Anyone who has been to Walt Disney World or Disneyland over the last few years can testify that amenities at Disney parks are quite expensive. While there’s no argument that there’s nothing quite like a trip to the most magical place on earth, and there's always something new at Disney World to make a return trip worthwhile, prices have slowly, and sometimes not so slowly, increased across the board. That's led to the sort of vacation that is clearly out of reach of many consumers. And, now, it looks like even Wall Street may be coming to that realization.
The price increases have certainly helped the House of Mouse's bottom line when it comes to stockholders. The Disney Experiences division, which includes the theme parks and Cruise Line, is often the primary profit center for the entire company, and the endless drive to make more money this quarter than last quarter has forced Disney to make massive layoffs while also increasing prices.
However, during the company's last quarterly earnings call, it warned that it expected a softening of attendance, or in corporate speak a “moderation of consumer demand” coming in the short term. Speaking to Yahoo Finance, Morningstar analyst Matthew Dolgin, wondered if the price increases may have gone too far, saying…
My one area of concern is whether it's a longer-term issue, as prices have gotten a little bit out of control, versus a shorter-term economically-tied type of issue. I don't know how much of this is a natural cyclical thing versus whether they have pushed the envelope a little bit too much on pricing, but that's the biggest thing that concerns me, rather than their investment in the business.
The comments echo sentiments made last year by Disney CEO Bob Iger last year, who admitted Disney Parks' price hikes had been too aggressive. Having said that, we certainly haven't seen them stop.
The price hikes increase revenue, which Wall Street loves, but at some point, if they result in reduced attendance, then revenue ends up going down. And that's something Wall Street doesn't love. Even if we look at this from a purely financial perspective, rather than a customer satisfaction one, there's a point at which increased prices are bad news.
Disney is currently planning a $60 billion investment in its theme parks and cruise lines, which will certainly increase costs over the next decade or so. While that may help attendance down the road, if attendance drops between now and then, it's going to be a rough period for Disney Parks, and therefore, the corporation as a whole.
The problem, however, is that if prices really have “pushed the envelope” as Dolgin says, that could mean a longer-term issue. There's an argument that the Mouse House is intentionally pricing people out as a way to reduce attendance while still keeping revenue high. That works to a point, but you can easily increase prices too much and go past that equilibrium point, and you likely won't know you've gone too far for some time.
Guests who have already planned Disney World vacations will still go on them but, if people are deciding Disney World is too expensive now, that’s going to result in this softening of attendance not being a minor blip on the radar but a long-term problem. The problem is that a price increase today that pushes things too far won't actually result in reduced attendance for months or even years down the road. By then, it will take months or years more to undo the damage.
If people think Disney World is a good value and they have a good time on their trip, they’ll tell their friends to go. If they come back and all they can talk about is how much they spent, that word of mouth may keep more people away. With that, once people have decided not to go, getting them to change their mind is a difficult, lengthy, and likely expensive, process.
