Like all industries, the winter resort business has become insular—we talk to each other too much. Yet basically we are experiencing the same trends that every other maturing industry faces. Maybe if we realize we aren’t different or immune, it would make it easier to respond to these inevitable and ongoing changes. Twenty years of working with companies in transition has convinced me that the sooner you respond, the easier and more successful your transition will be.
Porter recognizes that maturity doesn’t happen at a fixed point in an industry’s development and that it can be delayed. He also notes that rapid growth can return due to strategic breakthroughs, and that mature industries can therefore go through more than one period of transition to maturity.
Here are eight events that Porter says happen during this transition:
1. Slowing growth means more competition for market share.
2. Firms in the industry increasingly are selling to experienced repeat buyers.
3. Competition often shifts toward greater emphasis on cost and service.
4. There is a topping-out problem in adding industry capacity and personnel. Thus, companies’ orientations toward adding capacity and personnel must fundamentally shift and be disassociated from the euphoria of the past.
5. Manufacturing, marketing, distribution, selling and research methods are often undergoing changes. The firm is faced with the need for either a fundamental reorientation of its functional policies or some strategic action that will make reorientation unnecessary.
6. New products and applications are harder to come by.
7. International competition increases.
8. Industry profits often fall during the transition period, sometimes temporarily and sometimes permanently.
Does any of this look familiar? Can we just for a moment see through the industry’s historical momentum and inbred myopia to recognize that this is us? This has happened in the snowboard industry, in computers, automobiles and funeral homes. It’s happening right now in retail, telecommunications and, by the way, winter resorts.
The winter resort business is no different from any other industry in how it responds to maturity and consolidation. One good snow winter doesn’t change that.
At best, we’re growing slowly. Maybe demographics will change that. We’re sure as hell selling to more repeat buyers, and they mostly want to get more and spend less.
Cheap season passes are competition based on price no matter how you rationalize it. That’s not to say there aren’t valid business and competitive reasons for some resorts to utilize them. But hopefully, those reasons are consistent with a carefully thought out business plan—not just a response to needing to improve cash flow.
If you’re adding capacity and personnel and the ski industry growth rate doesn’t pick up, then the only way to succeed is by taking market share from other players. I’d say we’ve turned the corner as far as euphorically adding capacity and personnel goes. But competitive conditions, in the overall leisure industry, as well as in the winter sports market, seems to require resorts to invest in new facilities and capabilities just to stay even with other resorts.
If you’re big enough and well enough capitalized to diversify into real estate, golf courses, conference centers, retail, theme parks or whatever, then perhaps at some level it can be business as usual for you. If you’re strictly a winter resort and you make most of your money from lift tickets, then you are going to have to do business better than you’ve done it before. Tubing, snow skates, snow bikes and mini skis can all add some incremental revenue. But there’s not another snowboarding on the horizon. Like the man said, new products and applications are harder to come by unless you can change what you are.
What can you say about profitability when the before-tax profit was only eight tenths of one percent (0.8 percent) in the 1999/2000 season? That’s down from 5.8 percent the previous season (that season was six days longer). Leading short-term government bond mutual funds have one-year returns of eight to twelve percent with just a bit less risk.
If margins are lousy and competition extreme, it’s hard to justify investing in the winter sports business because of its seasonality and the financial implications of that. On the one hand, you’d really like to operate the business with somebody else’s money, because you don’t want to tie up equity for a year when you really only need it for four or five months. On the other hand, lacking a good balance sheet and reserves for bad snow years, which I expect we all agree will continue to happen, nobody will lend you the money you need to get through the season, because they see it as an equity risk. And if they do lend it to you, and your margins and/or total revenue are too low, the interest expense will kill you.
You know from the number of resorts reporting financial problems that this is a very real problem. On the other hand, there are a significant number of resorts that make money year after year. They are big and they are small and they are all over the continent. They are mostly privately held so you don’t hear much about them. Besides, a financial and management crisis is much more interesting than a low-key, boring, resort that just goes along knowing who their customers are and meeting their needs in consistent and predictable, but changing, ways.
How do they do it?
In any industry I’ve ever seen, there are always a few who are in the right place at the right time. I’ve got nothing against luck, but it usually doesn’t last. What you’ll find if you talk to the people running these resorts (or any manager of a company succeeding in a maturing industry) is that they mostly never heard of Michael Porter. They do know who their customers are and why they come to their resort. They know who they compete against. They have good management information systems and their finger is on the pulse of their cash flow. They have had to deal with most of the issues listed above and continue to deal with them.
But not in a crisis mode. Not with the bank threatening to pull the line of credit and uncertainty about how they will make payroll next week. They were more or less open-minded and aware of the changes that were happening. They have responded, and continue to respond, over a period of years with changes in how they do business. For the most part, no single change represented, by itself, a life-or-death issue. But the cumulative impact was dramatic.
Paraphrasing Les Otten, they didn’t have a problem, they had an opportunity. It was an opportunity because these areas saw the need for change and dealt with it before it was paralyzingly threatening. They never had to step outside their box. They just extended it a little at a time.
Don’t feel comfortable because it snowed.
