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entcol/turner/23″/mike1st/mark2nd Who would have thought, when we were growing up watching Elmer Fudd chasing Bugs around with a shotgun or Daffy Duck making those wacky whooping noises, that someday people would be willing to shell out $25,000 for a Looney Tunes chess set? The David Krakov-designed chess set is the most expensive item at the Fifth Avenue flagship of the Warner Bros. Studio Store, which expanded to nine stories in a building on New York’s equivalent of Rodeo Drive in October. Excessive? Maybe. But the retail chains launched by Warner Bros. and Walt Disney Co. have proven to be cash cows for both studios, and both chains have somehow managed to elevate their parent companies’ famous brands into high-end fashion icons. For many years, the studio stores run by Disney and Warner Bros. were ignored by analysts because, while they were believed to be profitable, their overall income and revenues represented barely a trickle of the torrential revenue streams of companies as big as Disney and Time Warner Inc. But both chains have grown so quickly that the trickle is turning into a veritable gusher. “In 1988, we started as a small division with annual revenues of $20 million,” said Dan Romanelli, president of the Warner Bros. worldwide consumer products division, which manages the studio stores, the licensing of the studio’s creative properties, interactive entertainment, publishing and toys. “Our growth has been at a compounded annual rate of 30 percent. Over the next four years, we will exceed $1 billion a year in revenues. That is clearly a considerable achievement,” he said. Romanelli is referring to overall revenues for the consumer products division financial information on the stores alone is not revealed in Time Warner’s public filings. But the majority of those revenues come from the retail and licensing sides. Warner Bros., which opened 22 new stores around the world in 1995, opened 30 more last year, bringing its total to 161. Disney, meanwhile, opened 101 new stores in 1996, bringing its total to 530. Like Time Warner, Disney doesn’t break out financial information for its stores division, but we do learn from its fiscal 1996 year-end earnings report that revenues from the Disney Stores increased $197 million in 1996 over 1995. If that’s the sales increase, the total sales figure must be in the neighborhood of $1 billion a year. Sales at the Disney and Warner stores aren’t necessarily brisk in the traditional retail sense usually, a retailer’s success is measured on how well its stores perform versus the previous year. From that standpoint, the Disney Store is nothing to write home about. According to Disney’s earnings report, same-store sales were down 2 percent in 1996, after rising 4 percent in 1995 on the popularity of merchandise based on “The Lion King.” As for Warner well, there’s no telling, but it would be surprising if its stores were doing substantially better than those of the merchandising master, the Mouse. The stores are nonetheless generating terrific profits for the studios, according to analysts, for two reasons: One, the continual opening of new stores generates a great deal of extra cash (that $197 million generated at Disney in 1996 came from its new stores), and two, the markup on that merchandise is monstrous. Arthur Rockwell, research director with L.A.-based Yaeger Capital Markets, says it’s relatively inexpensive for Disney and Warner Bros. to open new stores. And the better ones can generate a profit within three to six months. So a strategy of continual expansion is almost guaranteed to keep adding large sums to the studios’ balance sheets. Of course, this strategy has been tried by retail chains before, and inevitably a saturation point is reached. That’s when the market is too flooded with stores, the new stores stop generating profits and the old ones start losing money. But neither Disney nor Warner Bros. appears to have reached that point yet. “There is a critical mass, but what it is for studio stores, I don’t know,” said Rockwell. In addition, by establishing their entertainment properties into respected apparel and even houseware brands, the studios can charge a huge markup on their merchandise. Thus, Disney or Warner Bros. can slap a picture of Mickey Mouse or Wile E. Coyote on the pocket of a polo shirt made in Asia and charge the same price as a Ralph Lauren or an Izod. “When you go into one of these stores and pick up a Bugs Bunny or Daffy Duck keychain for $3.95, you don’t care if it only cost 5 cents to make it overseas. You’re paying for the brand,” said Steve Cesinger, entertainment analyst with downtown L.A.-based Greif & Co. Disney, of course, took some flack last year when activists accused the company of using underpaid child laborers in Asia to make its licensed products. But the protests appear to have done little damage to the studio’s sales or image, Cesinger said. With all the success these two Burbank-based giants have had with their retail divisions, it might seem odd that other studios haven’t jumped into the game. They haven’t, analysts say, simply because they can’t. The overwhelming majority of the merchandise in Disney and Warner Bros. stores is based on both studios’ animated character franchises. And nobody else but Disney and Warner has such well-established animated characters. That does, however, help explain why studios such as 20th Century Fox and DreamWorks SKG are spending so much money to build feature animation divisions.

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