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Event update: Media - Multiplexes – Allowing outside food - Is the business model at risk?

Event

Media reports have indicated that the Maharashtra Government has allowed consumption of food articles from outside within Multiplex/Theatrical properties from 1 August 2018. The announcement was made by the government’s food and civil supplies minister, Mr. Ravindra Chavan, in response to a query raised on the floor of the assembly (Read here).

Case Background

In August 2017, Mr. Jainendra Baxi (through his lawyer – Mr. Aditya Pratap) had filed a public interest litigation (PIL) in the Bombay High Court (HC) challenging multiplexes that prohibit patrons from bringing in and consuming food and beverages from outside sources within their properties. The PIL stated that this violated citizens’ constitutional rights and that there is no legal/statutory rule that prohibits the same. The PIL also mentioned that the Maharashtra Cinemas (Regulation) Rules prohibit hawking/selling food inside theatres/auditoriums.

In January 2018, the HC had directed the Maharashtra Government to file a response on why food articles, from outside, should not be prohibited in these premises. The government has sought extensions to respond (January 25, April 4, June 12, and June 27 hearings) and is now expected to file its response on 25 July 2018 (the next date of hearing) in the HC.

Company Responses

We spoke to the managements of both PVR Ltd. (PVRL) and Inox Leisure Ltd. (INOL) for clarifications on these latest developments. As per the managements, there has been no official notice regarding disallowing prohibition of food articles from outside sources. The Maharashtra Government has to yet file a response to the PIL. If the government does come out with these rules, the companies intend to take legal steps to safeguard their rights. The Multiplex Association of India, in a press release, has also echoed the same statement.

Our View

Can F&B prices be capped? In the past, charging a price higher than the printed Maximum Retail Price for supply of packaged water bottles in restaurants has been debated vigorously, wherein the government has defended consumers. However, a recent Supreme Court ruling ruled in favour of restaurants (read here) that higher prices are justified since these are part of a service provided by the said establishment to consumers versus a normal shop. The ruling was also restricted to packaged products only and that there is no precedence where prepared food has been subject to any pricing regulations. Although we are no legal experts, we believe that this move could be difficult to implement.

Is it fair to allow outside F&B inside theatres? Multiplexes are registered under the ‘shops & establishment’ act just like restaurants. There is no specific regulation that prohibits one to take outside food in a multiplex in Maharashtra (state subject). However, in our limited legal understanding, allowing outside food in a restaurant would destroy its business model and might not stand the test of constitutionality.

Thus we would wait for the official order in this case before taking a call on revising our estimates for PVRL (we do not cover INOL) and we believe that this would be challenged in a higher court in any case given that multiplexes/theatres are right-to-admission properties (which entail it certain rights). However, if indeed Maharashtra is able to implement it then we expect this to be implemented across the country in the name of urban populism.

As per our rough estimates, a 1% fall in F&B revenue (0.3% of overall revenue) would lead to a 1%/3% drop in overall EBITDA/PAT for PVRL. Movie exhibitors could try to recoup some of the losses by raising ticket prices, but this would in turn impact overall footfalls. We currently have an Outperformer rating on PVRL (no rating on INOL). However, we would have to relook our positive stance on the space if the regulation on F&B becomes a reality.