Editor’s note: In the September 1986, 25th Anniversary issue of SAM, a number of articles looked ahead, several using the convenient millennial device to ask, “What will the ski industry look like in the year 2000?” In writing about demand and demand research, Ted Farwell showed alarming prescience 15 years ago by conjuring up this scenario:
“What will the ski industry look like in the year 2000?…If there is no growth in the market, and further no research to guide decision making…hope replaces fact, expansion continues, competition intensifies, price wars provide temporary skier subsidies as many large ski areas expand to ultimate bankruptcy, while smaller regional areas close….The industry reaches maturity with several major conglomerates buying up overextended brethren at less than fifty cents on the dollar.”
We asked the author to revisit the issue to call the shots as he sees them now, in a ski world so different from that just 15 years ago.
On reading now what I wrote then, I must answer the obvious question: Are we there? Well, not really. And not necessarily. But let me step back and establish a couple of points that could start us on the same page.
- Skier visits, gross revenues and net cash flows measure ski resort performance.
- Growth in supply (VTF/hr.) has exceeded growth in demand (skier visits) for the past decade, leading to an inevitable drop in utilization. Many old ski areas have closed and several sold at a loss. The average ski area in the United States is not, by most accounting standards, an economically feasible undertaking.
These points made, this scenario is typical of a free enterprise economy where entrepreneurs are prone to overshoot the mark and only the strong survive. I submit that this cycle slowed down during the 2000/2001 season due to an excellent snow cover across most of the nation. It will return however, as long as the ski industry continues to build capacity faster than they build demand. The outcome is one that leads to bankruptcy for the weak.
Most ski resort sales in the past five years or so have been at prices that are far below “replacement cost.” While some of the exceptions may be in current financial trouble based partially on too high a purchase price, a few justified the multiple of EBITDA that was paid. Will more “overextended” ski areas change hands, and is this healthy? Perhaps one way to answer this question is to observe that the skiing public often ends up as winners, with few major ski resorts closing, but merely opening under new management, generally with some new facilities and motivational ticket deals.
Conventional wisdom has been saying there is a large potential skier/snowboarder market due to the echo boom generation. In connection with this, NSAA last year developed a growth model that calls for the ski industry to increase the retention rate among beginner skiers to build the necessary growth in demand. Also called for is an increase in beginner trial. The best estimate is that the active skier market is only some three-to-ten percent of our nation’s population. The hope is that the ski industry will successfully convert some of the balance. To my knowledge we have not surveyed any of these non-skiers since the USFS/Sno-engineering study completed in the early 1970s.
The average ski resort requires a 37 percent utilization level in order to reach economic break-even, meaning to earn a reasonable return. The national five-year average is 34 percent. What are the ramifications of this?
Many outside financial types really believe that the money is made in real estate and that the ski area is only a loss leader. But, the true picture is that the successful vacation ski resorts are balanced, with profits made from each department; that well-conceived and operated regional and local ski areas make an adequate return from lift tickets, rentals, ski school, food and beverage operations only. After all, the supply of ski-in/ski-out sites at vacation ski resorts is finite and despite the spectacular sales figures being posted by a few knowledgeable developers, the history of ski resort cash flow shows only eight percent of the net coming from real estate.
In my opinion, for the long-term health of the industry, expansion must be slowed. Keeping the stock price of a publicly traded resort growing is not a sound justification for increasing the resort’s capacity. A logical market will respond to growth in cash flow and profitability resulting from a strategy of balanced operations. The marketing department’s perceived need to always have something new to hype must be tempered with the reality of the consequences of over-building. Remember, we are not an island. The over-capacity dilemma can be seen today in the airlines, the cruise ship business and, in some regions, the golf industry. Each is scrambling to attract business at bargain prices to fill seats, berths or tee-off times.
In their best seller, “In Search of Excellence,” Peters and Waterman noted that the best companies are “close to the customer.” As I did when I wrote the 1986 article, I still believe that the ski industry needs to embark on home-based, original skier/snowboarder demand research. I say that while giving all due credit to those ski areas that participate in the NSAA National Skier Study and to Jim Spring and his National Skier/Boarder Opinion Survey for measuring and describing the active skier/boarder market.
The effort I see as needed should be regionally designed and thus most probably should be coordinated and supported financially by the regional associations. The Pacific Northwest Ski Areas Association conducted an excellent, home-based telephone market research project in 1993. Market research needs to be an ongoing activity, with a statistical snapshot produced at least every five years. The ski industry needs to quantify the skier/snowboarder market and identify the strength of the potential echo boom market. We need to know if there really is such a market for our sport?
This research should ideally be designed by NSAA in order to collect comparable data from each region, and the results should be available to everyone. It is just as helpful to the ski industry to provide data that might discourage a new area or a proposed expansion, as it is to justify one.
Ultimately, new resort concepts or expansions are based on a well-done business plan, for which a key component is market demand. Bankers and investors count on such a plan. I submit that a competent market research and analysis, together with a dynamic marketing plan, will not only get the attention of these critical individuals, but also achieve the required financing at a lower rate and under more favorable terms.
Another scenario in my predictions in the 1986 article presupposed an industry focus on quality and service, with capacity growing on the basis of the findings of market research. Fortunately, the industry has indeed done much to increase quality and service, and certainly our customers are receiving a better experience for their dollars. That is all very much to the good and promises well for the future.
Now, if we could only get this research and capacity thing phased in. Before it is too late.
