Some Businesses Should Never Go Under

by JT McGee

As I sat in a lazy river, a friend and I pondered the possibility that the theme park surrounding us could go under.

Impossible, I thought.

There isn’t anything necessarily special about this particular theme park. They all seem to have the same rides engineered by the same engineers relabeled with different names. Almost all of them have nasty, tacky carnival food that you eat only because you’re so exhausted. All attract people who look like they might have murdered someone yesterday.

At least I think they’re all like that.

Rigidity Only

Theme parks are part of the oddly fascinating business category that I hate so much: businesses where capital is productive only because of rigidity.

The thing is, theme parks are virtually the same. They’re spread out enough that few worry about attendance numbers, fun enough that people visit, and inexpensive enough that they’re virtually recession-proof when people take staycations. It’s like any other company with a really “niche” (hate that word) product. If the market is large enough to make money in, but small enough two firms cannot, and costly enough to start production, you’re going to have a monopoly, even if your product isn’t that good. But you won’t have the big bucks.

Unlike retail, where competitors practically build right on top of one another, no one is going to build a theme park next to another to compete on price. There’s a certain bit of a geographic monopoly that comes with a theme park. No one builds a theme park next to another to gamble on another park’s pricing.

The most ridiculous case of building on top of another business, ever.

You wouldn’t start a $100 million project with the assumption the company next to you will sell a good time for $10 less than you once you build. It’s a terrible gamble to take.

Businesses Ended by Irrationality

Six Flags is a great example of a typical corporate screw up. The company went bankrupt only a few years ago after going on a binge of debt-fueled acquisitions. It later escaped bankruptcy and went on to be majority owned by bondholders (mostly distressed debt investors who picked up the firm’s debt for pennies on the dollar.)

Six Flags is publicly-traded – this time with much less debt, but at a higher interest rate. Luckily, because the debt isn’t a massive barrier to profitability, and because no one is insane enough to open a new park next door, and because you couldn’t compete with the firm on price (already constructed attractions built in 1960 have a lower cost structure than those built in 2012), Six Flags will probably manage to do just fine.

But it won’t do great. It won’t set landspeed records for profitability, or earnings growth. It has no real advantages other than the fact it costs a TON to open a new theme park. And I won’t own it, because the assets it owns are not productive because they are awesome. They’re productive because people have few choices and because rigidity exists.

Six Flags is the kind of company that should never go under. Except that it has before.

{ 6 comments… read them below or add one }

PK August 20, 2012 at 10:40

Shouldn’t go under unless someone convinces them to go on a debt-fueled buying spree, you mean. I suppose that’s true for a lot of companies… if management didn’t do dumb things they could coast on reliable income. It’s when they get the crazy ideas in their heads things go awry.

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JT August 28, 2012 at 10:17

Binge acquisitions are the only thing worse than binge drinking!

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Darwin's Money August 20, 2012 at 21:43

Reminds me; we’re hitting Knoebel’s this week (old-school theme park for little kids in the middle of nowhere PA). It’s been around for decades; I wonder how the owners do financially?! Seems like very little new investment (the rides are a throwback to the 50s) and they have a unique costing approach (pay per ride as opposed to daily tickets everyone else sells).

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JT August 28, 2012 at 10:18

I thought pay per ride was something that existed only in videogames like Roller Coaster Tycoon. That’s a pretty cool model. If it weren’t for the endless pile of free tickets that land in my hands each year, I’d definitely prefer a park that charged per-ride.

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American Debt Project August 27, 2012 at 12:01

Would golf courses count as one of those businesses? I talked to a city where their golf course is their biggest money maker, their tiny (really tiny) 9 hole course makes $15K a week in greens fees. Except I have no idea what their maintenance costs are and I imagine they have to be high with city employees doing all the work.

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JT August 28, 2012 at 10:21

Oooh, golf courses are a perfect example. I actually worked for a golf course for a month or two. You’d be surprised how inexpensive they are to run assuming that 1) it rains with enough frequency that the sprinklers can be left off and 2) you don’t get slaughtered by property taxes. It’s my understanding that municipalities usually lease land for some trivial amount ($1 per year) to the golf course to avoid problem #2.

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