Can Tarzan swing it for Walt Disney?

With profits in near free-fall, Disney hopes its latest film and a major store revamp will re-animate sales. But there is a fundamental problem: today’s children are turning their backs on its ‘fairytale’ brands.

Tarzan, the latest animated film from the Walt Disney Company, has taken $100m (£61.7m) in the US since its launch in June, and £15m in the UK since it hit the screens in October.

But whether the ape man who rescues Jane as she falls from a tree can save Disney from a third consecutive decline in annual profits remains to be seen. The company recently reported a 27 per cent profits slide to $1.4bn (£864m) for the year to September 30.

This slump can be largely attributed to a 24 per cent decline in operating income – to $607m (£375m) – at Disney’s consumer products division – principally merchandise sold through Disney Stores and other toy retailers.

Disney is revamping its 712 retail stores worldwide in the hope that this will help to reverse the trend (MW November 18). But the stores’ sales are dependent on the success of Disney’s animated films and videos, from which their product range and customer demand are derived.

George Pitcher, a partner at issues management consultancy Luther Pendragon, says: “Ten years ago, all Disney had to do was release a film every so often, and then the video. But there is now so much new competition from computer games, the Internet, cable TV and other film companies that to make the same splash you need a much better product and a much bigger marketing spend.”

The Disney brand may have become outdated as children ditch its fairytale values at an earlier age in favour of more aggressive entertainment such as computer games.

Still, the company is understood to be spending up to $500m (£309m) on the store revamp and this could play a valuable role in making the brand more exciting to children.

Lynn Ferguson, vice-president of design and property development for Disney Stores, says: “We are building a prototype that will be more interactive than our existing stores. The new stores will be fresher, more convenient, and provide more information.”

Martin Artus, joint managing director for Fitch in the US, who worked on the new store design, says: “These days customers are asking why they should go to a store, not where. Like all retailers, Disney Stores needs to create a flexible environment which can be changed regularly, and where e-commerce is integral to the process. Ideally customers will buy products online after visiting the store.”

Richard Buchanan, a consultant at Interbrand Newell & Sorrell in the US, comments: “At the moment, Disney Stores are quite straight. Disney is a great entertainment brand but the stores do not live up to the experience of the theme parks.”

Buchanan says Disney should create a store like Niketown, where customers interact with the company through sound, visuals, artefacts and interactive technology.

Richard Read, media analyst at Credit Lyonnais in the US, says: “The stores are not really the issue. It is more that people don’t want to buy the merchandise. The main engine for growth at Disney is the film and animation unit Walt Disney Pictures – from which the merchandise is derived.”

Walt Disney Pictures is one of four film companies operating under the Disney-owned Buena Vista International banner.

Studio Entertainment, which principally comprises Disney’s film, home video and TV concerns, reported an 85 per cent decline in operating income to $116m (£71.6m) in the year to September, according to Disney.

Some of this decline is the result of a decrease in video sales (which also drive merchandise sales), in part because Disney re-released a large part of its back catalogue last year, effectively reducing demand this year.

More worryingly for Disney, observers believe that demand for its animated films, although cyclical, is in long-term decline. With the exception of Tarzan, they say that in recent years Disney has failed to create enduring classics such as the Lion King, Aladdin, Beauty and the Beast and Jungle Book. It can be argued these classics translate into long-term revenue streams.

Verdict Research senior retail analyst Steve Davis says: “Disney films do seem to have had a tough time recently, but maybe Tarzan will be the movie that reverses that trend.”

Toy Story has been by far the highest grossing Disney film in the past two years, but, at $199.7m (£123m), it does not compare with the $400m (£247m) raised by 1994’s the Lion King.

One US analyst says: “Film continues to be a problematic area for Disney. If that can be turned into a more profitable business, the rest will follow.”

Another US analyst comments: “It is also possible that children are outgrowing the Disney fairytale style more quickly and moving on to studios such as Dreamworks, Viacom and Time Warner, which capture the imagination of children in a less innocent way.”

Disney is responding to the threat with a diverse range of measures, suggesting one of the world’s strongest brands lacks a clear strategy and is instead trying to cover every base.

Recent research by branding agency Interbrand Newell & Sorrell values the Disney brand at $32bn (£19.8bn), behind Coca-Cola, Micro-soft, IBM and Ford, but ahead of McDonald’s, Marlboro, Nike and Mercedes-Benz.

Michael Eisner, chairman of Disney’s parent company, says he is committed to significantly increasing overseas activity, which presently accounts for only 15 per cent of turnover.

The company is laying the groundwork for a new international division to drive growth in Europe, Africa and the Middle East – headed by Etienne de Villiers, who is also the UK country manager.

The overseas drive coincides with the launch of the Disney Travel Company, Disney Cruise Line and Go.com.

David Haigh, managing director of Brand Finance, says: “Like Unilever, Disney is extremely good at managing brands. It has protected the Disney brand and moved into other areas through other brands.”

Analysts say the ABC network, Disney Channel and ESPN are performing extremely well, with 20 per cent annual growth. Miramax and Touchstone are also regarded as sound businesses.

Meanwhile, Read expects digital video disks to resurrect Disney’s video business in much the same way that compact discs did the music industry.

Even so, any brand which is dependent on creative content will always face uncertainty. The crowd-pleasing antics of Tarzan may be early signs that this part of Disney’s business has recovered – for the time being.

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