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Euro Disney: Bungling a Successful Concept

W
ith high expectations, Euro Disney opened just outside Paris in April

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. Success seemed assured. After all, the Disneylands in Florida, California, and more recently, Japan, were all spectacular successes. But somehow all the rosy expectations became a delusion. The opening results cast even the future continuance of Euro Disney into doubt. How could what seemed so right be so wrong? What mistakes were made?

PRELUDE

OPTIMISM

Perhaps a few early omens should have raised caution. Between 19

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and 1991, three $1

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0 million amusement parks had opened in France with great fanfare. All had fallen flat, and by 1991 two were in bankruptcy. Now the Walt Disney Company was finalizing its plans to open Europe’s first Disneyland early in 1992. This would turn out to be a $

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.4 billion enterprise sprawling over 5,000 acres twenty miles east of Paris. Initially it would have six hotels and 5,200 rooms, more rooms than the entire city of Cannes, and lodging was expected to triple in a few years as Disney opened a second theme park to keep visitors at the resort longer.

Disney also expected to develop a growing office complex, this to be only slightly smaller than France’s biggest, La Défense, in Paris. Plans also called for shopping malls, apartments, golf courses, and vacation homes. Euro Disney would tightly control all this ancillary development, designing and building nearly everything itself and eventually selling off the commercial properties at a huge profit.

Disney executives had no qualms about the huge enterprise, which would cover an area one-fifth the size of Paris itself. They were more worried that the park might not be big enough to handle the crowds: “My biggest fear is that we will be too successful.”1

Company executives initially predicted that

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million Europeans would visit the extravaganza in the first year alone. After all, Europeans accounted for 2.7 million visits to the US Disney parks and spent $1.

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billion on Disney merchandise. Surely a park in closer proximity would draw many thousands more. As Disney executives thought more about it, the forecast of 11 million seemed most conservative. They reasoned that because Disney parks in the United States (population of 250 million) attracted 41 million visitors a year, if Euro Disney attracted visitors in the same proportion, attendance could reach 60 million with Western Europe’s

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70 million people. 

Table

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.1

 shows the 1990 attendance at the two US Disney parks and the newest Japanese Disneyland, as well as the attendance/population ratios.

Adding fuel to the optimism was the fact that Europeans typically have more vacation time than US workers. For example, five-week vacations are commonplace for French and Germans, compared with two to three weeks for US workers.

The failure of the three earlier French parks was seen as irrelevant. Robert Fitzpatrick, Euro Disneyland’s chairman, stated that Disney was spending

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billion French francs to open the park, compared to the earlier competitors who spent 700 million. “This means we can pay infinitely more attention to details—costumes, hotels, shops, trash baskets—to create a fantastic place. There’s just too great a response to Disney for us to fail.”2

Nonetheless, a few scattered signs could be found that not everyone was happy with the coming of Disney. Leftist demonstrators at Euro Disney’s stock offering greeted company executives with eggs, ketchup, and “Mickey Go Home” signs. Some French intellectuals decried the pollution of the country’s cultural ambiance with the coming of Mickey Mouse and company: They called the park an American cultural abomination. The mainstream press also seemed contrary, describing every Disney setback with delight. And French officials in negotiating with Disney sought less American and more European culture at France’s Magic Kingdom. Still, such protests and bad press seemed contrived and unrepresentative, and certainly not predictive. Company officials dismissed the early criticism as “the ravings of an insignificant elite.”3

TABLE 10.1 Attendance and Attendance/Population Ratios of Disney Parks, 1990

THE LOCATION DECISION

In the search for a site for Euro Disney, Disney executives examined 200 locations in Europe. The other finalist was Barcelona, Spain. Its major attraction was warmer weather. But the transportation system was not as good as around Paris, and it also lacked level tracts of land of sufficient size. The clincher for the decision for Paris was its more central location. 

Table 10.2

 shows the number of people within two to six hours of the Paris site.

The beet fields of the Marne-la-Vallée area were chosen. Being near Paris seemed a major advantage, as Paris was Europe’s biggest tourist draw. France was eager to win the project to help lower its jobless rate and also to enhance its role as the center of tourist activity in Europe. The French government expected the project to create at least 30,000 jobs and to contribute $1 billion a year from foreign visitors.

To encourage the project, the French government allowed Disney to buy up huge tracts of land at 1971 prices. It provided $750 million in loans at below-market rates and also spent hundreds of millions of dollars on subway and other capital improvements for the park. For example, Paris’s express subway was extended out to the park; a 35-minute ride from downtown cost about $2.50. A new railroad station for the high-speed Train à Grande Vitesse (TGV) was built only

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0 yards from the entrance gate. This enabled visitors from Brussels to arrive in only ninety minutes. And when the English Channel tunnel opened in 1994, even London was only three hours and ten minutes away. In fact, Euro Disney was the second largest construction project in Europe, second only to construction of the English Channel tunnel.

TABLE 10.2 Number of People within 2–6 Hours of the Paris Site

Within a 2-hour drive:

  

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million people

Within a 4-hour drive:

  41 million people

Within a 6-hour drive:

109 million people

Within a 2-hour flight:

310 million people

Source: Euro Disney.

 Amusement Business magazine.

Commentary: The much more densely populated and geographically compact European continent makes access to Euro Disney much more convenient than accessing Disney parks is in the United States.

FINANCING

Euro Disney cost $4.4 billion. 

Table 10.3

 shows the sources of financing in percentages. The Disney Company had a 49 percent stake in the project, the most that the French government would allow. For this stake, it invested $

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0 million, while other investors contributed $1.2 billion in equity. The rest was financed by loans from the government, banks, and special partnerships formed to buy properties and lease them back.

The payoff for Disney began after the park opened. The company received 10 percent of Euro Disney’s admission fees and 5 percent of the food and merchandise revenues. This was the same arrangement as Disney had with the Japanese park. But in Tokyo Disneyland, the company took no ownership interest, opting instead only for the licensing fees and a percentage of the revenues. The reason for the conservative position with Tokyo Disneyland was that Disney money was heavily committed to building Epcot Center in Florida. Furthermore, Disney had some concerns about the Tokyo enterprise. This was the first non-American Disneyland and also the first cold-weather one. It seemed prudent to minimize the risks. But this turned out to be a significant blunder of conservatism: Tokyo became a huge success, as the following Information Box discusses in more detail.

TABLE 10.3 Sources of Initial Financing for Euro Disney (percent)

Total to Finance: $4.4 billion	100%
Shareholders equity, including $160 million from Walt Disney Co.	32
Loan from French government	22
Loan from group of 45 banks	21
Bank loans to Disney hotels	16
Real estate partnerships	9

Source: Euro Disney.

Commentary: The full flavor of the leverage is shown here, with equity comprising only 32 percent of the total expenditure.

SPECIAL MODIFICATIONS

With the experiences of the previous theme parks, particularly that of the first cold-weather park in Tokyo, Disney construction executives were able to bring state-of-the-art refinements to Euro Disney. Exacting demands were placed on French construction companies, and a higher level of performance and compliance resulted than many thought possible. The result was a major project on time if not completely on budget. In contrast, the Channel tunnel was plagued by delays and severe cost overruns.

INFORMATION BOX

THE TOKYO DISNEYLAND SUCCESS

Tokyo Disneyland opened in 1983 on 201 acres in the eastern suburb of Urazasu. It was arranged that an ownership group, Oriental Land, would build, own, and operate the theme park, with advice from Disney. The owners borrowed most of the $650 million needed to bring the project to fruition. Disney invested no money, but received 10 percent of the revenues from admission and rides and 5 percent of sales of food, drink, and souvenirs.

While the start was slow, the Japanese soon began flocking to the park in great numbers. By 1990, some 16 million a year passed through the turnstiles, about one-fourth more than visited Disneyland in California. In fiscal year 1990, revenues reached $988 million with profits of $150 million. Indicative of the Japanese preoccupation with all things American, the park served almost no Japanese food, and the live entertainers were mostly American. Japanese management even apologized for the presence of a single Japanese restaurant inside the park: “A lot of elderly Japanese came here from outlying parts of Japan, and they were not very familiar with hot dogs and hamburgers.”4

Disney executives were soon to realize the great mistake they made in not taking substantial ownership in Tokyo Disneyland. They did not want to make the same mistake with Euro Disney.

Would you expect the acceptance of the genuine American experience in Tokyo to be indicative of the reaction of the French and Europeans? Why or why not?

4 James Sterngold, “Cinderella Hits Her Stride in Tokyo,” New York Times, February 17, 1991, p. 6.

One of the things learned from the cold-weather project in Japan was that more needed to be done to protect visitors from such weather problems as wind, rain, and cold. Consequently, Euro Disney’s ticket booths were protected from the elements, as were the lines waiting for attractions and even the moving sidewalk from the

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,000-car parking area.

Certain French accents—British, German, and Italian accents as well—were added to the American flavor. The park had two official languages, English and French, but multilingual guides were available for Dutch, Spanish, German, and Italian visitors. Discoveryland, based on the science fiction of France’s Jules Verne, was a new attraction. A theater with a full 360-degree screen acquainted visitors with a sweep of European history. And, not the least modification for cultural diversity, Snow White spoke German, and the Belle Notte Pizzeria and Pasticceria were right next to Pinocchio.

Disney foresaw that it might encounter some cultural problems. This was one of the reasons for choosing Robert Fitzpatrick as Euro Disney’s president. While American, he spoke French and had a French wife. However, he was not able to establish the rapport needed and was replaced in 1993 by a French native. Still, some of his admonitions that France should not be approached as if it were Florida fell on deaf ears.

RESULTS

As the April 1992 opening approached, the company launched a massive communications blitz aimed at publicizing the fact that the fabled Disney experience was now accessible to all Europeans. Some 2,500 people from various print and broadcast media were lavishly entertained while being introduced to the new facilities. Most media people were positively impressed with the inauguration and with the enthusiastic spirit of the staffers. These public relations efforts, however, were criticized by some for being heavy-handed and for not providing access to Disney executives.

As 1992 wound down after the opening, it became clear that revenue projections were, unbelievably, not being met. But the opening turned out to be in the middle of a severe recession in Europe. European visitors, perhaps as a consequence, were far more frugal than their American counterparts. Many packed their own lunches and shunned the Disney hotels. A visitor named Corine from southern France typified the “no-spend” attitude of many: “It’s a bottomless pit,” she said as she, her husband, and their three children toured Euro Disney on a three-day visit. “Every time we turn around, one of the kids wants to buy something.”5 Perhaps investor expectations, despite the logic and rationale, were simply unrealistic.

Indeed, Disney had initially priced the park and the hotels to meet revenue targets and assumed demand was there at any price. Park admission was $42.25 for adults—higher than at the American parks. A room at the flagship Disneyland Hotel at the park’s entrance cost about $340 a night, the equivalent of a top hotel in Paris. It was soon averaging only a 50 percent occupancy. Guests were not staying as long or spending as much on the fairly high-priced food and merchandise. We can label the initial pricing strategy at Euro Disney as skimming pricing. The following Information Box discusses skimming and its opposite, penetration pricing.

Disney executives soon realized they had made a major miscalculation. While visitors to Florida’s Disney World often stayed more than four days, Euro Disney—with one theme park compared to Florida’s three—was proving to be a two-day experience at best. Many visitors arrived early in the morning, rushed to the park, staying late at night, then checked out of the hotel the next morning before heading back to the park for one final exploration.

The problems of Euro Disney were not public acceptance (despite the earlier critics). Europeans loved the place. Since the opening, it attracted just under 1 million visitors a month, thus easily achieving the original projections. Such patronage made it Europe’s biggest paid tourist attraction. But large numbers of frugal patrons did not come close to enabling Disney to meet revenue and profit projections and cover a bloated overhead.

INFORMATION BOX

SKIMMING AND PENETRATION PRICING

A firm with a new product or service may be in a temporary monopolistic situation. If there is little or no present and potential competition, more discretion in pricing is possible. In such a situation (and, of course, Euro Disney was in this situation), one of two basic and opposite approaches may be taken in the pricing strategy: (1) skimming or (2) penetration.

Skimming is a relatively high-price strategy. It is the most tempting where the product or service is highly differentiated, as it yields high per-unit profits. It is compatible with a quality image. But it has limitations. It assumes a rather inelastic demand curve, in which sales will not be appreciably affected by price. And if the product or service is easily imitated (which was hardly the case with Euro Disney), then competitors are encouraged because of the high profit margins.

The penetration strategy of low prices assumes an elastic demand curve, with sales increasing substantially if prices can be lowered. It is compatible with economies of scale, and discourages competitive entry. The classic example of penetration pricing was the Model T Ford. Henry Ford lowered his prices to put the car within the means of the general public, expanded production into the millions, and in so doing realized new horizons of economies of scale.

Euro Disney correctly saw itself in a monopoly position; it correctly judged that it had a relatively inelastic demand curve with customers flocking to the park regardless of rather high prices. What it did not reckon with was the shrewdness of European visitors: Because of the high prices, they shortened their stays, avoided the hotels, brought their own food and drink, and only sparingly bought the Disney merchandise.

What advantages would a lower price penetration strategy have offered Euro Disney? Do you see any drawbacks?

Other operational errors and miscalculations, most of these cultural, hurt the enterprise. A policy of serving no alcohol in the park caused consternation in a country where wine is customary at lunch and dinner. (This policy was soon reversed.) Disney thought Monday would be a light day and Friday a heavy one, and allocated staff accordingly, but the reverse was true. It found great peaks and valleys in attendance: The number of visitors per day in the high season could be ten times the number in slack times. The need to lay off employees during quiet periods ran up against France’s inflexible labor schedules.

One unpleasant surprise concerned breakfast. Disney executives were led to believe that Europeans did not eat breakfast; however, it turned out they wanted breakfast at Euro Disney. The lines became unmanageable as Disney tried to serve 2,500 breakfasts in restaurants that seated 350 people.6

Disney failed to anticipate another demand, this time from tour bus drivers. Restrooms were built for fifty drivers, but on peak days 2,000 drivers were seeking the facilities. “From impatient drivers to grumbling bankers, Disney stepped on toe after European toe.”7

For the fiscal year ending September 30, 1993, the amusement park had lost $960 million in US dollars, and the future of the park was in doubt. (As of December 31, 1993, the cumulative loss was 6.04 billion francs, or $1.03 billion.) The Walt Disney corporation made $175 million available to tide Euro Disney over until the next spring. Adding to the problems of the struggling park were heavy interest costs. As depicted in Table 10.3 above, against a total cost of $4.4 billion, only 32 percent of the project was financed by equity investment. Some $2.9 billion was borrowed primarily from 60 creditor banks, at interest rates running as high as 11 percent. Thus, the enterprise began heavily leveraged, and the hefty interest charges greatly increased the overhead to be covered from operations. Serious negotiations began with the banks to restructure and refinance.

ATTEMPTS TO RECOVER

The $960 million lost in the first fiscal year represented a shortfall of more than $2.5 million a day. The situation was not quite as dire as these statistics would seem to indicate. Actually, the park was generating an operating profit. But nonoperating costs were bringing it deeply into the red.

While operations were far from satisfactory, they were becoming better. It had taken twenty months to smooth out the wrinkles and adjust to the miscalculations about hotel demand and the willingness of Europeans to pay substantial prices for lodging, meals, and merchandise. Operational efficiencies were slowly improving.

By the beginning of 1994, Euro Disney had been made more affordable. Prices of some hotel rooms were cut—for example, at the low end, from $76 per night to $51. Expensive jewelry was replaced by $10 T-shirts and $5 crayon sets. Luxury sit-down restaurants were converted to self-service. Off-season admission prices were reduced from $38 to $30. And operating costs were reduced 7 percent by streamlining operations and eliminating over 900 jobs.

Efficiency and economy became the new watchwords. Merchandise in stores was pared from 30,000 items to 17,000, with more of the remaining goods being pure US Disney products. (The company had thought that European tastes might prefer more subtle items than the garish Mickey and Minnie souvenirs, but this proved untrue.) The number of different food items offered by park services was reduced more than 50 percent. New training programs were designed to remotivate the 9,000 full-time permanent employees, to make them more responsive to customers and more flexible in their job assignments. Employees in contact with the public were given crash courses in German and Spanish.

Still, as we have seen, the problem had not been attendance, although the recession and the high prices had reduced it. Some

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million people passed through the turnstiles in the first twenty months of operation. But they were not spending money as people did in the US parks. Furthermore, Disney had alienated some European tour operators with its high prices, and it diligently sought to win them back.

Management had hoped to reduce the heavy interest overhead by selling the hotels to private investors. But the hotels had an occupancy rate of only 55 percent, making them unattractive to investors. While the recession was a factor in such low occupancy rates, most of the problem lay in the calculation of lodging demands. With the park just thirty-five minutes from the center of Paris, many visitors stayed in town. About the same time as the opening, the real estate market in France collapsed, making the hotels unsalable in the short term. This added to the overhead burden and confounded business plan forecasts.

While some analysts were relegating Euro Disney to the cemetery, few remembered that Orlando’s Disney World showed early symptoms of being a disappointment. Costs were heavier than expected, and attendance was below expectations. But Orlando’s Disney World turned out to be one of the most profitable resorts in North America.

A FAVORABLE PROGNOSIS

Euro Disney had many things going for it, despite the disastrous early results. In May 1994, a station on the high-speed rail running from southern to northern France opened within walking distance of Euro Disney. This helped fill many of the hotel rooms too ambitiously built. Summer 1994, the 50th anniversary of the Normandy invasion, brought many people to France. Another favorable sign for Euro Disney was the English Channel tunnel’s opening in 1994, which could potentially bring a flood of British tourists. Furthermore, the recession in Europe was bound to end, and with it should come renewed interest in travel. As real estate prices became more favorable, hotels could be sold and real estate development around the park spurred.

Even as Disney Chairman Michael Eisner threatened to close the park unless lenders restructured the debt, Disney increased its French presence, opening a Disney store on the Champs Elysees. The likelihood of a Disney pullout seemed remote, despite the posturing of Eisner, as royalty fees could be a sizable source of revenues even if the park only broke even after servicing its debt. With only a 3.5 percent increase in revenues in 1995 and a 5 percent increase in 1996, these could yield $46 million in royalties for the parent company. “You can’t ask, ‘What does Euro Disney mean in 1995?’ You have to ask, ‘What does it mean in 1998?’”8

SUMMARY OF MAJOR MISTAKES

Euro Disney, as we have seen, fell far short of expectations in the first twenty months of its operation, so much so that its continued existence was even questioned. What went wrong?

EXTERNAL FACTORS

A serious economic recession that affected all of Europe undoubtedly was a major impediment to meeting expectations. As noted before, it adversely affected attendance—although still not all that much—but drastically affected spending patterns, with frugality being the order of the day for many visitors. The recession also affected real estate demand and prices, thus saddling Disney with hotels it had hoped to sell profitably to eager investors, and thereby take the strain off its hefty interest payments.

The company assumed that European visitors would not be greatly different from those visitors, foreign and domestic, of US Disney parks. Yet, at least in the first few years of operation, visitors were much more price conscious. This suggested that those within a two- to four-hour drive of Euro Disney were considerably different from the ones who traveled overseas, at least in spending ability and willingness.

INTERNAL FACTORS

Despite the decades of experience with the US Disney parks and the successful experience with the newer Japan park, Disney still made serious blunders in its operational planning, such as the demand for breakfasts, the insistence on wine at meals, the severe peaks and valleys in scheduling, and even such mundane things as sufficient restrooms for tour bus drivers. It had problems in motivating and training its French employees in efficiency and customer orientation. Did all these mistakes reflect an intractable French mindset or a deficiency of Disney management? Perhaps both. But should not Disney management have researched all cultural differences more thoroughly? Further, the park needed major streamlining of inventories and operations after the opening. The mistakes suggested an arrogant mindset by Disney management: “We were arrogant,” concedes one executive. “It was like, ‘We’re building the Taj Mahal and people will come—on our terms.’”9

The miscalculations in hotel rooms and in pricing of many products, including food services, showed an insensitivity to the harsh economic conditions. But the greatest mistake was taking on too much debt for the park. The highly leveraged situation burdened Euro Disney with such hefty interest payments and overhead that the break-even point was impossibly high, and even threatened the viability of the enterprise. See the following Information Box for a discussion of the important inputs and implications affecting the break-even point, and how these should play a role in strategic planning.

INFORMATION BOX

THE BREAK-EVEN POINT

A break-even analysis is a vital tool in making go/no go decisions about new ventures and alternative business strategies. This can be shown graphically as follows: Below the break-even point, the venture suffers losses; above it, the venture becomes profitable.

Let us make a hypothetical comparison of Euro Disney, with its $1.6 billion in high-interest loans (some of these as high as 11 percent) from the banks, and what the situation might be with more equity and less borrowed funds.

For this example, let us assume that other fixed costs are $240 million, that the average interest rate on the debt is 10 percent, and that average profit margin (contribution to overhead) from each visitor is $32. Now let us consider two scenarios: (a) $1.6 billion of debt, and (b) only $0.5 billion of debt.

The number of visitors needed to breakeven is determined as follows:

Because Euro Disney expected 11,000,000 visitors the first year, it obviously was not going to break even while servicing $1.6 billion in debt with $160 million in interest charges per year. The average visitor would have to be induced to spend more, thereby increasing the average profit or contribution to overhead.

In making go/no go decisions, many costs can be estimated quite closely. What cannot be determined as surely are the sales figures. Certain things can be done to affect the break-even point. Obviously it can be lowered if the overhead is reduced, as we saw in scenario (b). Higher prices also result in a lower break-even point because of greater per customer profits (but would probably affect total sales quite adversely). Promotion expenses can be either increased or decreased and affect the break-even point; but they probably also have an impact on sales. Some costs of operation can be reduced, thus lowering the break-even point. But the hefty interest charges act as a lodestone over an enterprise, greatly increasing the overhead and requiring what may be an unattainable break-even point.

Does a new venture have to break even or make a profit the first year to be worth going into? Why or why not?

Were such mistakes and miscalculations beyond what we would expect of reasonable executives? Probably not, with the possible exception of the crushing burden of debt. Any new venture is susceptible to surprises and the need to streamline and weed out its inefficiencies. While we would have expected such to have been done faster and more effectively from a well-tried Disney operation, European, and particularly French and Parisian, consumers and employees showed different behavioral and attitudinal patterns than expected.

The worst sin that Disney management and investors could make would be to give up on Euro Disney and not to look ahead a few years. A hint of the future promise was Christmas week of 1993. Despite the first year’s $920 million in red ink, some 35,000 packed the park most days. A week later on a cold January day, some of the rides still had 40-minute waits.

POSTSCRIPT

The problems of Euro Disney were still not resolved by mid-1994. The theme park and resort near Paris remained troubled. On March 15, 1994, an agreement was struck, aimed at making Euro Disney profitable by September 30, 1995. The European banks would fund another $500 million and make concessions such as forgiving eighteen months interest and deferring all principal payments for three years. In return, Walt Disney Company agreed to spend about $750 million to bail out its Euro Disney affiliate. Disney also agreed to eliminate for five years the lucrative management fees and royalties it received on the sale of tickets and merchandise.10 In addition, a new source for financing had emerged. A member of the Saudi Arabian royal family agreed to invest up to $500 million for a 24 percent stake in Euro Disney. Prince Alwaleed had shown considerable sophistication in investing in troubled enterprises in the past. Now his commitment to Euro Disney showed a belief in the ultimate success of the resort.11

Finally, in the third quarter of 1995, Euro Disney posted its first profit, some $35 million for the period. This compared with a year earlier loss of $1

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million. By now, Euro Disney was only 39 percent owned by Disney. It attributed the turnaround partly to a new marketing strategy in which prices were slashed both at the gate and within the theme park in an effort to boost attendance, and also to shed the nagging image of being overpriced. It also officially changed its name to Disneyland Paris to more closely identify the park “with one of the most romantic and exciting cities in the world” and dissociate itself from the business-like connotation of the word “Euro.”12

To the delight of the French government, Disney opened a movie theme park next to Magic Kingdom, Walt Disney Studios in March 2002. It blended Disney entertainment with the history and culture of European film. Marketing efforts reflected a newfound cultural awareness, and efforts were focused largely on selling the new park through travel agents, whom Disney initially neglected in promoting Disneyland Paris. The timing could have been better, though, as tourism took a downturn following the 9/11 terrorist attacks.13

By the end of 2004, Disneyland Paris was again facing record losses, partly because of the resumption of full royalty payments and management fees due to Walt Disney Co. But deeper problems beset the venture. Attendance remained flat at about 12.4 million. The new Disney Studios Park opened to expectations of 4 million visitors, but only 2.2 million came in 2004, and many complained that it did not have enough attractions.

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 Disneyland Paris opened several new attractions between 2007 and 2010, but with the exception of 2008, continued to face losses. In 2009 and 2010, Disneyland Paris again deferred interest payments to its largest lender as well as royalty fees to the Walt Disney Company.

RECENT UPDATE

Disneyland Paris continued to face a tumultuous situation. For example, on December 23, 2009, one of the busiest days for the resort, its staff went on strike, disrupting its daily parades to the boos and hisses of a huge crowd of holiday visitors. The entire episode was caught on several guests’ cell phones and posted to YouTube.15 In 2010, two workers, a chef and a cook, committed suicide. The company denied the suicides had to do with work, but family members and a trade union insisted the suicides were work related. The chef wrote on a suicide note that he did “not want to return to working for Mickey.”16 CEO Philippe Gas said that Disneyland Paris saw “certain fundamental changes in consumer behavior” as tourists booked at the last minute, sought out promotional incentives, and stayed close to home.17 The attendance figures and financial results for 2006 through 2011 shown in 

Table 10.4

 indicate that the situation was not improving significantly.

There is a lot at stake for Disney in the success of Disneyland Paris. Failure would hurt its global brand image as it is expanding into China and elsewhere in the Far East. Perhaps the lessons learned in Paris of trying to keep visitors longer while saving on fixed costs will transfer. The Information Box on Hong Kong Disneyland suggests that some lessons learned in Europe and the early years in Hong Kong might finally be assimilating. Or are they?

TABLE 10.4: Disneyland Paris 2006–2011 Attendance Figures and Financial Results

INFORMATION BOX

HONG KONG DISNEYLAND

When Hong Kong Disneyland opened in 2005, it struggled to connect with consumers. It missed its attendance target of 5.6 million visitors in its first year, and attendance dropped nearly 30 percent in the second year to only four million. The travel industry was quick to criticize that the park was too small and not appealing to mainland Chinese audiences. To better understand the China market, in the summer of 2007 Disney executives surveyed consumers in their homes and found that the park needed to be more Chinese; they also learned that the heritage of Disney stories was not known to most Chinese. Fortuitously, 2008 was the year of the rat, and they hoped to transform this into the “Year of the Mouse” with their rodents, Mickey and Minnie, dressed in special red Chinese outfits. Parades down Main Street featured a dragon dance and puppets of birds, flowers, and fish, set to traditional Chinese music. Mickey and Minnie were joined by the god of wealth, and also gods of longevity and happiness.

Even with the research and fine tuning, some missteps still occurred. A Disney ad in 2006 featured a family consisting of two kids and two parents. China’s government, however, limits most couples to just one child. So the commercial had to be reset to show one child, two parents, and two grandparents. During the year of the mouse campaign, Disney hoped that “kids and families are discovering Disney stories together.”18

Design a marketing strategy for the theme park to better appeal to Chinese consumers.

18 Geoffrey A. Fowler, “Main Street, H.K.,” Wall Street Journal, January 23, 2008, pp. B1, B2.

Invitation for Your Analysis and Conclusions

How do you account for Disney management erring so badly, both at the beginning and even for years afterwards? Any suggestions?

WHAT WE CAN LEARN

Beware the Arrogant Mindset, Especially When Dealing with New Situations and New Cultures

French sensitivities were offended by Disney corporate executives who often turned out to be brash, insensitive, and overbearing. A contentious attitude by Disney personnel alienated people and aggravated planning and operational difficulties.

Such a mindset is a natural concomitant of success. It is said that success breeds arrogance, but this inclination must be fought against by those who would spurn the ideas and concerns of others. For a proud and touchy people, the French, this almost contemptuous attitude by the Americans fueled resentment and glee at Disney miscues. It did not foster cooperation, understanding, or the willingness to smooth the process. One might almost speculate that, had not the potential economic benefits to France been so great, the Euro Disney project might never have been approved.

Great Success May Be Ephemeral

We often find that great successes are not lasting, that they have no staying power. Somehow the success pattern gets lost or forgotten or is not well rounded. Other times an operation grows beyond the capability of the originators. Hungry competitors are always in the wings, ready to take advantage of any lapse. As we saw with Euro Disney, having a closed mind to new ideas or needed revisions of an old success pattern—the arrogance of success—makes expansion into different environments more difficult and even risky.

While corporate Disney has continued to have good success with its other theme parks, competitors are moving in with their own theme parks in the United States and elsewhere. We may question whether this industry is approaching saturation, and we may wonder whether Disney has learned from its mistakes in Europe.

Highly Leveraged Situations Are Extremely Vulnerable

During most of the 1980s, many managers, including corporate raiders, pursued a strategy of debt financing (leveraging) in contrast to equity financing (stock ownership). Funds for such borrowing were usually readily available, heavy debt had income tax advantages, and profits could be distributed among fewer shares so that return on equity was enhanced. During this time a few voices decried the over-leveraged situations of many companies. They predicted that when the eventual economic downturn came, such firms would find themselves unable to meet the heavy interest burden. Most lenders paid little heed to such lonesome voices and encouraged greater borrowing.

The widely publicized problems of some of the raiders in the late 1980s, such as Robert Campeau, who acquired major department store corporations only to find himself overextended and lose everything, suddenly changed some expansionist lending sentiments. The harsh reality dawned that these arrangements were often fragile indeed, especially when they rested on optimistic projections for asset sales, for revenues, and for cost savings to cover the interest payments. An economic slowdown hastened the demise of some of these ill-advised speculations. The subprime mortgage bubble of 2007 and 2008 was arguably the supreme example of wild exuberance crashing down to bring the whole economy into a recession.

Disney was guilty of speculative excesses with Euro Disney, relying far too much on borrowed funds and assuming that assets, such as hotels, could be easily sold off at higher prices to other investors. As we saw in the break-even box above, hefty interest charges from such over-leveraged conditions can jeopardize the viability of the enterprise if revenue and profit projections fail to meet the rosy expectations.

Be Judicious with the Skimming Price Strategy

Euro Disney faced the classical situation favorable for a skimming price strategy. It was in a monopoly position, with no equivalent competitors likely. It faced a somewhat inelastic demand curve, which indicated that people would come almost regardless of price. So why not price to maximize per-unit profits? Unfortunately for Disney, the wily Europeans circumvented the high prices by frugality. Of course, a severe recession exacerbated the situation.

The learning insight from this example is that a skimming price assumes that customers are willing and able to pay the higher prices and have no lower-priced competitive alternatives. It is a faulty strategy when many customers are unable, or unwilling, to pay the high prices and can find a way to experience the product or service in a modest way.

CONSIDER

Can you think of other learning insights from this case?

TEAM DEBATE EXERCISE

It is two years after the opening and Euro Disney is a monumental mistake, profit-wise. Two schools of thought are emerging for improving the situation. One is to pour more money into the project, build one or two more theme parks, and really make this another Disney World. The other camp believes more investment would be wasted at this time, that the need is to pare expenses to the bone and wait for an eventual upturn. Debate the two positions

QUESTIONS

1. How could the company have erred so badly in its estimates of spending patterns of European customers?

2. Could a better reading of the effect of cultural differences on revenues have been achieved?

3. What suggestions do you have for fostering a climate of sensitivity and goodwill in corporate dealings with the French?

4. How do you account for the great success of Tokyo Disneyland and the problems of Euro Disney? What are the key contributory differences?

5. Do you believe that Euro Disney might have done better if it were located elsewhere in Europe rather than just outside Paris? Why or why not?

6. “Mickey Mouse and the Disney Park are an American cultural abomination.” Evaluate this critical statement.

7. Consider how a strong marketing approach might be made to both European consumers and middlemen, such as travel agents, tour guides, even bus drivers.

8. Discuss the desirability of raising admission prices at the very time when attendance is static, profits are nonexistent, and new attractions are months and several years in the future.

QUESTIONS

1. As the staff assistant to the president of Euro Disney, you already believe before the grand opening that the plans to use a skimming pricing strategy and to emphasize luxury hotel accommodations are ill advised. What arguments would you marshal to try to persuade the company to offer lower prices and more moderate accommodations? Be as persuasive as you can.

2. It is six months after the opening. Revenues are not meeting target, and a number of problems have surfaced and are being worked on. The major problem remains, however, that the venture needs more visitors or higher expenditures per visitor. Develop a business model to improve the situation.

3. How would you rid an organization, such as Euro Disney, of an arrogant mindset? Assume that you are an operational VP and have substantial resources, but not necessarily the eager support of top management.

TEAM DEBATE

 ->Under the topic “Team Debate Exercise” , you will find information about two camps adopting two opposing positions. Pick a position and discuss why that is the right approach for improving the situation.

-> If you were to be appointed as the Chief Marketing Officer of Euro Disney, what would be your actions to make Euro Disney a more attractive place for the customers? Explain in detail.