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Small Business Success Story -- Alamo Drafthouse
The Alamo Drafthouse is a permanent fixture in the city of Austin, TX. The unique theatre experience is unlike anything most movie-goers have experienced, and those that visit one of the several locations always leave with a smile on their face. From the quirky movie-themed nights, to the cold pitchers of beer, the Drafthouse is THE place to kick back and enjoy the newest movies, or get re-acquainted with classics. For this edition of the Small Business Success Stories, Rocky Brown sat down with Tim League of the Alamo Drafthouse
RB: I'm here with Tim League, one of the original founders of the Alamo Drafthouse which was started in 1997. Tim's wife Kerri, who's not here today, is also a founder. So Tim, for the people who are not familiar with the Alamo Drafthouse is, can you briefly describe the experience?
TL: Sure. When we first opened in 1997 the company was a bit different than we are now, although the core of it is still the same. We're a movie theatre, but we also have what you would call an expanded concessions offering. We have full restaurant service and beer and wine that are served to you at your seat in the movie theatre.
RB: And what was the inspiration for this? Where did the idea of merging a restaurant with the movie theatre experience originate?
TL: Well, a few years before, in 1994, my wife and I opened a theatre in Bakersfield, California before we moved here to Austin and that was actually something of a catastrophic failure. It was called the Tejon Theater. It was an old theater built in the 40s. It means either gold bar or badger. That was our logo for a while, a badger on top of a gold bar. We were really young at the time. We opened that theatre when we were twenty-four.
RB: Twenty-four? Wow. That is young to become an entrepreneur.
TL: We had no real experience beforehand and we obviously gained experience there, so it's where we cut our teeth and learned the business a little bit and learned what not to do in certain circumstances. That was more of a traditional theatre, although we dabbled in food-related events. Then when we were trying to figure out our exit strategy from Bakersfield, so we could start over again, we started looking at some other models, and really, honestly, the one that inspired us the most….I say inspired, but we kind of stole from them….was McMenamins theatre chain up in Portland. I've been a fan of theirs ever since I found out about them, so we went up there to kind of scout around. We do things very differently than they do, but that was the concept that made us say, "Ok, well these guys are independent operators and they're successfully doing their own thing, so we should be able to as well." McMenamins also brews their own beer and has restaurants and bars associated with theatres all through the Portland area.
RB: If you and Kerri started off in 1994 at age twenty-four with the Bakersfield theatre, how was it funded? And how was it funded in 1997 when you decided to open the Alamo Drafthouse here in Austin? Was it personal money? Friends and family? Or did you have to go to the bank and give a fancy presentation with business plans and the whole nine yards?
TL: It was an assortment of those things. I funded the Bakersfield theatre. I worked for Shell Oil for a couple of years out of college and I never really stopped being a student, so I just saved all my money, knowing I was not going to do that (work) for very long. I was building for a change ever since I started there. The first theatre was an old theatre and it didn't take much to get it started. I had $40,000 and I spent it all renovating the theatre, and we were able to pull about $50,000 out of that theatre in the end before coming to Austin. For the Drafthouse, my wife's parents actually mortgaged their house, so they gave us $100,000, which was great.
RB: (laughs) I can't imagine many in-laws who would do that.
TL: (laughs) Well, we had proved that we could work really hard and they were familiar with the business in California and they knew what the problems were.
RB: And believed in you…
TL: Yeah, they believed. And we made a pact with them….(we both came from engineering and science backgrounds)…that if we failed we'd put our tails between our legs and pay them back by getting engineering jobs again.
So, we got $30,000 in personal credit card loans, and also at that time, Bank of America had an "Invest in America" loan, which was a one page, no questions asked $50,000 loan. It was the only time they ever offered it. I think we were part of the 5% that ever really paid it back. (laughs) But we got in on the sweet spot. We had a few other minor investors as well, but we only really had about $250,000 to run with to open up the first theater.
RB: And that was the one in downtown Austin, right?
TL: Yes.
RB: In the early years of the downtown Austin location, around the 1997 time frame when you first opened, how was it? What kind of challenges and obstacles did you have to overcome?
TL: Well, mainly we had to overcome our lack of experience in running a restaurant. We had gotten control of finances and we knew how to run the money side of things (we were very frugal), and we knew how to run the theatre more or less. But neither one of us had ever done anything restaurant-wise. So Kerri got a job as a waitress and I got a job as a pizza cook. That was in the downtime before we started renovating.
RB: You got your hands dirty.
TL: Yeah. Read a lot of books and just made it up as we went along. Thankfully, I mean, it could have been disastrous, but we were pretty determined at that time.
RB: So is it difficult to run a restaurant on top of the movie theater? I know the restaurant business just a little bit from an old business I used to run that dealt with restaurants and I saw them come and go in the blink of an eye. And it's interesting that that component is so ingrained in your business and it's still going and I wonder if you ever want to say, "Ugh, enough of this!"
TL: Well the good thing is that a long time ago we realized it's better to hire people that really know what they're doing so we hired a few key people that run the restaurant side of things and ever since we did that I don't really worry about it.
RB: You don't even think about it?
TL: I don't even know how it works. I go down there and it frightens me because there's so many people working on a Friday night - it's insane. We're hands down the highest volume restaurant in Austin.
RB: Seriously?
TL: Yeah, well the South Lamar theatre alone seats 850 people and on Fridays and Saturdays it sells out. So you seat 850 people at a time, at the same time basically, then you turn it over and you do it again 2 hours later. It's actually an intense operation.
RB: It sounds really intense.
TL: Yeah, very high pressure. It's also a dark theater and you've got a movie going on and people expect their food within half an hour.
RB: That sounds like a logistical nightmare. But like you said you've got people that know what they're doing.
TL: We spend a lot of time with our schedule so that things are staggered just a little bit over the course of 45 minutes. And the kitchen is actually broken up into two kitchens… they're mirror images of each another. So three of the theaters go into one kitchen, and three go into the other, and again, they're staggered a bit so it's not really all 800 going at once but for a good solid hour and fifteen minutes it's non-stop fast food production.
RB: Everyone in Austin and the surrounding areas pretty much know about The Alamo Drafthouse unless they've been living under a rock, but when you started how did you get the word out around town?
TL: It was a lot more difficult back then because it was the early stages of the Internet. I mean, it was a little bit further along than when we had the theater in Bakersfield, but nobody really had internet access and if they did it was through AOL (definitely all dial-up). So we built a website and interestingly enough I actually just found it again because of a service that archives time capsules on the web and lo and behold there's a snapshot of our website in 1997. I looked at it and it was atrocious. (laughs)
RB: I've got to see that.
TL: It was so awful. It had popcorn background and was hard to read. I remember getting done with it and thinking "That's perfect!" It's embarrassing now.
RB: (laughs). That's awesome.
TL: But we didn't spend a whole lot to get the word out. From the get-go we started advertising in the Austin Chronicle and daily in the Austin-American Statesmen. But we used a lot more of grassroots-type stuff - we passed out a lot of flyers. I've kind of given up on that idea now because there are so many better ways to reach more people. But anything we could do that didn't cost us a lot of money, we did it. We would aggressively try to get on radio stations. We'd spend a little money but try to maximize it. Thankfully we got some support from the Chronicle and the Statesman early on because we honestly didn't have enough working capital. If things would have gone south we would have gone under.
RB: It seems like word-of-mouth worked phenomenally for you guys. I mean as soon as the first few people showed up they probably left saying, "Holy cow, this place is serving up beer and food!"
TL: Honestly it didn't take long, thankfully. The first couple of weeks were a little scary but then it was real obvious when the tide started to shift and people were talking about it. There were some radio deejays that we actively recruited early on and they just talked and talked and talked about it on the radio.
RB: That's great. So I remember in 2005, Entertainment Weekly named you the best theater in the country. In the country! That's quite the honor.
TL: I know, it was pretty surprising. I was on the road when I got the news from Entertainment Weekly. We were very flattered. We use that honor all the time now.
RB: Do they do that every year?
TL: It was a one issue thing. It was tied to a story about why movie admissions are declining and what's wrong with the movie industry. It highlighted on a few theaters that were actively combating the problems people have with going to the movies. We identified those problems and tried to eliminate them.
RB: That was one of my earlier questions - what do you see as the biggest challenges? In talking about ways to combat the decline in movie attendance, what do you see today as some of the biggest challenges? How do you plan to overcome them and what are you actively doing?
TL: I mean it hasn't changed much since that article came out in 2005 because I personally believe that people are always going to want to get out of the house and do things. There's a doom and gloom in the industry about people downloading movies and having home theaters - thinking that people are just going to stay at home - and they will - but if you offer them a good time, an affordable time, and you make their entire experience pleasant for them, when they get stir crazy in the house they're going to want to go out and if you're the option that appeals to them the most then you're going to stay alive. But so many of the big theatres don't understand that some of the policies they have are driving their customers away.
RB: Really? Like what?
TL: Like not paying enough attention to the technical presentations, bombarding people with advertisements after they've already paid, so it's going to inflate a ticket price and a super-inflated soda and popcorn price to get in the door. It makes it not worth it if you're not having fun. And then there's the growing trend of people talking on the phone and being disrespectful during the movie watching experience. So those are all things we're aware of and we try to combat in our own ways.
RB: That's interesting that you mention exposing the paying audience to ads and inflating popcorn prices. When times like now occur - semi-recessions, full blown recessions, or however you want to look at it - are those other things you'd look at for additional revenue streams? Like doing some on-screen advertising or maybe advertising in the bathrooms as I see in other places?
TL: Probably not because it's part of our long term plan that we're going to be the theater of choice for people because we make it a more pleasant environment. If we start advertising and putting shampoo commercials on screen, for example, that's going to anger people and we'll lose our base. I think if we have to be scrappy we can, I don't like to talk about the impending or occurring recession because I think that brings on a recession or pushes us deeper into one, you know? But even still, if something like that were to happen, the movie business has proven that they're relatively recession-proof if it's still economical for people to go. So if the country really does go to heck then we'll reduce our ticket prices or have discount nights.
RB: And you have a fair amount of those already.
TL: Yeah.
RB: So there are seven Alamo locations, you own three of them and the others are franchised right?
TL: Yeah, basically. Kerri and I founded the company. We also started the franchise company but then once that ball got rolling we realized that it was a beast. So we had a very complicated legal agreement where we ostensibly sold the company and then licensed it back to ourselves indefinitely for our locations. So the 3 locations in Austin are completely under my control and then we really don't have anything to do with the franchise locations even though we opened those initially.
RB: So even the licensing agreements from the movie distributors - they all deal with that separately?
TL: Totally separate.
RB: Most people, including me, don't really know how the movie theater business works outside of selling tickets and snacks but I did a little digging and I know that there's a lot of little intricacies involved in licensing and the distribution and I found out that the distributors have certain geographic zones that they service, like licenses that they only give to a specific theater in a geographic zone. How does all that work?
TL: You know I wish I knew better. I know basically how it works in that Austin is divided up in different zones and if there are two theaters in a zone then they are supposed to split the product from each studio. Like I get one Warner Brothers movie, and the other theatre in the same zone (if there is one) gets another Warner Brothers movie, back and forth. It's supposed to be theoretically an equitable split. And then there are zones in the city where there's just one theater and you can play whatever you want. And actually all three of the theaters we own are in their own zones - there's no other competition for us at our locations.
RB: Does that give you more negotiating power - if you're the only theater in the zone and they want to push their movie into that zone.
TL: There are always negotiations. We actually outsource all of our contract negotiations with studios to 3rd party because we're an independent. What they do is book for all the independents of this region in the country so we have a little more buying power and we can be a more unified force and a have a similar level of respect to a Regal or United Artists. I found very early that you want really have a negotiator and you have to know when to choose your battles, when to fight, and when to say, "Ok we'll do you a favor in terms of the long-term relationship." For instance, if they're asking you to play something you don't want to play, but in you know in December you're going to want to play something they might not want to give to you, you have to learn the give and take game.
RB: So can they dictate what you play in the theaters?
TL: Oh yeah, absolutely. Again, it's all about choosing your battles. I usually get to choose whatever I want. The hardest part is when there's a limited release product, for example an art-house type of film because it'll only go to one theater in Austin to open up, so I'm usually fighting against the big boys and whenever I win one of those they get really, really angry.
RB: And it's nice to get a few of those I'm sure.
TL: Yeah, yeah. I think our audience is a fairly sophisticated audience and so I would play more of those movies probably but I don't win all of those.
RB: So what kind of premiers have you guys had at the Drafthouse?
TL: The big one this year was the world premier of "There Will Be Blood".
RB: That's right, I remember reading about that.
TL: Yeah, so that was a big surprise. We know Paul Thomas Anderson just from doing events with him in the past. And he is an interesting guy, he doesn't like all the red carpet and glitz and glamour and so he knew about the festival that we put on in the fall and said, "That sounds perfect - I'm going to slip into town, I'm going to bring the film with me and we're going to premier it there." I think he only really told the studio about a week before it happened. He didn't ask them, he told him. And we also did a premier of "Semi-Pro" with Will Ferrell and that was a lot of fun.
RB: And he came into town I'm sure.
TL: Yeah he was there for that.
RB: So you've met all kinds of celebrities.
TL: Oh yeah.
RB: So are you feeling increased pressure from the new megaplexes that have been popping up, or are you feeling pretty good because you've found a niche to be in and you have loyal customers?
TL: We have much smaller theaters and smaller operations than they do, so come summertime they will make way more money on Iron Man and big blockbuster movies like that. What works for us is odd. Of the top 10 grossing movies of all time for the Alamo, right now Juno is number one, Pan's Labyrinth is number two, and Little Miss Sunshine is number three. We may not have a huge gross on opening weeks, but it just keeps going and going and going. Those types of smaller movies perform well for us. We'll still play the big blockbusters though.
RB: Do you ever get to see movies before they come out? I know you get them before they are shown to the public but do you get screener DVDs from production companies or whoever actually distributes those?
TL: I try to. For really small movies we get screener DVDs but for big movies that never happens anymore. But we do screenings for exhibitors, like advanced screenings, so we can get a sense of what a movie is like.
RB: Let's move on to more fun, light-hearted questions. Who comes up with all the cool themed movie nights that you have, like the Justin Timberlake sing-a-long? (there are some girls here at Hoover's that just go nuts over that)
TL: (Laughs) I've turned into a Justin Timberlake fan. Really - if you would have asked me a year ago I would have said that was a ridiculous concept.
RB: And then what's the other one - the Ferris Bueller quote-a-long? Those just sound like great concepts. Do you come up with those? Do you have employee contests where employees get to give ideas for events like those?
TL: I come up with some of them but I have a programming office; there are five of us that work as a team to do all of the special event programming for the Alamo and we each have our own specialty. So there are a couple guys that are way more serious, you know, and they're actively working with the Austin Film Society and the Harry Ransom Center doing more classic repertory cinema. Henry, who is basically the office Creative Director, came up with the quote-a-long and sing-a-long ideas. He still hosts most of those and he's a big Justin Timberlake fan.
RB: And also I was reading an article about you guys having a Rock Band competition? Where people bring in their X-boxes and Playstations (or you provide them) and the best 12 bands are supposed to dress up in costume, come up and perform in front of an audience?
TL: Yes - that's correct.
RB: That's awesome - who came up with that one?
TL: That one is actually mine.
RB: I laughed so hard when I read about that.
TL: We bought Rock Band for my nieces and nephews this Christmas, and Christmas was at my house, and they were at my house for a week and that's all we did. We do a lot of similar type shows, like we been the Air Guitar venue for 5 years and host a lot of other odd ball things that aren't really movie related. What we've done is diversify what we offer at the movie theater. Movies are still our core but we like these things that are cool to experience in a group while still providing the movie theater type setting.
RB: Last question - what kind of advice would you give to entrepreneurs trying to start their own business? Any key points or things you think should drive somebody who wants to start their own business?
TL: Yeah, there are several things. First, location, location, location. A total cliché but I've got to say it every time because my first business, the Tejon Theatre in Bakersfield did so poorly due to the improper location. We were very, very particular about where we were going to land for the second attempt, what city, and what part of the city because that's why people didn't come to the Tejon. I think we were in the wrong town and definitely the wrong side of town. We were very idealistic kids and that idealism got slapped out of us really quick. Another thing is to just be ok with the concept of failure. We were ok with it, and we knew it was risky and it might not work. But what was the worst case scenario? The worst case scenario was we might lose all our money and spend the five, six, seven years paying back our parents all the money they loaned us. And we were totally ok with that situation. I wouldn't go into opening a business with rose colored glasses, but I would go in expecting failure and hoping to do everything in my power to not fail. I guess the last thing is be ready to completely give up everything else.
RB: (laughs) Give up your life - you're a slave to the business.
TL: Yeah, for the first few years you will be. We didn't do anything else. We'd just wake up, business, then sleep and then do it again for years. For the first two years we really didn't take any time off, ever. Then we got to the point where we hired our first manager and slapped a big high five after that.
RB: (laughs) And the rest is history.
TL: The rest is history.
RB: Well, thank you for your time today Tim. That was a really interesting story and I'm sure our readers will appreciate it.
TL: No problem. It was my pleasure.
