In this week’s newsletter, we discuss movie passport, inflation & recession, money tips and a lot more.
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Subscribe to PVR Inox?!
In 2022, 12 crore people watched at least one movie in the theatre in India. That’s almost 10% of the population.
Seems like a big number, no?
But it was still 16% lower than the pre-pandemic levels. People weren’t going back to the movie halls fast enough. And theatres are hustling hard to get these numbers up.
For instance, remember the recently viral social media post about exorbitant food and beverage (F&B) prices at theatres? The moviegoer complained that their popcorn and soft drink cost as much as a year’s Amazon Prime subscription. And PVR-Inox was quick to respond. It announced an unlimited refills on its popcorn and beverages deal during weekends. It also rolled out cheaper food combos starting at ₹99. Maybe they felt that if higher F&B prices were proving to be a deterrent, special deals on weekdays could be an attractive proposition.
And it didn’t stop there. A couple of days ago it announced something quite interesting — a monthly movie subscription called PVR INOX Passport. Pay ₹699 and you can watch 10 movies a month, Monday to Thursday with some strings attached, of course.
Now on the face of it, these plans sound like a steal for customers — if you consider that in FY23 the Average Ticket Price (ATP) at PVR INOX stood at ₹240, signing up for the monthly subscription means that you could end up with 70% cheaper tickets overall! Who wouldn’t love that? Add cheaper F&B to the mix, and it gets better. And it sounds like a loss-making proposition for PVR Inox. They seem to be giving up all the potential revenue with these massive discounts. But it might just be the cinema chain that comes out on top with these deals.
For starters, consider the typical occupancy levels on weekdays. Analysts peg it to be a measly 17%. Which means that less than 2 seats out of 10 are filled for a movie. Now, for PVR Inox, the rest of the 8 seats signal lost potential. They don’t make anything out of it. Yet, there’s a fixed cost of screening the show. So they’d rather find some way to lure more people onto the chairs. There’s no extra cost. There’s just extra revenue where earlier there would’ve been none. And analysts estimate that occupancy levels could rise to 25% with this deal.
And remember, it’s not just the tickets that drive revenue for the company. F&B is a massive contributor too. PVR INOX’s annual report suggests that moviegoers spent 51% of the ATP on F&B. So more moviegoers means an increase in the spend per head (SPH). Just look at other big names in the theatre world ― AMC US the world’s largest multiplex chain, Cinemark US, Cineworld US and Cineplex Canada see moviegoers spending upwards of 60% of their ATP on F&B. So maybe these tricks from PVR will see their numbers inch upwards too.
Then let’s consider the cinema subscription models itself. While it might be the first of its kind in India, it’s tried and tested globally. For instance, there’s US-based AMC. In 2018 it dipped its toes into the movie subscription model and its CEO pointed out some interesting bits shortly after. You see, when customers buy a subscription, they try to squeeze it for all its worth in the first couple of weeks. But soon, the excitement dies down and there’s a drop in their theatre visits. So while the pass gave access to around 12 movies a month, the average pass holder only saw 3 movies a month in 2019.
Now, if you apply this trend to PVR INOX, that is, if subscribers end up watching 3 movies a month, they still end up paying almost the same price per movie as its current ATP. So, the multiplex isn’t really losing potential revenue.
And there’s one more thing. Something that AMC’s CEO called the ‘bring along metric’. When subscribers come to watch a movie, they don’t often come alone. They bring non-subscriber companions who pay the full ticket price. And for AMC, subscribers helped boost this revenue while also increasing F&B spends by a whopping 250% within just a year of its subscription launch.
So maybe it’s numbers like these that pushed PVR INOX to launch India’s first movie subscription model too. And not to forget that a subscription model typically ensures upfront cash and a steady stream of revenue. Businesses love that.
Anyway, it’s just a trial for now. There are only 20,000 passes that are being handed out. And we’ll just have to wait and see if the initial numbers are enough to convince the PVR INOX management if they’ve hit upon a goldmine of a money-making idea or not.
Dear Bill — should we worry about inflation or a recession?
When a country wants to borrow money to fund its various needs, it issues bonds. It could be short-term bonds for just a year or so. Or it could be long-term bonds that only need to be repaid after 10 years. Maybe even 30 years. It’s up to the country really.
And how do they decide on the rate of interest they need to pay on the bonds, you ask?
In a very crude sense, they try and get it close to the expectations of inflation in the country. See, they have to make it attractive enough for investors to buy the bonds. And everyone wants to beat inflation. So maybe the government might think that over the next 10 years, inflation is likely to hover around 6%. They might then issue a bond priced at ₹100 and tack on a little extra yield. The yield or the interest in this case might be 6.50%.
Now this makes government bonds quite unique and interesting. They actually serve an important function — they’re indicators of inflationary expectations.
And if investors soon start believing that inflation is higher than anticipated, they’ll start to demand higher returns from the bonds. They might look to sell the existing bond and invest in some other asset. Something they believe will offer more bang for their buck. This selling pressure drives the price down.
And here’s something you should know about bond price and yield. They have an inverse relationship. Take the example from before. Say the price drops from ₹100 to ₹99. Now if an investors snaps this bond up and keeps it safe until its maturity, they’ll still get ₹100 back. Plus, they get paid 6.50% every year. So the interest along with that additional benefit of the price rising on maturity leads to them earning an additional yield.
That’s what we mean by the inverse relationship between bond prices and yield.
All good so far?
Great.
Now let’s turn our attention to Bill Ackman — the protagonist of the story. Bill is a big deal in the investment world. He’s an activist investor. That means he buys shares in a company, controls a fair bit of a firm, and then forces companies to make changes he thinks it needs. But also, he’s made quite a ton of money buying and selling bonds. For instance, he bet many companies would default on their borrowings during the pandemic. He bought a sort of insurance against this. And netted $2.6 billion.
So yeah, when he talks (or tweets), people listen.
And in August ’23, Bill Ackman made a big announcement. He believed that the US Federal Reserve (their central bank) was underestimating inflation. He thought inflation would be a bigger problem than anticipated. And that bonds would soon react to this ground reality. People would ask for higher yields. So he said the 30-year US bond would break the 5% level. It was trading at around 4.1% back then.
So, he bet against the bonds. He took a short position of sorts where he’d make money if the yields went higher and prices fell. And lo and behold, just 2 months after his bet, that’s exactly what happened, the 30-year bond yields shot up, And also, for the first time in 16 years, the yield on the 10-year Treasury bond just crossed the 5% mark too.
Seems like everyone was well and truly worried about inflation. And Bill Ackman maybe added fuel to the fire with his tweet.
But then, out of the blue, Bill Ackman tweeted again. This time, he said he was closing his position. Or reversing the trade. He was signaling that he didn’t expect yields to go much higher from here.
But why, you ask? Isn’t inflation still a worry?
Well, for starters, it might simply be a bet on historic trends. See, 5% isn’t a magic number. It’s just that historically, in the past 40-odd years at least, it hasn’t breached that level often. A resistance builds in and it becomes a ceiling. And that leads to investors penciling this in as a ‘rule of thumb’. They treat it as a magic ceiling even if it isn’t one technically. So they’re inclined to bet on the probability that the yields will fall from this level.
And you know that bond prices and yields have an inverse relationship. If the yield falls, the price rises. So you’d rather buy a government bond and ride the price rise this way. You’d get a nice chunk of money.
But also it looks like Bill Ackman’s priorities have changed. He’s ditched inflation and seems to be suddenly worried about an impending recession. He said, “The economy is slowing faster than what recent data suggests.”
And this is quite confusing, no? Just a while ago, there was inflation on the cards. And now it’s a recession. Make your mind up, Bill!
Or maybe if you think about it, the inflationary environment might just be what leads to a recession. You see, inflation could squeeze the spending power of consumers. But if the US Federal Reserve is worried that inflation might get worse, they’ll keep interest rates high anyway. And that could trigger a situation where people struggle to meet their existing loan payments. For instance, the US is facing one of its highest levels of defaults on car loans. And this could have a domino effect.
And if you look at India, you’ll see a clear sign of an American slowdown playing out too. Remember the shocking news from a couple of weeks ago when Infosys said they probably won’t hire from colleges this year? It’s shocking because these IT companies are a mainstay of campus placements come rain or shine. So when they declare something like this, it could be a pretty big signal.
Now yeah, we know that experts have been predicting this forever. But even a broken clock is right twice a day, right? Is Bill Ackman on to something?
Time will tell.
PS: Bill Ackman’s big short on US bonds supposedly netted him a whopping $200 million. A few tweets was all it took, eh?
Money Tips
: Trash cans can trigger money manners
Ever observed how we’ve changed the way we deal with garbage over the years?
What used to be dumped in a single bin before, now goes into three or four different ones. A bin for dry waste, one for wet waste and the others for sanitary and e-waste.
Sorting it right makes recycling easy.
And you know what? This applies to your money too.
Think of it like this. Putting all your money in one place for all goals combined, can make it hard for you to manage. Also, when you put all your eggs in one basket, if your investment turns out to be a dud, you won’t have anything else to count on.
That’s why separating your money or savings by type always works better. Maybe you want to go on a trip next year, so you put your money in a short-term fund that you can liquidate when it’s time for you to travel.
In five years, you might want to switch jobs or study further. You might want to set up a separate fund that’s a mix of stocks and bonds for that.
And for retirement? Well, if it’s a long time away, you might want to give chance for your money to grow well and focus on a slightly more aggressive, equity (stocks) mutual fund for that.
If you lock all of this money away in one place, you’re going to find it hard to identify your short-term savings from the long-term ones. And no one would want to be in a sticky situation like that no?
This is what trash cans can teach us about money as well.
So the next time you dispose of garbage, do it right and think about what it secretly tells you about your money habits.
Jargon of the Day
: Sweat Equity
And that’s all for today folks! If you learned something new, make sure to subscribe to Finshots for more such insights 🙂
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