As Merlin Entertainments celebrates the opening of its largest new theme park ever – Legoland Florida – Nick Varney shares his thoughts on a wide range of topics with Owen Ralph.
Two decades after entering the theme park industry as marketing director of Alton Towers, Nick Varney sits as chief executive of one of the world’s top attraction operators, second only to Disney. After a management buyout of Vardon Attractions in 1999, he and his team launched Merlin Entertainments Group. Six years later, Varney secured private equity funding from Blackstone to mount an audacious bid for the Legoland parks business, followed by Gardaland in Italy and the Tussauds Group in 2006/7. Since then Merlin has grown via a sustained programme of new openings, acquisitions and partnerships and now boasting almost 80 attractions in 17 countries on four continents. Key to the company’s growth is the development of its theme park resorts, opening of new Legoland parks, and exploitation of its strong ‘Midway’ brands such as Sea Life, Madame Tussauds, Legoland Discovery Centre, the ‘Eye’ and The Dungeons – often ‘clustered’ together in one location.
Why did you decide to launch Legoland Florida on the former Cypress Gardens site in Winter Haven?
Legoland is on a very good upwards trajectory in the US, as is our business generally, and we wanted to be in Florida – the biggest theme park market on the planet. Now, if we are honest, ideally you want to be slap bang in the middle of Orlando. The trouble is getting the site, getting permission to turn it into a theme park and, because you would be building from scratch, you would need to spend probably what is being spent in Malaysia, $300 million, to turn it into a top of the range Legoland park.
What we were able to do in Winter Haven was buy a site with existing permissions and infrastructure, and reopen it just two years later as Legoland Florida. The previous owners had already invested millions in infrastructure but didn’t have a compelling brand; Cypress Gardens was just not strong enough to work in that market. Legoland on the other hand is a very established global brand with a unique positioning for families with young children.
No one will visit Legoland Florida without thinking it is a top of the range international theme park, up there with Disneyland, SeaWorld and Universal. The addition of all the Legoland ingredients to what was already there, the infrastructure, botanical gardens and lakeside setting, has produced without question the most marvellous Legoland to date. I defy you not to walk around that park and think we’ve invested at least a half billion dollars.
When Blackstone acquired Busch Entertainment (now SeaWorld Parks and Entertainment) were there any discussions about merging it with Merlin?
There were discussions, but the truth is there were a whole variety of reasons why that would have been extremely difficult, and not necessarily desirable, to do. I make no secret of the fact I am a big admirer of Busch Gardens in Tampa and Williamsburg, and in another life they would have fitted very nicely into Merlin. The SeaWorld brand too is successful and very well defined. But these attractions are now part of a separate company which has got a great team behind it, and [CEO] Jim Atchison is a good friend.
How important is it to have a good partner when pushing into markets like North America and Asia-Pacific?
When we talk about partners, there are different levels. In the US one of the most effective partnerships we have got is with the Simon Property Group. They get the benefit that our brands can bring to their malls. Sea Life when it opened literally rejuvenated the centre in Dallas/Fort Worth, to the delight of the other tenants. We on the other hand benefit from a supportive landlord with premier sites which are well established in high footfall locations. In short it’s a great partnership for us both. Partners like that are very important to the development of Midway in North America and elsewhere.
In the past we have also gone into new markets we were a bit unsure about, such as Scandinavia, as joint ventures. We have a 50/50 relationship for example with Linnanmäki at Sea Life Helsinki. That’s worked well, but generally once we’ve got the feel for a market we are often happier to go it alone.
Australia is different again. The Sydney Attractions Group acquisition has also resulted in a strategic relationship with Village Roadshow that will see us potentially developing a Legoland Discovery Centre with them on the Gold Coast.
In China, where we already have Madame Tussauds in Hong Kong and Shanghai, we have seen big gains in spending power in the last few years. However it’s difficult to determine what the real tourism flows are. There is also already quite a significant local Chinese attractions industry – companies most of us have never heard of running are 10 theme parks! So it’s an interesting, fantastically high potential market, but one you could jump into and get absolutely murdered! China we therefore believe is one of those markets where you need some local knowledge and partnership, whether it’s with the government or a developer.
What about the Middle East – will Legoland still happen in Dubai?
We have signed a contract to build Legoland Dubailand. Obviously we all know what happened with the crash, but so far as I am concerned, our contract with Dubai is still live. They have greatly reduced the scope of their overall leisure plans there, but if I was a betting man, I would say that at some point in the next five years you are going to see both the Universal and Legoland parks opening in Dubai.
Our Midway model is also well suited to the region. You already see aquariums being put into malls in the Middle East and Turkey, but the mistakes many people are making is building them too big for the market, whereas the Sea Life model would be perfect.
At what point do your Midway brands reach critical mass? Is there a risk of them becoming as ubiquitous as McDonald’s or Starbucks?
I don’t see that. When I joined Vardon Attractions we had 16 Sea Life centres around the UK, and as soon as we got the chance as Merlin we sold seven of the smaller aquariums in order to focus on those in locations with large enough markets. I don’t think I can see many more aquarium opportunities in the UK for example, and there’s probably room for just one more in Germany. But in North America we’ve only got four, so I think there’s a lot of places we can go there, and then we’ve got the whole Asia-Pacific market too.
Merlin recently relaunched Blackpool Tower and has plans for an observation tower in Weymouth, a host venue during the 2012 Olympic Games. How much do you believe in the British seaside?
I believe in certain seaside resorts. I think there are an awful lot trying to be something they can’t. Most coastal resorts, not just in the UK but also in Europe and even America, are feeding a small local market. There are, however, a few resorts that have big enough catchment areas and brand reputations to stand out as major destinations. Blackpool clearly is one of those. It’s certainly never lost its core market of the Midlands right up to Scotland, but we think it can also have national appeal, Others that stand out are Brighton and Bournemouth along the south coast. Places like Scarborough and Skegness are quite big as well, but there aren’t many of them.
The Weymouth opportunity came up partly because our head office is based locally in Dorset, and I think that region has got huge potential. There are seven huge holiday camps around Weymouth and it’s on the Jurassic Coast, which is a World Heritage Site. Our Weymouth Sea Life Park already does very well, although it’s a slightly different product because it’s got all the aquarium elements but also a rides area, mini waterpark and adventure golf; it’s almost like a half day theme park. So we were delighted to pursue the opportunity to put an observation tower there. It’s also not just about the Olympics, we think it will stack up on its own as a successful tourist attraction for many years to come as a second gate to the existing Sea Life park
What are your plans for the ‘Eye’ brand?
We acquired the London Eye in 2007 and have worked very hard on the brand proposition. We have a very clear idea in our mind of what we will brand with the Eye. It’s a very prestigious brand; iconic landmark attractions that afford people an inspiring perspective – a bird’s eye view. The London Eye is an amazing structure, as are our other two ‘Eyes’ – the Blackpool Tower and the Sydney Tower.
We were always keen to make the London Eye more than just a ride on an observation wheel. The 4D pre-show is an immersive, emotional, hairs on the back of your neck experience. We put that in because we wanted to build a brand experience, ease throughput and, frankly, wanted to justify a price increase. The pre-show is now also part of the offer in Sydney and Blackpool, and will be anywhere we do an Eye-branded attraction.
Will there be many more Eye-branded observation wheels?
The Eye can be any iconic landmark observation attraction – which may be wheels or towers. We are looking at ‘Eye’ branded wheels in both Orlando and Vegas for example. To me however there are not many places that can justify £100 million plus [$160m/€116m] of capital expenditure on a fixed capsule observation wheel. Where these are being built we see them as partnership projects.
A 4D experience now forms an integral part of all Eye-branded attractions, such as the Sydney Tower
Other than the ongoing Legoland projects, would you ever build a new theme park from scratch?
I keep hearing rumours about a big park that someone is trying to get off the ground in the south east of England and, you know, I just scratch my head because the old saying is a fool and their money are easily parted. There is no evidence, anywhere in Europe as far back as I can remember, of anyone making money by building a new theme park from scratch.
It’s said that today the only people who can make money from mainstream theme parks are the ones that pick them up the second or third time round, and our acquisition of Cypress Gardens is a good example of that. Of course there are consultants out there who make their money from doing studies that will tell clients differently, and people from other sectors who think running a theme park can’t be that hard. So I guess they’ll continue to spend all their money, get it open …and loose their shirt.
You certainly won’t see Merlin building new resort theme parks from scratch. There’s too much benefit still to be gained from doing the other things we are doing. What’s more wise investors would never put money into building a green field site theme park.
Do independent parks have a future?
There is definitely room for independent parks, they are part of what add variety and colour to the business, and I might add that just because Alton Towers and Gardaland are owned by Merlin I hope they are just as strong and individual as they have ever been. But you need to know what your position in the market is, you’ve got to have some sort of edge and brand image that marks you out. If you have, it doesn’t matter if you are owned by a big corporate or you are a family or independent operation. Europa-Park and Efteling stand up as great examples of that.
You spoke recently of your belief that European theme parks are under priced. Why is this?
Right now the biggest lead price in continental Europe is €36, which is nothing for what they are offering. Theme parks and attractions deliver the best value for money of all location based entertainment and to prove it I’ve devised an ‘entertainment cost per hour’ analysis [see panel below].
We are simply not charging prices that reflect the level of investment that goes into creating the experience. I’m not just talking about the rides, it’s about the cost of labour, marketing, maintenance, all those things that it takes to create a good theme park. If you can’t pass all that on to your customer then you are never going to get a good return. And if you don’t get good returns, you are going to find it difficult to get investment, whether you want to sell it, float it, or go to a bank for a loan.
I really had to discipline my own team on this because their natural reaction every time they were put under pressure by the media on the issue of pricing was to point out the discounts in the market, rather than defend the lead price. Of course there are discounts out there, that’s part of how we market, but the lead price reflects what we believe our product is worth.
What doesn’t help, at least in the UK, is the rate of VAT – 20% as opposed to say 5.5% in France and 8% in Spain. This puts the UK at a big disadvantage. Even Ireland, which has to be bailed out by the European Union, cut the rate of VAT on tourism services. It’s doing that because every time it’s ever lowered VAT it leads to a surge of tourism revenues and job creation – not something successive UK governments appear to understand!
When will be the right time to float the company?
We were going to float last year but the stock markets were volatile, and I think you can say they haven’t continued to be any less volatile! That’s why we did the CVC deal, which secured our growth plans so we won’t be thinking about it for a few years because as a new investor they obviously want to see the company grow.
That said, we have grown our profits in double digits for 10 years in a row, and we still think that Merlin’s ultimate destiny is to be a public company. We have got a couple of big things on our side, Midway and the Legoland parks. Without them we’d be just another theme park company, whereas everybody looks at Merlin and sees a very balanced portfolio.
Did you think you would end up creating the world’s second biggest attractions operator when you arrived at Alton Towers/Tussauds in 1990?
Certainly when we created Merlin Entertainments the ambition was to create a top 10 global player although we weren’t even on the radar at that time. We still have that same vision and strategy and, thanks to Blackstone’s backing, a fantastic team and a lot of luck, we have become the world number two. But there is still a lot to go for!