand what a monopoly is, first of all.

Secondly, you do realize that your "solution" simply destroys good will with your guests and forces them to seek entertainment elsewhere, right? Yeah, that totally sounds like a great long-term strategy.

I'm beginning to think you're actually Kinzel himself. Which is preferable to being some random fanboy, I guess.

If everybody is leaving Detroit, where are they going? Are they still in the market?

As for the math problem...

As the price increases, demand decreases.
As the price decreases, profit per unit sold decreases but demand increases.

Supply is not effectively limited. So as the demand increases, supply will meet demand as the price approaches the break-even point.

The trick is that while the total profit is a linear function of units sold and sale price, the demand function, which represents the number of units sold, is non-linear. A small change in price can have a large effect on total sales. Since total profit is dependent on the number of units sold, the linearity of the total profit equation goes away as soon as demand is considered.

This is not a math problem, it is an economics problem.

--Dave Althoff, Jr.

I have a few friends in the Detroit area and they do not paint very poisitive pictures. But I wasn't sure what had happened to the metro area in terms of population.

I don't think the solution is obvious. You need to know how many folks are not buying drinks now or buyer fewer of them because of the prices and who would buy or buy more if the prices were $x lower. And how many people avoid the park all together because of drink prices who would come back and buy drinks if the price was $x lower. And you need to compare that to the lost revenue from folks who are buying the drinks now at current prices. And in all of that you somehow need to factor in whatever number of folks are still going but who are left with a bad taste in their mouth which will lead to fewer visits in the future. Not an easy analysis.

I think its an accomplishment to increase attendance year over year when your core market is not growing significantly (and in parts may be shrinking). They have done it by building attractions. But at some point does that stop working or at least become less effective? How many people who do not visit CP now would do so if they added any given ride compared to the number who just don't want to go to an amusement park at all? Have you reached all of the people you can reach by building new attractions such that your growth now would come primarily from population growth which you do not have?

RideMan said:
Second, if everybody is leaving Detroit, where are they going? Are they still in the market?

Good question. I'd bet, though, that they're NOT going to the Cleveland area, given that it's almost as bad in Ohio. Places I hear a mentioned most often in "we're getting out of Dodge" conversations? Tennessee, Florida & Texas.

GoBucks89 said:
I don't think the solution is obvious. You need to know how many folks are not buying drinks now or buyer fewer of them because of the prices and who would buy or buy more if the prices were $x lower.

Perhaps the critical point at which they maximize profit is not obvious, but it shouldn't take a rocket scientist to see that CP is NOT doing well lately (based on per-cap, attendance & lodging). And yet, Disney - a more expensive competitor to CP - is doing just fine. Why? Because they adjusted (rapidly) their pricing in-line with the economic situation on the ground. Sure, maybe Disney didn't maximize revenue last year. But you know what? They got butts in seats (or rides), and those people left with a positive impression of their stay. I bet a $5 soda doesn't accomplish that.

I think its an accomplishment to increase attendance year over year when your core market is not growing significantly (and in parts may be shrinking). They have done it by building attractions.

CP has been increasing attendance?

@DJ: I'd reference ebitda, per cap, operating cash flow, operating income, or compare to Disney, but we've already tried all of that.

You're right, Cedar Point obviously made a crippling mistake raising prices of pop to $5 and all of the financial statistics are simply incorrect. ;)

djDaemon said:

Perhaps the critical point at which they maximize profit is not obvious, but it shouldn't take a rocket scientist to see that CP is NOT doing well lately (based on per-cap, attendance & lodging). And yet, Disney - a more expensive competitor to CP - is doing just fine. Why? Because they adjusted (rapidly) their pricing in-line with the economic situation on the ground.

Disney gets a lot of visitors from Europe and Asia which protected it somewhat from the economic melt down in the USA. With the economic problems that Europe is facing this year, and the value of the Euro, I am expecting Disney to have a drop in attendance this year.

If companies continue to have more confidence in the economy, I think CP will have a pretty good year as group outings sponsered by various companies are restored. That area of the business was pretty hard hit last year from what I have heard.

Kyle2154 said:
@DJ: I'd reference ebitda, per cap, operating cash flow, operating income, or compare to Disney, but we've already tried all of that.

Why do you assume that if these "indicators" are correct, that everything is fine? As evidenced over the last several pages, you clearly have no idea what most of these even mean. I don't either, but I'm not citing them as proof for anything, as you are.

Pete said:
Disney gets a lot of visitors from Europe and Asia which protected it somewhat from the economic melt down in the USA. With the economic problems that Europe is facing this year, and the value of the Euro, I am expecting Disney to have a drop in attendance this year.

Fair enough, but the point remains that Disney actually did something in response to the situation. Cedar Fair did not. That sort of apathetic, "it's always worked before (because people have to eat)" mentality doesn't seem to be setting the world on fire with success.

djDaemon said:

Why do you assume that if these "indicators" are correct, that everything is fine? As evidenced over the last several pages, you clearly have no idea what most of these even mean. I don't either, but I'm not citing them as proof for anything, as you are.

The indicators are a better sign things are ok than you going on and on about how bad Cedar Point is doing because of high pop costs.

And I actually saw a lot of people in agreement about the indicators over the last few pages, even after Jeffs rant about the "BS" of the statistics. Did you take time to read?

I've never made such a claim. You've tried to put those words in my mouth (twice now, I think... which is lame), but I've not said that.

My basic premise is that if CP continues this type of pricing "strategy", the effects will be negative over the long run (you know, in the future). Show me statistics from the future that prove me wrong, and then you'll have something. Until then, you're not telling me anything I don't already know.

Kyle2154 said:
And I actually saw a lot of people in agreement about the indicators over the last few pages, even after Jeffs rant about the "BS" of the statistics. Did you take time to read?

The statistics, as they relate to my point anyway, are "BS", because they don't indicate how their current pricing strategy is going to impact their long-term success in a recession. Sure, it was comparatively easy to sell $3 sodas 10 years ago, when the economy was going gangbusters. Now, not so much.

Honestly? No one can say Cedar Point isn't making a mistake unless they provide future stats? Stop being silly.

No, I'm saying that you cannot use PAST data to predict FUTURE success, especially when you consider the FUTURE scenario has to navigate a recession, which the PAST did not.

What's so hard to understand about that?

Anyone else feel the heat coming off this thread? I'm sweating just reading it.