For the past three years, Disney's theme parks have cast a powerful spell on its bottom line. As the pandemic receded, guests streamed through their turnstiles flush with furlough cash and a pent-up demand to travel. Many of Disney's resorts hit new highs but one was not so lucky.
Few countries suffered from the pandemic for as long as Japan. Its location on an island initially protected it but tourism nosedived as most of the world couldn't travel there during lockdown. As countries started emerging from the pandemic, Covid-19 reached Japan's shores so it had to impose strict limits on inbound tourism. Its restrictions on tourists were only fully dropped last April leaving the country starved of travelers for years.
The tourism industry had to try and attract foreign travelers again after the dial had been reset. As they say, the bigger they are, the harder they fall so it's perhaps no surprise that one of the most badly-bruised businesses was Tokyo Disney Resort, Japan's most-visited theme park complex.
The 494-acre site on the outskirts of Tokyo is the only Disney-branded resort in the world which isn't owned or operated by The Walt Disney Company (TWDC). Instead, it is owned and run by the Oriental Land Company (OLC), a specialist leisure venue operator listed on Japan's Nikkei stock exchange.
OLC contracts Disney's Imagineering design division to develop the resort in Tokyo and the media giant also earns royalties on its revenues. They come from five official hotels, an entertainment district and two theme parks. The Tokyo Disneyland park opened in 1983 and is almost a carbon copy of the Magic Kingdom at Walt Disney World in Orlando with its centerpiece Cinderella Castle and surrounding fairytale-themed lands. It was followed in 2001 by Tokyo DisneySea which is widely seen as being the world's most elaborate theme park as it features hyper-realistic recreations of Venice and Cape Cod as well as ports from fairytales.
MORE FROMFORBES ADVISOR
The pandemic blew dark clouds over Tokyo Disney as shows were canceled, park hours were reduced, daily attendance limits were introduced and restaurants even cut their menus. In order to keep guest numbers down and minimize mass gatherings, annual passes and multi-day tickets were withdrawn.
The dark skies still haven't cleared as many of the flagship shows are shuttered, single-day tickets are still the only options and guests have to specify which park they want to visit. While Covid-19 is thankfully a distant memory for many theme parks, OLC's filings don't hide the fact that one of its objectives for 2024 is "recovery from the pandemic." This isn't the only challenge it is facing.
A number of the other obstacles in OLC's way are due to its archaic operating procedures. Many of the shows in its theme parks operate a lottery system which guests have to enter in order to get a seat. Also, unlike most major parks in Europe and the United States, guests can't join ride queues right up to closing time as the lines are roped off if they extend beyond the operating hours of the park. So when Tokyo Disneyland closes at 9pm and the Big Thunder Mountain roller coaster has a 40 minute wait time by 8:20pm guests aren't allowed to join the queue.
Getting to the parks isn't child's play either as although a monorail pulls up to the gates, it isn't free like it is at Disney World or Disneyland in California. Riders need to buy a ticket and if you don't have a Japanese credit card, you need to use cash.
The digital infrastructure at Tokyo Disney is also weaker than its counterparts elsewhere in the world as wi-fi is only available in certain parts of the parks. They clearly aren't aimed at international guests as staff speak very little English and, in line with Japanese tastes, many of the rides are much more tame than their equivalents Stateside. The Tower of Terror freefall ride even has over-the-shoulder seatbelts rather than lap restraints as there are in the US.
These peculiarities are nothing new but they are becoming all the more important due to an increasing reliance on overseas visitors. According to filings from OLC, they accounted for around 12.7% of the total of 27.5 million visitors in the year to March 31, 2024 and are forecast to rise to 14% of the 29 million expected over the course of this year. It is no surprise.
High air fares and tepid wage growth have inspired Japanese travelers to explore closer to home. So residents who live far from Tokyo may think twice about visiting the parks. Likewise, withdrawing annual passes has put off a lot of locals as they were amongst the most frequent visitors.
"We don’t have annual passes so day tickets are the only option. As the price goes up I visit less often. If it got extortionate I’d likely just go a few times a year," said X user @8_theme in October last year. @MagicalNezumi added that it's "too bad COVID made OLC realize they didn't need us [annual pass] folk." @TRVLtruth concurred and asked: "Is anyone @TDR_PR aware that the pandemic is over and it’s time to bring back annual passes?"
The annual passes and multi-day tickets to theme parks were priced at a significant discount to the equivalent number of daily tickets as a benefit for purchasers paying a large amount in one go. Accordingly, guests of Tokyo Disney now have to buy multiple expensive single-day tickets when previously they paid much less for precisely the same time in the parks.
This additional revenue therefore falls straight to the bottom line as profit and it helped OLC to generate $1 billion (¥165.4 billion) of operating income on $3.9 billion (¥618.5 billion) of revenue in the last financial year. That is just the start.
Last month, DisneySea opened Fantasy Springs, a new land containing a 475-room deluxe hotel, a gift shop, three restaurants and four new attractions themed to Disney's hit animated movies Frozen, Peter Pan and Tangled.
At a cost of $2.1 billion (¥320 billion) it isn't just the most expensive expansion to Tokyo Disney in its 41 year history but one of the most costly ever added to a Disney park. Although it has a blockbuster cost, Fantasy Springs looks cartoony and seems incongruous in the realistic setting of DisneySea which hasn't escaped the attention of some fans as we reported.
It has also suffered from Byzantine barriers to entry as guests either need to buy a $13 Disney Premier Access pass or a complimentary Standby Pass for each attraction just to get into Fantasy Springs. Standby Passes are allocated at a notoriously fast rate so the odds of securing one are low, even if you arrive before the park opens. The Premier Access passes can only be purchased after you’ve entered the park and can only be booked one at a time, with availability only opening up again once one has been used.
Alternatively, guests can purchase a Fantasy Springs Magic Passport to get access to the four rides in the land. This costs between $147.45 and $166.76 per adult but can only be purchased if you’ve booked a package with Tokyo Disney. They typically cost north of $500 per night and are hard to come by as can be seen from a cursory check on the resort's online reservation portal.
Even though access to Fantasy Springs is selling out, social media has been awash with report after report after report of how empty it is, suggesting that the resort is releasing far fewer passes than it actually could. It is a world away from the crowds which were common elsewhere in Tokyo Disney's parks before the pandemic.
Thanks in part to the pricey single-day park tickets, OLC forecasts that revenue will rise 10.7% to a record $4.3 billion (¥684.8 billion) this year with operating income increasing to an all-time high of $1.1 billion (¥170 billion) even though attendance is expected to be 11% down on its peak of 32.6 million in 2019 as we revealed. OLC's filings add that next year "the number of guests from mainland China is projected to recover to a greater degree than in FY3/24, although not to the pre-pandemic level." It is far from a dream ticket for investors.
This stock chart shows that OLC's market capitalization – the total value of its shares – peaked this year at $62.7 billion in January but has fallen by a staggering $15.8 billion since then. It isn't due to an overall decline in the market. This is clear from the fact that the performance of OLC's stock stands in stark contrast to the Nikkei 225 Domestic Exposure 50 Index, which it is a component of. As the charts below show, the value of the Index has surged around 15% over the same time frame that OLC has crashed 19% under its chief executive Yumiko Takano.
As we recently reported, opening new theme park attractions isn't a magic formula for financial success as they are cost-intensive and generate low to no direct revenue. Tickets to Disney theme parks grant guests access to all of the attractions and visitors don't have to purchase access passes or queue-cutting tickets if they don't want to. Even Fantasy Springs, with its array of entry options, can still be visited with a regular park ticket and a complimentary Standby Pass.
The real financial wizardry comes when park operators manage to increase the number of guests without spending huge sums on new attractions. Fantasy Springs was given the green light long before the pandemic and recovery but heavy capital expenditure in a theme park still looks like a bold move at a time when it is emerging from a protracted downturn. It has the potential to attract new visitors but it also leaves little headroom which can concern investors.
OLC's free cashflow has only increased 8.8% to $590 million (¥94.8 billion) over the past decade as it has opened major new attractions in both of its parks. Capital expenditure can lead to a decrease in cash flow as companies spend money on assets that do not generate revenue immediately. Over time, investments can lead to increased cash flow, as companies benefit from higher sales, but theme park attractions are designed to be around for decades so many investors may not be prepared to wait that long.
The risk that comes from heavy capital expenditure is magnified by the nature of the investment and OLC has gone out on a limb by building an attraction themed to Tangled which has yet to prove it can stand the test of time. What's more, part of the attraction, and the entirety of one of the others, is set outdoors despite Tokyo having such bad weather that the turn-of-the-century street at the entrance to Tokyo Disneyland is covered.
The real financial impact of Fantasy Springs will only start to be seen in October when OLC releases its second quarter results covering the period from July to September this year. Its first quarter results will be released before then but only include the first few weeks of Fantasy Springs' operations which is when its popularity is naturally expected to peak. The new land doesn't seem to have enchanted investors a great deal as OLC's stock price has only increased by 1.5% to $28.65 (¥4,605) over the month since Fantasy Springs opened.
Some investors want a happy ending sooner rather than later. In November last year British fund Palliser Capital urged private railway operator Keisei Electric Railway to cash in its OLC shares to free up capital for core investments. Keisei reduced its stake but Palliser is now calling for further reductions by March 31, 2026.
Keisei is one of the largest shareholders in OLC followed by Japanese property developer Mitsui Fudosan which has also faced similar pressure from investors. In February it was reported that US-based activist investor Elliott Management had asked Mitsui Fudosan to sell its interest in OLC so that it could conduct a share buyback.
Blinded by the quality found in the majority of DisneySea, many fans often say that they wish Disney owned its outpost in Tokyo. Given the performance of its stock, that seems to be the last thing it needs.
