Every industry has to deal with risk. In some cases (here’s looking at you, the financial sector) it’s just part of the business, while in others risk is something that needs to be avoided at all costs and then unceremoniously smothered with insurance. But this doesn’t necessarily have to involve taking out an actual policy. Take the understandably risk-averse Merlin Entertainments, for instance.
Merlin suffered a disaster in June, when a crash on the Smiler rollercoaster at its Alton Towers resort injured four young people. The park closed for a while, and visitor numbers remained low after it reopened – even adrenaline junkies have their limits, apparently.
How badly has this affected the company? Today Merlin released a trading update covering the year to date, ahead of its full-year results in February. Trading at Alton Towers unsurprisingly ‘remained significantly below the prior year’, despite ‘narrowing’ in recent weeks as a result of a Halloween promotion.
The firm expects its resort and theme park division to have underlying earnings (EBITDA) of £40-45m this year, around half what it was in 2014. That’s pretty serious, but when you look at the group as a whole that shortfall only represents around 10% of total earnings.
Merlin clearly demonstrates the value of diversification here as a way of protecting against shocks. Its theme parks represent about a fifth of its business, alongside its Legoland and ‘midway attractions’ divisions, the latter of which includes Madame Tussaud’s and the London Eye.
A crash at Alton Towers may hurt business there and indeed across the UK theme park sector more widely, but it isn’t likely to clear out Legoland in Florida or stop people looking visiting an aquarium in London.
Indeed, organic growth at the midway and Legoland divisions has been sufficient, Merlin said, to mean that group profits for 2015 are likely to be similar to what they were in 2014, around £400m – and that’s despite cool trading conditions in London and Hong Kong.
Of course, diversification can bring its own risks, most notably of becoming a jack of all trades and master of none – you only have to look at how often poorly performing companies shed extraneous divisions to focus on their ‘core business’ to see that in action. But when you’re in an industry that’s so vulnerable to something going wrong, it clearly has its virtues.