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China: Opportunities can be transformational for those who persist

Article by Nick Varney, Chief Executive Officer at Merlin Entertainments

Travelling through Shenyang Taoxian International Airport last month, one could easily mistake it for one of the European hub airports for its modernity and scale.

Yet despite nearly 150 servicing airlines transporting over 17 million passengers every year, Taoxian International is only China’s 24th busiest airport[1]. This immediately tells me two things: China is big – far bigger than some might imagine; and the Chinese are travelling, having both the time and money to do so.

Asia, in particular China, represents significant opportunities for the entertainment industry. The explosion of a middle-class with greater disposable income is well documented and is the primary driver of an increase in consumer expenditure. Yet the proportion of consumer spend on leisure activities (11%) remains low compared to the US (21%) or UK (17%)[2], and with more time on their hands and more cash in their pockets, the boon in the Chinese leisure market arguably still lies ahead.

We know this. Merlin has been active in China for over ten years. We now have eight attractions, with five more scheduled to open this year alone. Disney opened its $5bn Shanghai park last year (which is fantastic by the way) and we’re looking very closely at a handful of sites to build new full-scale LEGOLAND Parks, of which we think we can build three in the medium term.

As the government relaxes restrictions on foreign direct ownership, participation is only increasing. Morgan Stanley believes that 85% of total anticipated capital expenditure by the industry over the next three years on new theme parks, totalling some $20bn, will be in Asia[3] with the main slug of that in China.

Yet there is evidence that the theme park market is overheating. An oversupply of attractions on the back of attractive growth prospects is inevitably leading to a shake out of winners and losers. We’ve seen some spectacular openings, and some even more emphatic closures. What will emerge from it as a result will be a better balanced industry with international brands as well as strong local players.

We hope to be one of these. With strong brand franchises such as LEGO, SEA LIFE and Peppa Pig, the consumer appeal is enduring, continually supported by product investment and global marketing. International companies investing for the long term also bring with them standards in quality, compliance and safety, which translate into consistently good customer experiences.

Our preference is always to work with local partners, particularly when the stakeholder landscape is tricky to navigate, reducing unnecessary capital risk while gaining invaluable local insight. Returns might take time to come through, but persistence pays off as we have demonstrated with Madame Tussauds Shanghai, now one of our largest and most successful Midway attractions.

The fact is that China is vast and there is room for both international and local brands to succeed. If entertainment companies can adapt to the environment, be patient with new businesses and meet ever-evolving consumer expectations, the opportunity can be transformational for our industry.

[1]Civil Aviation Administration of China: passenger journeys 2016

[2]OC&C Strategy Consultants: Taking a Serious Look at Fun; The growth of the leisure industry in China, 2017

[3]Morgan Stanley: Focus on theme parks, 13 July 2018