Euro Disney – Case Study I

By Dagmar Recklies

The following report was written as an assignment in the authors MBA-course for the subject
Managing Resources – Accounting. It was subject to a word limit, so that no deeper investigation
was possible.

Question:
Were the 1992 and 1993 financial results for Euro Disney an indication that principal factors in the planning
process were wrong?

1  Introduction – Euro Disney’s Plans and Reality

When the International Offer of Shares for the Euro Disneyland S.C.A. (in the following called Euro Disney) was
published in October 1989 the plans for this new enterprise of the Walt Disney group were ambiguous. The financial
plans for the first year of operation projected total revenues of FF 5,482 million and a net profit after taxation of FF
204 million. For the following years the development should be even more impressive. At that time the plans were
seen as a consequent application of the concepts of the existing Disney-designed theme parks. [1]  

Just a short time after Euro Disney was opened in time on April 1992 it was obvious that reality would not meet the
plans. In November 1992 the financial reports for the year ended 30 September 1992 were published which included
the first 172 opening days of Disneyland Paris. There the management had to announce a loss of FF 188 million.
The second year was even worse. Although Euro Disney nearly met plans for guest attendance, they faced a loss of
FF 5,337 million whereas total turnover was FF 5,725 million. Plans for the second year of operation (1 April 1993
to 31 March 1994) forecasted a turnover of FF 6,801 Mio and a profit of FF 359 Mio. 

The scope of this assignment is to find out if these financial results were an indication that principal factors in the
planning process were wrong. For this the author will compare the plans and actual results for Euro Disney’s first
two years, analyse major premises Disney set when planning for Euro Disney and analyse the steps of the planning
process. The base for this analysis will be mainly the profit and loss accounts.

2   Theory of the Planning Process 

Normally there are several ways to reach an organisations goal. To determine the way to this goal which is for most
organisations – except non-profit ones – the maximisation of profit, a plan is needed. Planning means to decide for
one of the possible ways given.  

The process of planning takes three steps: 

1.    Collection of information

2.    Development of several alternative plans

3.    Decision for one of these plans 

In the first step it is important to gather as much information as possible to provide the best basis to decide for the
plan that promises best results. Because of the future nature of planning there will not be complete information. This
requires some estimations. Therefore all plans include more or less elements of uncertainty and risk. [2] Since
planning is essentially about the future, the results and information from the past usually are only relevant as the
basis from which to forecast. 
On the basis of the information available and the projections of possible future developments it is possible to
retrieve alternative plans for different scenarios. In spite of the uncertainty of the future, planning offers the means
to evaluate alternative proposals. This should reduce uncertainty and risk.[3] 

Planning is involved in various kinds of decisions, but especially important for major decisions concerning the
overall future strategy and large investments. Such issues are very risky since they require a high spending of capital
and have an long-term influence on the future development of the organisation. One example is the foundation and
setting-up of a new company.

3   Comparison of Euro Disney’s Plans and actual Results

A direct comparison between the plans for Euro Disney as given in the Offer of Shares and the results presented in
the financial reports is not possible for the following reasons: 

       The Offer of Shares refers to a complete year after the opening of the park, that means
from April 1st to March 30th of the following year. The financial reports refer to the financial
year beginning October 1st and ending September 30th of the following year.

       The details given in the Offer of Shares and in the financial reports refer to different
positions of the profit and loss accounts. Therefore it is not possible to compare the
composition of the positions and analyse reasons for differences. 

For this reasons all conclusions given below should be evaluated carefully. For a more detailed analysis additional
information would be necessary[4]. 

To be able to make a general statement this report will compare the plans for the first and second year of operation
with the financial years ending September 30th 1992 and 1993. At least the last one will provide the opportunity to
compare two periods of twelve months of operation. This comparison is provided in appendices 1 to 3. With a stress
on the second year – as explained above – the following conclusions can be drawn: 

       In the first year Euro Disney nearly met expectations for revenues and operating
expenses of the Magic Kingdom. With no operating profit from the resort and property
development sector and higher than planned general and administrative costs it failed to
meet the profit projection by FF 392 Mio.

       In the second year again revenues from the Magic Kingdom reached the planned level
but operating expenses for this exceeded plans so that the operating profit was below
expectations.

       Again there was no significant operating profit from the resort and property development
operations.

       Lease, general and administrative expenses far exceeded plans.

       As a result the profit before exceptional profit and taxation missed plans by FF 2,332
Mio. 

A more detailed analysis is given in appendix 4. 

4    Critical Analysis of the planning Premises and the planning

4.1                Summary of the planning premises for Euro Disney

A detailed overview of Disney’s planning premises for its European theme park as it can be retrieved from the Offer
of Shares is given in appendix 5. From this it can be seen that the main ideas and principles were the following: 

       The planned Euro Disney theme park was seen as such a unique project that it would be
a monopolist; revenues were planned remarkably above the market level.

       Plans were based on Disney’s experiences with the existing theme parks.

       Disney drew conclusions from the successful development of Disneyland Tokyo which
was seen as a prove that the strictly American philosophy of Disney could be implemented
without major change in other cultural environments.

       Disney had two externals – Arthur D Little (in the following: ADS) and Petiteau Scacchi,
the French member firm of its auditor Price Waterholes  - examine its plans and the
underlying premises. 

Besides this the plans for Euro Disney were driven by the wish to avoid the limitations for profit generation faced in
other theme parks. These were the facts that Disney owed only a small number of the hotels around its existing
theme parks[5] and that it did not own and operate the Japanese theme park by itself thus only receiving pre-defined
royalties. The author assumes that the latter one originally was organised that way to limit the risk of a high
investment in a so far new cultural environment.

4.2           Analysis of the planning Process

The following analysis of Disney’s planning process and premises for the European theme park takes assumptions
for Disney’s activities concerning the three planning steps. This is done with the help of examples. Not all issues
connected with the original plans are covered. 

In general the last three of the above principles used by Disney to give the plans more reliability are all reasonable
and necessary.  

For the first planning step – the collection of information - a company has to base its plans for a new business in a
new market-environment - amongst other information - on its experiences with existing activities. From the details
given in the Offer of Shares it can be concluded that Disney did this quite carefully. Moreover the frequent stress of
the positive experiences with the American and Japanese theme parks indicates that Disney was a bit too impressed
by its own success. It is also the authors experience that companies which can refer to existing successfully
performing businesses sometimes tend to be over-optimistic for their newly planned activities. 

A second important group of information that has to be gathered are facts about the environment for the newly
planned business (e.g. PESTLE-analysis). The offer of Shares indicates that Disney covered this field as well but
obviously at least not all socio-cultural and economical issues were cared for enough. 
The second step– the development of several alternative plans - requires an adjustment of the previous
experiences to the special situation for the new business. Because of the uncertainty involved this should result in
some different scenarios. These again result in different business plans. These alternative business plans include
amongst others 

       Forecasts for the development of revenues, costs and cash flow and other economical
figures,

       Options to include or exclude additional business activities like in Disney’s case the
resort and property development. 

The sensitivity analysis presented in the Offer of Shares is an indication that Disney followed this step in its
planning process. For the reason of assessment of plans under alternative future scenarios this sensitivity analysis
presented to the public does not offer enough information. Its main weakness is that in each scenario only one factor
is changed whereas all other factors remained stable. At least a combination of the factors which are most likely to
change would have added more clarity. 

There is no information available if Disney prepared a scenario with a high influence of cultural differences. But the
reality showed that at least in the third step – decision for one plan – Disney underestimated the influence of
cultural differences between America and Europe.[6] This had a considerable influence on the actual deviation from
the plans.  

In addition, Disney decided for a plan in which the underlying scenario sees a Disney theme park as a monopolist
because of its quality and uniqueness. They did not take enough care for competitors offering different leisure and
entertainment activities. This resulted in too high expectations of guest attendance figures and acceptability of
planned admission fees, prices for food and beverages and merchandise. This assessment by Disney was supported
by a report from ADL, stating that the assumptions for guest attendance and per capita spending were reasonable.
On the other hand a report of Petiteau Scacchi gave a very cautious statement. It only said that the plans were
consistent with the accounting policies, were correctly calculated and correctly compiled on the base of the
assumptions. Since the auditors gave no statement that the planning premises were reasonable this should have been
taken as a serious indication that there were some problems. In fact the theme park had to compete with other tourist
attractions and theme parks around Europe. Thus there is no monopolistic position for Euro Disney but an
oligopolistic one.[7] 

As for the resort and property development business - which was an essential part of the plans for Euro Disney – the
management decided for a scenario that assumes a stable property market in France for the years to come. This was
based on an analysis by ADS, concluding a high influence of the Disney theme park on the property market of the
local area. Despite this study the scenario seems to be optimistic since obviously no care was taken for a possible
decrease or breakdown in the property market. It would have been more cautious to plan for a lower level of
revenues and profits from resort and property development and leave the expected higher level as chance for higher-
than-planned profits.

5     Summary

Euro Disney’s financial results of the years 1992 and 1993 by far missed the plans given in the Offer of shares. 

This plans were mainly based on Disney’s experiences with its existing and successfully performing theme parks. 

Although the planning process seems to have been carefully conducted and backed by analysis of external experts
some significant failures occurred. From the financial results of the first two years of operation and from analysts
comments on the actual development one can see that the problems resulted amongst other factors from the
following general reasons: 
       wrong assessment of the market situation,

       overall economical development,

       development of property market,

       guest awareness of high prices,

       cultural problems.

Even though not all developments could have been predicted correctly at the time the plans were established, the
above factors were not taken care for in the necessary extent in the planning concept. In this sense Disney decided
for a too optimistic scenario.