Disney’s Renewal Features Cars, CEO Horse Race: Retail

Disney's Cars Land
Confetti cascades while rows of bright neon signs, illuminated billboards and pyrotechnics light up the night as dozens of costumed performers and Disney executives celebrate the gala opening of Cars Land at Disney California Adventure park in Anaheim, California, on June 13, 2012. Photographer: Scott Brinegar/Disney Parks via Getty Images

Walt Disney Co. opens the Cars Land attraction in Anaheim, California, to the public today, part of its largest investment ever in the theme-park unit. The implications are broad for both earnings and succession at the world’s largest entertainment company.

The 12-acre addition at California Adventure, next-door to Disneyland, takes guests through the fictional town of Radiator Springs from the two “Cars” movies. More than 4,000 tons of steel and 280,000 feet (85 kilometers) of rock work were installed, including mountains shaped like vintage Cadillac tail fins.

The $1.1 billion remodeling of California Adventure, including Cars Land, is part of a multiyear expansion of the parks and resorts division that adds two more cruise ships, attractions in Orlando and Hong Kong and a $4.4 billion Shanghai park scheduled for 2015. Disney has raised prices in Anaheim in a bet the new rides will draw consumers even as the economic recovery remains tentative.

It’s a crucial test, too, for Thomas Staggs, who moved over to lead the parks unit in 2010 after 12 years as Disney’s chief financial officer. He is seen by investors, along with Chief Financial Officer Jay Rasulo, as a contender to be named chief executive of Burbank, California-based Disney when Robert Iger relinquishes the title in March 2015.

“Bob had to take Tom out of his comfort zone to give him operational experience at what is the soul of the company, the parks,” said David Miller, an analyst who follows Disney for Caris & Co. in Los Angeles. “If you took a poll of 100 portfolio managers, 55 percent would say Staggs gets the job, 45 percent Rasulo. Mr. Staggs has the leg up.”

Profit Margin

Staggs said he is content where he is.

“You get to open a park like this, makes me feel like I’ve got one of best jobs in the world,” Staggs said at a June 13 event at Cars Land. “I’m not anxious about going anywhere anytime soon, so as long as I can keep doing this I’m happy.”

Parks and resorts is Disney’s second-largest unit, after its television networks, accounting for 29 percent of sales and 18 percent of profit in fiscal 2011. The networks, led by ESPN and Disney Channel, generated almost four times the parks unit’s $1.55 billion in profit, on about 1 1/2 times its $11.8 billion in revenue.

The choices to fix California Adventure and invest in other leisure businesses were made over the past five years, even as the company was offering discounts to entice recession-conscious travelers to its parks, Iger said in an interview.

“It’s a long game, it’s not a short game,” he said. “The decisions were made when we thought the opportunities existed and the time was right.”

Investment ‘Bubble’

The company invested $2.7 billion in its parks division last year, up from $933 million in 2008, according to Disney filings.

“We’ve got a real bubble in terms of investment, but also a real surge in opportunity going forward,” Staggs told Bloomberg Television at the launch of the Disney Fantasy cruise ship in March.

Disney rose 2.1 percent to $47.18 yesterday in New York, and has gained 25 percent this year.

Todd Juenger, an analyst who follows the stock at Sanford C. Bernstein & Co. in New York, said he expects operating income at the parks division to top $2.4 billion next year, a 55 percent increase from 2011, as global tourism rises and Disney’s new projects come online.

Attendance at the parks worldwide climbed 5 percent in the company’s second fiscal quarter that ended March 31, while revenue in the unit gained 10 percent to $2.9 billion. Attendance at Disneyland set a record, the company said.

California ‘Brand’

California Adventure was considered a flop after it opened in 2001. The 67-acre park, 30 miles (48 kilometers) southeast of Los Angeles, was designed as a tribute to the company’s home state, with reproductions of Monterey’s wharf and Yosemite National Park.

“The feeling was that California could be a brand; that may have been where they went off track,” said John Gerner, a theme-park industry consultant in Richmond, Virginia. “It just doesn’t compare to the popularity of the Disney characters.”

Attendance last year, at 6.3 million visitors, was one-third of that of Disneyland, according to an annual report published by the Themed Entertainment Association and the consulting firm Aecom.

The company’s strategic goal for California Adventure is still to persuade guests to extend their stay at its properties while relieving crowding at Disneyland, Rasulo said in an interview. This time, however, the park is less California and more Disney, including characters from Pixar Animation Studios, which the company acquired for $7 billion in 2006.

Road Trip

To create Cars Land, Disney designers embarked on a road trip across the western U.S., incorporating 1950s roadside architecture into park features such as the Cozy Cone Motel snack stands.

Pixar chief John Lasseter, who helped with the design, said park landscapers found a plant that blossoms to look like a traffic safety cone.

“You look at this and say ‘How did they do that?’’ he said in an interview. ‘‘The level of detail is unbelievable.’’

In addition to Cars Land, the California Adventure remodel includes a new entrance designed to look like Los Angeles when company founder Walt Disney first arrived there in 1923. Another recent addition: Ariel’s Undersea Adventure, which opened last year and features characters from the 1989 Disney film ‘‘The Little Mermaid.’’

Actor Cheech Marin, who voiced Ramone in the ‘‘Cars’’ films, said cast members spent three hours previewing the attractions. ‘‘All anybody could say was, ‘Wow, wow, wow,’’’ Marin said in an interview. ‘‘It’s truly mind-blowing. It’s going to be a huge hit.”

Raising Prices

There’s precedent in big theme-park investments leading to a bump in visitors, Gerner said. Comcast Corp.’s Universal Island of Adventure park in Orlando saw a 29 percent attendance increase to 7.6 million last year after opening its Wizarding World of Harry Potter in 2010.

Disney raised prices on its two Anaheim parks 8.8 percent to $87 in May. The park-hopper ticket, which includes admission to both Disneyland and California Adventure in one day, rose 19 percent to $125 and the annual pass for non-Southern California residents climbed 30 percent to $649.

Disneyland daily admission prices have risen from $10.25 in 1981, an average annual increase of 7 percent over the past 31 years, compared with a 2.9 percent increase for the Consumer Price Index, according to Bloomberg research.

“We try to keep the price-value relationship in our parks intact,” Staggs said. “We weigh those decisions very carefully.”

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