Mickey's Trip To Trouble

THE SPIRES OF SLEEPING BEAUTY'S castle are glistening, there's no line for Aladdin's cave and a yellow Mickey Mouse slicker costs only $5. It's late January, and the cold rain in France's Marne-la-Vallee is soft but relentless. In the Disneyland Hotel's luxurious lobby, a fire is burning in the grate, but there aren't many guests to enjoy it. Of 500 rooms only 35 are occupied. A supervisor tries a little humor to cheer up his bored and lonely desk clerks: "Welcome to the Phantom Disneyland Hotel," he tells them. "I'm sure you've counted the crystals in the chandelier 100 times. . ." This is Euro Disneyland in the "low season."

The low season has lasted longer than the folks at Disney ever imagined when they opened the park near Paris in April 1992. Despite howls from the intelligentsia about Disney's threat to French culture, France had laid out the red carpet. French children have always loved Mickey, and in 1985 when Disney announced its plans the grown-ups were newly enamored of the kind of American capitalism Disney does so well. Sixty international banks plunked down billions of francs, the government flooded Disney with incentives, and workers from all over Europe lined up for a piece of the American dream. Even the Roman Catholic Church saw an angle; for the first time in decades, it assigned a priest to the fallow farm area east of Paris.

But Euro Disney has fallen far short of the dream. A stunning 19 million people have visited the park since it opened, a fact the company trumpets with devotion. But it isn't enough. The guests don't spend enough time or money at the park, and no one will buy the hotels Euro Disney had built and planned to sell. Euro Disney is drowning in debt, and its stock has plunged.

Last week Euro Disney announced a first-quarter loss 30 percent bigger than last year's. Least happy to get this bulletin were Disney's bankers. They met for hours to debate Disney's proposal that half of the $3.5 billion in debt be restructured, with the loss split 50-50 between the banks and Disney. Bondholders, shut out of the negotiations, threatened to sue. The bad news has been flowing since the fall, when the park said it would cut 950 jobs. But time is running out; Walt Disney Co., which owns 49 percent of Euro Disney, has injected $175 million to keep the park running through March. The parent Company took a $514.7 million charge last year for its share of losses, but it is making plenty elsewhere. Still, in December, Michael Eisner said the magic words: Euro Disney might shut down. Eisner was simply rattling sabers, say the bankers, though the warning had one happy consequence. Brussels travel agent Ajnes Van De Velde finally saw a surge in bookings: "People want to go before it closes."

Don't rush to your booking office. Euro Disney will probably remain open and even prosper. Disney's other parks struggled at first, and too many people have too much riding on this one. Eisner has approved a new business plan that slashes prices on everything from admission to hamburgers. The park itself is a fantasia, richly detailed inside and out, from the wainscoting in Walt's restaurant to the handmade Aubusson tapestries in Sleeping Beauty's castle. The inventive rides are expertly engineered: "Brilliant," says Bob Hoffman of Dublin as he flies over London with Peter Pan.

But that's only part of the picture. Far from showing Europe the fairest face of American capitalism, Disney has for many become the corporate embodiment of the ugly American. A Spanish newspaper runs a cartoon of Mickey panhandling near the Eiffel Tower. A Swiss satire portrays Euro Disney in 2001 as a camp for Paris's homeless. And a French taxi driver laughs when he hears the name. France, he says, has become Disney's "Berezina," the icy Russian river where Napoleon lost 10,000 men in his retreat from Moscow.

Disney executives refused to be interviewed for this story. A spokesman disputes some figures (but won't provide his own) and delivers the company line: the problem is the economy. Europe's recession has been fierce. But critics see Euro Disney as something akin to Coke's 1985 decision to change its formula--a remarkable by a master marketer. NEWSWEEK interviewed dozens former and current employees, as well as bankers, government officials, marketing and financial experts. They draw a picture of blinding arrogance and two foolish assumptions: Disney always triumphs and economies don't slow down. Disney is putting the lesson to work as it plans a new park in northern Virginia (page 37). But for any business looking abroad, it's a powerful cautionary tale.

Eisner and his team came by their hubris in the usual way: a long run of success. It was Walt Disney himself, of course, who built the first park; he'd found inspiration in Copenhagen's Tivoli Gardens. In 1955 he opened his own version in Anaheim, Calif., and declared it "The Happiest Place on Earth." When Eisner took over the company almost 30 years later, one of his top priorities was to expand Disney's presence abroad.

Disney in 1984 was a hugely powerful brand name, but it had stalled financially. While Disney people combed Europe for the best site, Eisner's team was remaking the company. It built 100 retail stores in four years, pushed the movie studio to number three from number 12 and rejuvenated animation art by creating new hits such as "The Little Mermaid." They jacked up prices in the parks but crowds poured in, thanks largely to all the baby boomers who were now having babies of their own.

To top it all off, there was Disney's newest park, in Tokyo. Nervous about their first foreign and cold-climate park, Eisner's predecessors had let the Japanese build it; they just took royalties. But by the late 198Os Tokyo was booming, a rare trophy for an American company in the decade of Japan Inc. Disney profits and stock kept climbing. But it wasn't enough. "They always need to top themselves," says a former executive. "It's like, 'We're a shark. If we're not moving forward, we're dead'."

In Europe, Eisner was determined to exploit the market more than his predecessors had done in Tokyo-by taking only royalties-or in Orlando, where they'd failed to control hotel development and now own only 14 percent. So Disney thought big. It would build the park complex, 5.200 hotel rooms, thousands more square feet of offices, a golf course and 570 homes. That was just phase one.

The huge development plan only boosted competition for the park in Europe, giving Disney the perfect climate to drive one of its famously hard bargains. By late 1985 the finalists were sites near Paris' and Barcelona. Spain had a lot going for it, most of all sunshine. (Mild Spanish winters make it one of Britain's top vacation destinations.) But there were downsides, particularly Spain's location farther from Europe's heart, its older trains and smaller airports.

France. meanwhile, was turning cartwheels. The Socialist government, facing tough elections, was determined to bag the Disney prize and prove, says the then culture minister, Jack Lang, that it was a ,'modern" party, receptive to private enterprise. Many Europeans were euphoric over plans to unite all of Europe in 1992. Europe would be one big happy family' the perfect Disney market. In 1987 France agreed to cut taxes, build rail lines and provide low-interest loans. Banks and investors would put up about $3.6 billion: Disney would cough up only $200 million. most of it for a 49 percent share of the new company. The stock was later offered at about $11.50, but Disney paid about $1.50 a share. A complex financial web largely insulated Disney from risk, and it was guaranteed royalty and management fees. "Everyone in the U. S. knew [the projections] were hyped," says one analyst. Asked why he barely looked at Disney's numbers, one banker just shrugs: "Disney was a magic name."

Eisner's team told itself-and the public-that it was headed for glory. As construction began, one executive called the venture "something immortal, [like] the Pyramids." But back at headquarters, some lower-level executives were nervous. Sure, Disney characters were popular in Europe. Millions of children had read "Le journal de Mickey" since 1934, and "Jungle Book" has the world's record for home-video sales. But did that mean people would spend days at Disney hotels, with Paris just 20 miles away? And wasn't sunshine part of the Disney experience? "I'm not sure the Europeans will stand in line in winter," ventured one executive in a strategy meeting. "The answer" from Eisner's guys. recounts a former Disney executive, was: "'The Japanese do.' No one said, 'The Japanese are different'."

Disney insiders these days can catalog those differences: Europeans' per-capita income is lower than the Japanese, and they like to spread it out over long vacations, not four-day spending sprees. Japanese employees eagerly conformed to Disney's famous mandate: smile at all times. The French were hardly specialists in service. But, says the executive, "The people in that room" didn't want to hear it.

At Marnee-la-Vallee, the budget kept growing. One winter day Eisner warmed himself by a fire in a Paris hotel lobby and ordered more than a dozen wood-burning fireplaces for Euro Disney, despite the added cost of chimneys and upkeep. The roller coaster on Big Thunder Mountain was redesigned to splash down into water, making it necessary to dig tunnels. just months before opening Disney realized it had to borrow another $6.6 million to build 3,500 dorm rooms for employees.

Bankers raised questions, especially as the economy weakened, but Disney brushed aside all concerns. Chairman Robert Fitzpatrick told Business Week in 1990: "We're seeing Cartesian skepticism meeting American can-do-ism."

On opening day, April 12, 1992, traffic was hurt by a rail workers' strike. But the sparkling new park was a hit. By October, 6.8 million visitors had streamed in. The spirits of "cast members," as Disney calls employees, were high. Some were annoyed to find rules forbidding facial hair makeup and nails longer than 0.2 inches. But they were delighted that managers wanted to be addressed by their first names and to be told that these weren't just jobs, but careers. While it's often hard to move up in European companies, this promise pure American," says Roger Dupont, a union official: "Everyone would climb the corporate ladder according to his abilities."

But the tremors of culture shock had just begun. When customers ordered lunch or dinner, they were stunned to discover that there was no beer or wine. Especially when they'd been standing in line so long. Unlike Americans, who will wander around, hot dog in hand. Europeans seemed determined to eat at a set time. Everyone would converge on the restaurants at 12:30.

Food wasn't the only problem. Some customers seemed taken aback to find as many shops in the park as attractions-and by the prices. A tiny figurine of Prince Charming for $14? But worst of all was the Europeans' short attention span. Disney was used to Orlando. where families may stay a week, filling hotels. Many visitors to Euro Disney were day-trippers. And if they stayed longer, they didn't always stay in Disney's six carefully hotels. Paris had more variety, cheaper options and it was, well, Paris. Approaching Orlando's 94 percent occupancy rate was only a dream.

Disney managers in Marne-la-Vallee could have used some sympathy from top brass. But the learning curve seemed steep. One executive, fresh from Burbank, was furious to see a guest's Mercedes standing outside the Cheyenne, an "economy" hotel, remembers one visitor. He raged at a marketing manager: Mercedes drivers should be staying at the luxury Disneyland Hotel! Someone took him aside to explain; not every Mercedes driver in Europe was wealthy. This was a Mercedes 190, roughly equivalent to a Buick. It wasn't until last summer, when business plummeted, that the message came home. Beer and wine appeared on the menu. It was a start.

In the Walt Disney annual report issued late last year, Eisner gave Euro Disney a "D"-and blamed the recession. He hasn't said much to the press lately That tough job has fallen to Jacques-Henri Eyraud, who did press duty for the French military during the gulf war. In flawless English, he declares: "There is no cultural resistance to the product." But then he goes on to catalog the changes: A "softer" ad campaign has begun, targeting only Disney-friendly territory. New attractions will open, with a stronger emphasis on European figures such as Jules Verne.

But what Euro Disney really needs is a second park. Construction should have started by now on MGM Studio, the second "gate" critical to draw and keep customers. But those plans are on the shelf for now. England's Independent called Euro Disney a "cultural Vietnam." But the military metaphor is more apt; Disney can't afford to commit more, and it can't afford to pull out. For the moment, hopes are pinned on the English Channel tunnel, opening this spring, and a new high-speed rail line. Bankers have called another big meeting for later this month; they'll hear from auditors who are checking Disney's math. If everyone can agree on how much medicine to swallow, there may yet be a happy ending.

But others are busy crunching the numbers, too. Last month Euro Disney's bankers were invited to an ornate hall at the Georges V Hotel. While a harpist played softly, the sixty-something financiers were treated to champagne by some new American capitalists. This time they were thirty-something Wall Streeters who've mastered the art--new to France-of buying and repackaging bad debt. The message: hey, we'll give you 50 cents on the dollar. Really, it's a great deal.

France triumphs over Spain as the site for Disney's new park. Says the left-leaning daily Liberation: "The little Hollywood mouse prefers Brie cheese to Spanish paella."

French Prime Minister Jacques Chirac and Disney CEO Michael Eisner sign the final contract for the $2 billion park. A clause requires new park to respect French culture.

Euro Disney's stock offering (at $11.30 a share) announced with hoopla in Paris. Eisner and Mickey are pelted with ketchup and eggs: protesters shout, "Mickey go home."

Opening-day ceremonies broadcast to 30 countries. Stock price: $28.18 a share. But that fall, Banque Paribas issues a "sell" recommendation on the stock, which then nose-dives.

Euro Disney slashes its entrance prices; the 1,098-room Newport Bay Club Hotel closes for the winter. Dismal first-quarter results reported: $92.4 million loss.

Euro Disney drops its ban on beer and wine in the park. But, despite the summer weather, there are fewer visitors from outside France, and spending is down, too.

Euro Disney says it lost more than $900 million for the fiscal year; its stock drops to $7. Walt Disney Co. calls on banks to restructure debt: it will supply cash through March.

A month after Eisner says that the park could shut down, Euro Disney announces a first-quarter loss worse than last year's. Negotiations with the banks continue.