Money-Growing: Dream Factories on the Neva

St. Petersburg’s first-ever multiplex cinema theaters were built in retail and leisure centers, and the local cinema market is still developing under the aegis of the retail sector. Virtually all the retail development projects implemented in the city nowadays stipulate the construction of multi-screen theaters.

However, the initial euphoria surrounding multiplex theaters is gradually subsiding as it transpires that hiring an enviable theater operator is not that easy. Theater chains, for their part, complain that attractive facilities are rare while the rental charges are exorbitant.

In November 2004 there were 19 modern theaters, or 57 screens, in St. Petersburg, according to the Nevafilm company. Two new cinemas with nine screens are due to be commissioned by the end of the year. The list of ‘dream factories’ equipped with Dolby Surround Sound systems includes both Soviet-era movie theaters rebuilt to meet modern standards (Kristall Palas, Mirazh Cinema, Kolizei, Avrora, Barrikada, Stereokino, Balkany, Rubezh, etc.) and newly built theaters (two Dzhem Halls, Leader, and six cinemas of the Kronverk chain).

Multiplexes are still rare in the Northern Capital. The very first multiplex – a 5-screen theater at the Zanevsky Kaskad retail center near Ladozhskaya metro station – opened only a year ago. Earlier St. Petersburg residents were content with the 3-screen Kristall Palas – a renovated Soviet-built theater on Nevsky Prospekt.

However, in the past 12 months the market has experienced a qualitative breakthrough as a result of the implementation of the Kronverk Cinema project aimed at building a chain of nine multiplexes, equipped with digital Dolby Surround Sound systems, with a total of 57 screens and a total capacity of 10,000.

Bankers Want Entertainment

The development of the Kronverk Cinema chain is financed by JSC Bankers House St. Petersburg (Bankirsky Dom Sankt-Peterburg) – a key shareholder in the chain. Kronverk Cinema is managed by the company Epos, established especially by Bankers House.

Epos’s debut project was rather modest. The 2-screen, 250-seat theater NEO opened in December 2002 on Bolshoi Prospekt on Vassilyevsky Island at the Baltiisky retail center. It occupied a 2-storied 900-sqm annex to a shop gallery. The development and fitting out of NEO cost $1.5 million.

It was the city’s first-ever cinema and retail hybrid and the first joint project by Epos and the St. Petersburg holding company Adamant – the most active investor and developer on the city’s retail real estate market. Adamant began by developing one-storied retail pavilions in the early 1990s and has grown ever since to become the key shareholder in 10 entertainment and retail centers with a total space exceeding 250,000 square meters. Today Adamant continues to expand its chain.

In December 2003 the 5-screen movie theater Kronverk Cinema was opened on the premises of the retail center Zanevsky Kaskad. Incidentally, at the Kinoexpo-2004 forum Kronverk Cinema was awarded a prize in the category for the best cinema theater of the two capitals (i.e. Moscow and St. Petersburg). The developers spent approximately $2 million on decorating and equipping the cinema complex, with its largest hall designed to accommodate 350 spectators.

In 2004 the Kronverk chain opened four more multiplexes. New movie theaters in the retail centers Nord (6 halls, 900 seats), Akademichesky (5 screens, 800 seats), Balkansky (7 halls, 1,500 seats) and Mercury (8 halls, 1,200 seats) opened one after the other. All four are equipped with German Kinoton projectors, Harkness Hall screens and Dolby, DTS, JBL and Crown sound systems.

With the help of its strategic partner Adamant, which builds retail centers in the vicinity of metro stations on the outer limits of the city and on the busy motorways running through commuter areas, the Kronverk chain will soon besiege the Northern capital. In 2005 it plans to open multiplexes in two more shopping centers – Nevsky (6 halls and 700 seats), and Kazachok (7 screens and 1,500 seats).

Eduard Pichugin, the general director of Epos, recalls: “We spent quite a long time looking for investors for the project, seeking cooperation with Moscow-based and foreign cinema chains. But eventually we found financing in St. Petersburg.” The market capitalization of the company, which owns six movie theaters with a total of 33 screens, now stands at $50 million, according to evaluations by market experts.

In certain projects where Bankers House St. Petersburg acts as a co-investor along with Adamant, the former secures a stake in retail centers where Epos rents space. “For the time being the payback period on multiplexes is relatively short. Even premium class projects pay back in less than three years provided they are properly managed, while for economy-class theaters that period is even shorter,” says Eduard Pichugin.

When the Kronverk cinema in Zanevsky Kaskad first opened its halls were only 25 per cent full. Over the past nine months attendances have grown 90 per cent. In summer up to 75,000 spectators visited the theater each month. By the end of autumn Epos hopes to achieve even higher growth.

According to Eduard Pichugin’s estimates, a movie theater usually takes a year to become popular, although, of course, the cinemas that belong to the chain vary in terms of their potential. So far, of all the Kronverk Cinemas the best growth has been registered at the one in Balkanskaya Square, operated on the premises of the Balkansky retail center that is situated at the end of a metro line and near a suburban railway station. The overall area of the complex is 3,000sqm. The biggest hall, which is used for premieres, seats 400.

The multiplex at the Mercury shopping center, at the other end of the scale, is showing the slowest growth. However, in the long run it is likely to show good profits considering that Mercury is located in the rapidly growing Primorsky District, practically at the end of the city. The retail and entertainment center with a total space of 80,000sqm is to be fully commissioned in early 2005. Its core anchors are M.Video [home appliances store], Sportmaster [sports goods], Arbat-Prestizh [perfumery chain], the Greit furniture store, and the Paterson supermarket.

Kronverk cinemas sell tickets from 50 to 180 rubles. Teenagers over 14 and students account for the majority of the customers. Recently families with children have also become regular visitors.

Epos’ experience shows that multiplexes tend to earn most of their profits by screening movies rather than selling drinks and popcorn.

Eduard Pichugin believes that Kronverk’s rivals have lost virtually no customers since the chain opened its theaters in the city: “According to estimates by the distributors, the profits of other market players have not dropped following our arrival. The regular polls that we carry out at the cinemas show that only seven per cent of our guests used to regularly attend Kolizei or, say, Mirazh-Cinema before, and now they have also begun to visit our theaters every now and then.

“This proves that we have attracted a new audience to our cinemas – people who simply never went to the movies before. Given recent political decisions and the trends in the economic development of St. Petersburg and its surrounding areas – such as the relocation of head offices of several major corporations from Moscow to our city – within four years from now the city’s film distribution market may require 150 screens, and even 200 in the longer term.”

A network of nine multiplexes is the first stage of Kronverk Cinema’s development. Epos’ next objective is to expand the chain to 120 screens within three years by implementing projects both in and outside St. Petersburg.

One Eye on the Leader

Oleg Berezin, general director of JSC Nevafilm which specializes in cinema design and equipment, film dubbing, consulting services, etc., believes that Kronverk Cinema’s active expansion has radically changed the city cinema market.

“The [Kronverk Cinema] chain is a clear leader and it is unlikely that anyone will catch up with it. But developers’ interest in multiplexes in the city is now waning. Certain developers who earlier planned to build cinema theaters within retail centers gave up on the idea after Epos opened its outlets in the vicinity. And that makes sense,” Berezin says.

Developers of the Kosmopolis retail center in Ozerki changed their mind about building a multi-screen theater on the premises, opting for consumer services instead. A similar decision was taken by the firm Dorinda developing a large retail and entertainment center on Primorskoye Shosse.

Svetlana Makhlayeva, senior consultant at the retail real estate department with Colliers International (St. Petersburg), warns: “Moscow developers are already talking about the redundancy of entertainment facilities within retail centers, which has an adverse effect on the profitability of such projects.”

Nevertheless, a number of developers in the Northern capital still harbor plans of opening multi-screen theaters in retail centers. The investment company Makromir, set to develop up to 10 major shopping centers in commuter areas, plans to open cinema theaters at almost all those sites. A 9-screen theater is to be built on the premises of the City Mall near Pionerskaya metro station. The center is to be commissioned as early as 2005, but Makromir still has to reach a final agreement with a company to manage the movie theater.

Another retail center under construction is Rodeo Drive at the intersection of Prospekt Kultury, Severny Prospekt and Prospekt Lunacharskogo, where Makromir plans to open a 6-screen cinema theater. The Galereya Graf Orlov shopping center on Moskovsky Prospekt – to be commissioned in 2007-2008 – will house an 11-screen multiplex.

Igor Rogulin, marketing and sales director at Makromir, believes multiplexes are the most awkward anchor tenants.

“Cinema chains impose a lot of demands for the engineering characteristics of the project: the height of ceilings, quantity of emergency exits, etc. Besides, each operator has their own concept and understanding of how many large and medium-size halls a multiplex should operate. That is why a developer cannot just design a uniform project and offer it to all the cinema people. Talks with each chain require special preparations and are time-consuming. We are ready to show flexibility in dealing with our partners’ demands and welcome them as tenants, as well as co-investors,” Rogulin says.

Pilot Investments

While virtually all the influential participants of the Russian cinema market express some kind of interest in St. Petersburg, they are nonetheless extremely cautious about entering the local market.

Roskinoprokat will make its debut in St. Petersburg in December 2004 by launching an 8-screen, 1,200-seat round-the-clock movie theater at the newly built retail center Pik in Sennaya Square – the first-ever multiplex to emerge in the city center. JSC Sovetnik – the investor in the Pik project – and Roskinoprokat have signed a lease agreement for a period of 20 years with an option of extending the lease.

The theater will occupy the entire fourth floor of the mall – some 6,000sqm – and will operate six economy-class halls with the number of seats ranging from 100 to 250, one business-class hall with 148 seats, and a VIP-hall with tables serviced by waiters (42 seats). The lobby will house slot machines, attractions and a bar.

General director of the Pik multiplex Vladimir Dvoryansky hopes the project will pay back within 2.5 years, provided 30 per cent of the seats are filled and tickets cost from 100 to 400 rubles. According to his calculations, the city’s cinema market is only 20 per cent saturated, but so far Pik is the only project to be implemented by Roskinoprokat in St. Petersburg.

The Cinema Park chain – a joint venture by Nikita Mikhalkov’s Studia TRITE and Interros’s media arm Prof-Media – is also launching a project in the Northern capital.

The chain will open a 9-screen multiplex theater to occupy over 8,000 square meters at the Grand Canyon shopping center currently under construction on the northern outskirts of the city, not far from the Prospekt Prosveshchenia metro station. The terms and conditions of an agreement signed by the owner of the future mall – Solomon Co. – and Cinema Park remain secret, but, according to sources inside the companies, the parties have agreed on a joint investment for the project.

A year ago Cinema Park voiced its intention to open as many as three multiplex theaters, 8 to 11 screens and costing in the region of $8-10 million each. However, the chain has not moved beyond talks with developers.

In a year the KinoMaks chain will open a 4-screen, 700-seat movie theater near the Kirovsky Zavod metro station. The theater will rent space at a retail and hotel complex being built by Petromobilstroi, where its neighbors will be a Paterson supermarket, a gallery of shops and a 3-star hotel with up to 150 rooms. With the total space of the theater being approximately 2,100sqm, rental charges will not exceed $200-250 per square meter a year.

InvestKinoProekt has become a co-investor in the development of a retail and entertainment complex at the former Varshavsky train station on the embankment of Obvodnoi Kanal. The company will work in tandem with the Adamant holding that is overseeing the project. The new retail center – Varshavsky Ekspress (Warsaw Express) – is so far the only project to be implemented in St. Petersburg by Muscovites. However, says Sergei Bombusov, the project management director at InvestKinoProekt, the company is currently examining other sites as well.

InvestKinoProekt plans to spend $8 million on developing entertainment facilities at the retail center. Those will include the 9-screen, 1,200-seat Kinoplex movie theater, a food-court to be operated by six catering outlets, several cafes, a 20-lane bowling alley, a billiards hall, a virtual gambling arcade, an Aqua-Terra 3-D attraction, and so on. The 9,000-sqm entertainment center will occupy three levels, including a basement floor. The Moscow-based InvestKinoProekt has invited Italian architect Giovanni Bartoli to design the complex.

The historic facades on the side of the building will be preserved. The elongated building will be divided into several zones. A locomotive on elevated rails will be installed at the central entrance from the Obvodnoi Kanal, creating the impression that it is flying out of the building onto the embankment. Varshavsky Ekspress will occupy a total of 40,000sqm and is to be commissioned in 2005.

Multiplexes are also to be built in retail centers being developed by foreign investors. A 10-screen theater is to open at the Piter-Raduga complex, the construction of which has been launched in Moskovsky District by the international concern VINCI. A theater operator has yet to be designated.

Art for Art’s Sake

Despite the popularity of the retail and cinema combination, there are several projects in St. Petersburg where multiplex theaters are setting up on their own, without cooperating with retailers.

In 2005 Kronverk Cinema plans to open a theater in Alexander Garden near the Petropavlovsk Fortress. The new theater will be able to accommodate up to 2,000 spectators. Its ten halls will include a hall for new productions, two VIP halls and the city’s first IMAX with an enormous screen and special effects.

The Mirazh Cinema company – another influential participant in the St. Petersburg cinema market – is currently rebuilding the Rus theater – a Soviet-era project that was never finished. Mirazh Cinema owns a 4-screen, 1,000-seat movie theater of the same name on Bolshoi Prospekt of the Petrogradskaya Storona district. The new multiplex will include five halls to accommodate 1,500 spectators. The main hall (650 seats) will be equipped with state-of-the-art equipment.

In the early 1990s the St. Petersburg authorities transferred the unfinished 16,000-sqm building near Pionerskaya metro station to the Blagaya Vest religious mission, but the group failed to complete the construction work. Under an agreement with Mirazh Cinema they have moved to a new address.

Viktor Rudman, the general director of Mirazh Cinema, plans to turn Rus into an entertainment complex where his own project – the theater proper – will occupy a space of some 6,000sqm, while other properties will be ceded to co-investors who will open a bowling alley, a discotheque, a club, a cafe, etc. Mirazh plans to open the renovated Rus in mid-2006.

Making forecasts about the development of the St. Petersburg cinema market is quite difficult considering the abundance of projects that are still in their early stages. What is clear is that as competition grows stronger cinema chains will pay more and more attention to the selection of new sites.

Oleg Berezin, the general director of Nevafilm, believes that the times when developers invited bids from cinema operators are gone: “These days in 90 per cent of cases developers fight for such an anchor. I believe that investors in retail centers will have to include projects for the development of multiplexes more and more often, and partially finance them.”

Viktor Rudman agrees: “Today the owners of retail centers themselves are willing to invest in multiplexes and offer us highly favorable terms. The St. Petersburg cinema market is already quite saturated, but we are set to develop new projects so as to preserve parity and to prevent monopolization.”