Don't Blame Shanghai for Cuts at Disneyland and Disney World

Over the past week, Disney fans have been Tweeting with the hashtag #ThanksShanghai — a sarcastic shout-out to Disney's newest theme park, whose cost overruns the fans blame for cut-backs at Disney's American theme parks.

Shanghai Disneyland opens on June 16, but Disney's target for the park was late last year. The delay has inflated the price of construction and has cost Disney its share of six months of income from what might end up becoming the world's most popular theme park. At the same time, fans are seeing cuts at the Walt Disney World and Disneyland Resorts, with fewer entertainment options, reduced capacity at some attractions and reports of cast members seeing reductions in their hours scheduled.

It's easy to put two and two together, and... #ThanksShanghai. But blaming Shanghai Disneyland for operational cuts at Disneyland and Disney World reflects a simplistic conclusion. This just isn't the way that publicly-traded companies run.

To start, one basic rule of accounting is that capital expenditures — money spent on construction, new equipment, and buying land — is accounted differently that money for operations — such as paying employees. If Disney had to pay more than it planned to build Shanghai Disneyland, that's a hit to its capital budget. And no amount of cutting its operational budget will change that.

If Disney wants to offset an unexpected expense in its capital budget, it would need to do that by delaying or canceling another construction project. Now, there's a strong consensus within the analyst community that Disney already did that... by delaying Star Wars Land for nearly two years. Yes, the company was waiting for the start of the new trilogy, and yes, the company's board sent the original plans back to Imagineering for another go. It's possible, even likely, that Disney would have ended up delaying Star Wars Land even if it had never started the project in Shanghai. But it was a lot easier for Disney management to justify those capital delays when Shanghai was running over budget.

So what about that loss of six months' income? That is an operational issue. But in accounting terms, that delay was a one-time, extraordinary event. One-time items are the "get of of jail free" cards that companies hand to analysts, hoping not to be punished for a loss that doesn't reflect an ongoing problem in the company. Disney doesn't have to make cuts to balance that — analysts know what's up.

Of course, all of Disney's capital and operational expenses get thrown together on the company's bottom line. And any corporate executive who wants to keep her or his job wants that bottom line to look as black and as fat as possible. But any analyst with the ability to read a spreadsheet looks far beyond the bottom line. They know exactly what's happening in Shanghai. Nothing that Disney does stateside will hide that.

But... aren't cast members hearing from their managers that they're under orders to cut costs due to Shanghai? Here's where the corporate game of telephone comes into play. Of course, Disney wants to deliver the best bottom-line performance that it can, despite a hit from delays in Shanghai. So that's why upper-level executives would tell their department managers to take a hard look at all aspects of their operations, to see what might be cut to improve their departments' contributions to the bottom line. And yet... executives tell managers to get out the scissors all the time. With Bob Chapek taking over the Parks division from Tom Staggs last year, it's likely that such a call would have come anyway, with or without Shanghai in play. An immediate boost to the bottom line is an immediate boost to a new leader's reputation.

Disney always cuts labor hours in the shoulder season between Spring Break and the start of summer. And with Star Wars Land construction taking over large sections of Disneyland and Disney's Hollywood Studios, several attractions were going to close — whether for a short time or forever. But managers now are looking for whatever other cuts they can make to their labor and operational budgets, to see which ones they can "get away with," without resulting in a loss of income or attendance.

Many fans are citing the elimination of the Pixar Play Parade at Disney California Adventure for the next month as an example of #ThanksShanghai. But the festival marketplace food booths for the DCA Food & Wine Festival effectively block the park's parade route, making the parade impossible to run during the festival. Sure, Disney could have found other locations in the park for the booths, allowing both the parade and the festival to run at the same time. But here's how that cost-cutting analysis comes into play — Disneyland management is betting that it doesn't need the parade to draw visitors while the festival is running. And if the parade isn't going to improve the bottom line during the festival, why run it? Why not save the expense and let that flow to the bottom line?

Here's how you know that the current cuts at Disneyland and Disney World ultimately don't have anything to do with Shanghai. Imagine if Shanghai Disneyland becomes a wild financial success, earning more than Disney anticipated and contributing billions to the company's profit. What happens then?

Here's what happens — If the cuts at Disneyland and Disney World do not result in a loss of income or attendance at those parks, Disney won't change a thing. Disney will bank the extra profits from Shanghai and the extra profits from cutting superfluous expenses at DLR and WDW. The only way that Disney will back off cuts at its U.S. resorts will be if those cuts result in losses for the company. Ultimately, the parks' direction is not determined by what's happening in China. It will be determined by the decisions of Disney's theme park customers.

If fans decide that they'd rather go spend their money at Universal, Knott's, SeaWorld, Six Flags, or other parks and attractions, than put up with cuts at Disney, then Disney will have a reason to open its checkbook to win back its former customers. But if fans continue to support Disney's theme parks — deciding that Disney with cuts is still better than the competition — then why of Earth should Disney increase marginal spending on labor and operations? It's making its money without that expense.

Every time Disney raises its ticket prices or cuts something in its parks, fans go online and wail and moan. Many say that's the final straw and that they will stop spending money at Disney's theme parks. And year after year, Disney's theme park attendance and income grow anyway.

Disney knows exactly what it is doing. And it does it better than anyone else in this industry, which is why Disney is far and away the industry leader in attendance and income.

Don't like what's happening at Disney's theme parks? Don't say #ThanksShanghai. Give credit where credit is due and say... #ThanksDisneyFans.

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