Does Cineworld’s decision to close all screens in the US and UK make sense?

Does Cineworld’s decision to close all screens in the US and UK make sense?

On 4 October 2020, Cineworld dropped a bombshell. According to a report in the Financial Times, Cineworld, the world’s second biggest cinema operator, was preparing to close all its 543 Regal theatres in the US and 128 cinemas in the UK after further delays to the new James Bond film pushed its struggling business to the brink.

The indefinite closure of 90 per cent of Cineworld’s screens, which is expected as soon as this week, raises fundamental questions over the viability of the company and a cinema sector devastated by the pandemic. In September the company posted a $1.6bn pre-tax loss for the first six months of the year, during which time its net debt rose to $8.2bn.

The closures will last until a fuller list of Hollywood releases are confirmed, according to people familiar with the plans, suggesting the closure could extend into the first quarter of 2021. More than 30,000 staff are expected to be affected worldwide, including 5,500 in the UK.

Cineworld presents an interesting case that illustrates one of the two fundamental decisions on participation (“which”) and extent (“how much”) facing business leaders. Managerial economics is the science of cost-effective management of scarce resources. Wherever resources are scarce, managers can make more cost-effective decisions by applying the discipline of managerial economics.

In this assignment, you are asked to apply the principles of managerial economics to analyse Cineworld’s decision to temporarily shut all its screens in the US and UK. In doing so, you are expected to use information from respectful sources, including the company’s annual reports to analyse whether the company’s decision makes sense. The coursework is intended for you to demonstrate a critical understanding of different economic concepts and how they can be used in business situations, to understand the methods and tools of economics and how they are applied to business situations, and to use theory and economic analysis to solve real world business problems. It is also intended to develop your skills of critical thinking in terms of understanding of different economic concepts and their applicability in the real world, your commercial awareness in terms of knowledge about current issues in economics and commerce, directly relevant to firms, businesses and industries, and your skills of strategic thinking in terms of ability to think about strategic interactions.

To complete the assignment, you are expected to focus on the following tasks:

• Analyse the extent to which factors of demand, supply and costs underline Cineworld’s decision of temporary exit from the markets in the US and UK
• Analyse whether the closure of only half of the company’s screens in the US and UK can be an alternative course of action
• Discuss the strategic implications Cineworld’s decision would have for the market equilibrium in the cinema market in the US and UK

To carry out this assignment you will undertake analysis of which (temporary exit) and how much (extent or the scale of operations) in order to identify the right course of action in the case of Cineworld. This will involve the analysis of demand, supply, costs, the interaction between demand and supply, and break-even analysis. It will also involve the analysis of supply shift as a result of Cineworld’s exit from the market and the equilibrium change the exit may cause.

You should use tables and figures to illustrate your analysis.

It is recommended that you read around such topics:

• Demand
• Supply
• Costs
• Market equilibrium

The proposed assignment template: