China Consumer, Talking Point

Fairytale opening

Will Shanghai and Disney live happily ever after?

Dancers perform during the groundbreaking ceremony of Shanghai Disneyland in Pudong

“Ni hao Shanghai”: the house of mouse arrives in Shanghai

Cities will go a long way to secure a Disneyland. For example, when Hong Kong began its courtship of Mickey Mouse, the government broke with standard practice and offered Disney a 100-year lease rather than the more usual 50-year one. On top of that concession, Hong Kong taxpayers had to cough up nearly $3 billion for a 57% stake in the joint venture. The US theme park giant only needed to invest about one tenth as much for the other 43%.

Shanghai was equally keen to lure the ‘house of mouse’. As the Wall Street Journal reported last week, that led local authorities to make some key concessions of their own. It notes that Disney secured “unusual leeway to police its new theme park”, obtaining permission to use the same crowd control techniques it uses in other Magic Kingdoms.

Disney told the Journal that uniformed Shanghai police generally won’t be seen inside the park gates, which instead will be patrolled by security guards wearing “yellow ties, white police style hats and cartoonish badges emblazoned with a castle logo”. The job of these staff, says Disney, is “protecting the magic”.

The park has a daily capacity of around 60,000, a big enough crowd to normally make the Chinese police jittery. Indeed, Shanghai’s last experience of dealing with large daily crowds was its World Expo in 2010. Security was tight at that event, comments the Journal, with “a battalion of officers, paramilitary and army” stationed at the site.

By obtaining the go-ahead to police its own park Disney won a key concession (whisper it, but it is the first overseas entity to get such a right to do this on a meaningful chunk of Chinese territory since the colonial era, when foreign police patrolled the Treaty Ports). If nothing else, that illustrates how badly Shanghai wanted to ink its deal with the media giant.

Yesterday the $5.5 billion park finally opened to the public after years of hype and anticipation – and six years of construction. Not surprisingly, there has been a welter of media coverage, looking at what the stakes are for Disney and assessing how transformational the park could prove for Shanghai, as it seeks to displace Beijing as the country’s number one tourist destination.

The law of big numbers

There are a lot of dizzying stats associated with the new Shanghai park, but perhaps the one that gets Disney executives most excited: there are 330 million people who live within a three-hour journey of its entrance gates and can afford tickets. Plus the Shanghai Disney Resort is located relatively near Pudong International Airport, so the park can expect visitors from more distant parts of China too.

Median forecasts reckon 15 million Chinese will visit Shanghai Disneyland in its first year. The South China Morning Post says the resort – which is twice the size of New York’s Central Park – could generate Rmb19.5 billion ($2.96 billion) of annual sales, or the equivalent of 0.8% of Shanghai’s GDP. The more bullish analysts reckon it could add an even larger Rmb40 billion to the local economy each year when you factor in spending by Disney tourists elsewhere in the city.

Fellow US multinational Starbucks is already betting big on the success of Disney’s first mainland Chinese venue. On Wednesday the coffee chain opened an enormous store at the site. The outlet is staffed by 110 baristas. Starbucks expects it to become its busiest location globally.

The Shanghai investment is so to important to Disney’s future that CEO Robert Iger made a rare inspection visit. The Journal says he doesn’t normally get involved in the “minutiae of the company’s projects” but was “making an exception for the Shanghai Disney Resort”. He visited the weekend before last and mostly liked what he saw. One thing he wasn’t happy about: “We’re scrambling to put in more seating and shade”.

Is success guaranteed?

The Shanghai resort is three times larger than its Hong Kong equivalent but few think filling the park will be a problem in the initial months. Quite the opposite: tickets for the opening fortnight sold out within minutes when they went on sale earlier this year.

Hu Xingdou, a professor of economics at Beijing Institute of Technology, told the Journal: “It should be no problem for Disney to do well for a while since it is the only park in mainland China and Chinese people love to try new things. However, what Disney should worry about is how to attract them to come back twice or even more times.”

During the past month a trial opening period has been underway. The South China Morning Post reported that while some complained about long queues, it found many were happy about their day out. A retired worker, for example, who visited in early June told the SCMP: “After getting rich, people hope to have some enjoyable experiences at fun-filled venues. It was a wonderful experience and I’ll spend money and time to visit it again.”

Similarly a middle school teacher was upbeat: “I would give it a big thumbs-up because the attractions and performances provided a unique experience.”

The resort prices tickets slightly cheaper than at its major US equivalent (entry to the park ranges from $56 to $76 in Shanghai, versus $105 to $124 in Florida), but what remains to be seen is how much the average visitor will spend on food and merchandise once they are inside the venue. Already, some media have reported that locals have complained the prices are too high in the park.

Just how quickly the park turns a profit will depend on these in-resort spending figures. That’s why analysts will be looking for signs that Chinese visitors not only turn up in big numbers but get their wallets out too.

Disney’s formula is not guaranteed to succeed. Just look at Disney’s Hong Kong park, which opened in 2005, broke even in 2012, had three years of profit, but then slipped into loss again last year. But He Jianmin, director of the tourism management department of the Shanghai University of Finance and Economics, is confident. He told the SCMP that based on his estimates of visitor numbers and their spending patterns he reckons the theme park will recoup its investment within about 12 years (Disney owns 43% of the resort; a state-backed firm owns the rest).

What it means for Disney

For Disney the profitability of the park must be considered within the totality of its much broader media business, which has been doing well in China. For example, four of the top 10 grossing movies in China this year were made by Disney-owned studios. Indeed, the booming Chinese box office looks certain to propel Disney’s earnings in the years ahead.

In this respect the park has a marketing role to play: introducing Chinese visitors to Disney’s brands and characters, and producing even greater sales for the many Disney movie franchises, ranging from its animated films (such as this year’s hit Zootopia; expect a sequel) to superhero flicks (such as Iron Man, Thor and Captain America), and, of course, Star Wars (the awareness of which is relatively low in China).

The park offers a physical bridgehead into one of Disney’s biggest growth markets (it represents the firm’s largest investment outside the US). Iger told an investor conference: “As Walt did with Disneyland in the fifties, which enabled Disneyland to really grow the Disney brand in the US, we believe we will have some really interesting opportunities to do the same in China.”

Iger says he sees opportunities galore – for example, to launch new digital businesses in China, sell more of Disney’s licenced products online and even launch cruise ships. He also adds that the company plans to expand the park itself – intriguingly, he says it could triple in size.

“This is built for the long term,” he told the Journal, dismissing fears relating to China’s slowing rate of economic growth. “We’ve opened plenty of things in down economies.”

A clash of cultures?

Not everyone in China is welcoming Disney with open arms. As we reported in WiC327, the tycoon behind the Wanda Group has even thrown down the gauntlet by predicting that his own rival theme parks will mean “Shanghai Disney won’t be able to post profits in 20 years”.

Wang Jianlin told state broadcaster CCTV that Shanghai Disneyland “glorifies American culture” and his own parks are designed to play more to Chinese culture. Besides, says the billionaire, people are “bored” of Mickey Mouse and Donald Duck and Disney is now just “cloning products, with no innovation”.

Others have echoed Wang’s warnings of cultural brainwashing. Actor Sun Haiying wrote on his weibo that his fellow Chinese should not visit the park because it represented “sheer American values”. He even asked the education ministry to warn children not to go to Disneyland (that said, he was mocked online for this stance).

Similarly Takungpao, a Hong Kong newspaper, has noted that in the years since the Shanghai Disneyland was agreed upon “the political environment in China has changed from having an affinity with to being more hostile towards Western culture”. And today “America is viewed as a potential enemy”.

But He of the Shanghai University of Finance and Economics was dismissive of such views. He told the SCMP that the new Disneyland would help Chinese officials understand what culture was: “To put it in a simple way, culture is the products and services that can make people happy.”

In a press release this week, Iger described the park as “authentically Disney” but also a “distinctly Chinese destination”. Indeed, the New York Times reports that Disney even feared that “importing classic rides would reek of cultural imperialism, so it left out stalwarts such as Space Mountain, the Jungle Cruise and It’s a Small World”. Instead 80% of the rides are original to Shanghai, including a Tron rollercoaster. The balancing act has resulted in the first Mandarin-language production of The Lion King musical.

Iger was also diplomatic in the speech he gave to open the park: “We realise we are invited guests in China – it’s a privilege for us to be here.”

Good for Shanghai too?

The area surrounding Disney has boomed. Reference News, for example, reports that property prices in Chuansha New Town – the park’s location – have surged 35% year-on-year. Shanghai officials are buoyant too, arguing a successful park promises to boost the local economy. The Shanghai Observer even declares Disney will turn Shanghai into China’s top tourist city (not surprisingly, the capital Beijing has responded to the threat by agreeing to a Universal Studios theme park, due to open 2019).

The tourism boost will also be a welcome boon for Shanghai’s hotel sector, which is still struggling from overbuilding ahead of the 2010 Expo. Occupancy rates remain low at 65.6%. Those should go up if Disney attracts the 25 million people annually that China Daily thinks possible (admittedly this is the most bullish forecast WiC has seen).

Shenwan Hongyuan Securities also reckons tourists visiting Disneyland will spend Rmb4 billion per year on bus and high-speed train services in the Yangtze River Delta region too.

Of course, not all in this city of 25 million are going to be happy. In spite of Shanghai having built eight major roads ahead of Disney’s opening, drivers are concerned that traffic congestion could worsen. One estimate: the number of car journeys could rise 3% thanks to Disney tourists. The Shanghainese authorities have already advised visitors that during weekends and public holidays they’d do best to use public transport to avoid jams.

However, the Journal seems to think the worst bottleneck could prove to be at the entrance to the metro station by the park’s front gate. This line has been designed to shuttle 20,000 passengers per hour to and from the resort. But as the newspaper’s journalist noted, it’s also the spot where Disney’s security stops and the Shanghai police’s authority resumes. During last week’s trial opening he watched as a large queue formed at the narrow subway entrance, moving slowly because police insisted bags be put through X-ray machines (a standard practice in Chinese subways).

How did the opening day go?

WiC sent a correspondent to see for ourselves (we’ll publish a fuller review of the resort in our next issue). In the meantime we can report that Disney put in a slick performance, with security and ticket checks managed efficiently.

We followed a family from the main gate to their first ride. As we walked into the park they complained that the tickets were expensive, but after experiencing their first Disney attraction – the Pirates of the Caribbean ride – they proclaimed it was worth every penny.

One thing Disney could not control was the weather: it rained intermittently, bucketing down in particular at 4pm.

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