Vast ills have followed a belief in certainty
Posted: Oct 29, 2020
Ever heard of the story of the grasshopper and the ant. A grasshopper that has spent the summer singing while the ant worked to store up food for winter. During winter, the grasshopper finds itself dying of hunger and begs the ant for food. The ant in this story does the hedging against the seasonal risk by storing the commodities for future use. If what the story indicates is correct, the ant had more than enough supplies for the winter, due to which it could even lend. If there were only summers and no winter, the ant would not have to store and would have joined the singing grasshopper. In real life, seasonality doesn’t only relate to solar seasons. It could be anything from seasonal crops to ski resorts. That being said, seasonality and cyclical are entirely different. The former depends on how regular the period of change is, and the latter is a trend, not necessarily aligned with time.
Recently, the largest US theme parks have reported no COVID-19 outbreaks since their reopening as per a recent article from The Orange County Register. They have implemented basic guidelines that are now familiar as part of the "new normal" in the COVID-19 era: mandatory masks, social distancing, increased sanitization, contactless payments, reduced attraction capacity, and employee training. All of them have been operating under reduced capacity. In 2019, Disney's Parks, Experiences and Consumer Products segment emerged as one of its fastest-growing profit drivers as per CNBC. With the coronavirus breakout, not just Disney's, but all the theme parks worldwide have been closed down. According to the analysts, this could be the biggest drag on earnings for Disney. Even with the coronavirus out of the equation, amusement parks are one of many seasonal industries. Establishment and maintenance constitute high fixed costs, creating more dependency on consistent customer revenues.
The theme park concept originated from the age-old concept of a "pleasure garden", a public area left aside for entertainment and recreational purposes. Over time, theme parks have evolved to include amusement parks, bandstands, concert halls, and zoos. Many companies like Warner Brothers, Anheuser-Busch, Legoland, and Disney have, over time, ventured into this business. Without confining just to the United States, they have established theme parks worldwide, customized to the host country's culture. Theme parks also constitute an important branch of tourism. A successful theme park would promote the local economy and create employment opportunities; otherwise, it would be a waste of money and integral land resources. The influential factors for theme parks' success are tourist markets and transportation conditions, regional economic development, the city's image, and spatial agglomeration and competition.
Risks that amusement parks are exposed to, can briefly be classified into strategic, operational, financial, and hazard. Consumers at theme parks are majorly children below the age of eighteen. A variety of measures like frequent maintenance, provision of signboards wherever required, and having medical personnel and first-aid kits standby can help mitigate these risks. One of the financial instruments that can be utilized in such scenarios is insurance. Investopedia defines insurance as a contract in which an individual receives financial protection against losses from the insurance seller. This financial protection can hedge against hazard risk in case of an accident.
Another type of risk the theme park industry is prone to is, seasonal risk. Winter is off-season; the cold weather and rainy days in winter might be an abhorrence, especially for kids and their families. Compared to other forms of property or real estate, theme parks might be the most volatile in terms of generating revenues. Usually, commercial properties provide services in return for a year or more time contracts. A theme park provides entertainment and leisure based on day or per ride tickets. Excess reliance on a particular day or ride fares causes enormous demand swings based on holidays, vacation periods, and the weather. Functioning around these peaks is one of the most critical operational challenges in designing a theme park. Personnel planning, demand forecasting, capacity planning, and good customer service are few but not all the factors that could hedge against the seasonality risk.
The amusement park business is built on the crowd it attracts, and communal experiences and rides have been created to serve more riders and parades, park hours, and firework shows to ensure people gather and remain in the park for longer periods. Dining areas are designed in a way to accommodate as many people as possible. Not all the theme parks are open now, and of those which are open, all of them are running under reduced capacity. Because of COVID-19, theme parks have lost their peak season for the year 2020. According to a McKinsey study, "Although the pandemic's impact has varied across regions, one of the five themes that have become quite evident among consumers across the globe is shift to value and essentials." However, the current sentiment is that demand will grow gradually if the theme parks try and address the park visitors' concerns and build trust over time. Either way, adapting to the new normal seems inevitable.
Effective enterprise risk management has never been more important than it is today. In an unpredictable and dynamic business environment, assessing and managing risk effectively has become a key way of gaining competitive advantage. The Institute of Risk Management is the world’s leading professional body for Enterprise Risk Management qualifications, training and research. Headquartered in the UK, IRM is a globally recognised, not-for-profit body with a presence in 143 countries and is run by professional members across the world since 1986. It provides globally recognized qualifications with designations, customised industry training programs, publishes research and sets professional standards to help today’s risk community meet the demands of a challenging environment.
Submitted by - Veenanjali
Member - Student Risk Committee at the Institute of Risk Management - India Chapter.
Member - Student Risk Committee at the Institute of Risk Management - India Chapter. I have keen interest in enterprise risk management research.