Wall Street money was supposed to recapitalize the industry, improving the experience with alpine villages, new lifts and snowmaking. The enhanced product would encourage people to ski more and generate real estate sales to Baby Boomers, adding profits and long-term customers.
In theory, new customers and increased revenue would generate the necessary financial returns expected by banks and investors.
It didn’t turn out that way. Over the last five years, the ski industry’s financial health—and it’s never been a particularly robust industry—has declined. Debt is up, skier days show little growth, and profitability is down significantly.
NSAA’s numbers prove we’re shooting ourselves in the pocketbook. The worst offenses: we’ve dramatically elevated General and Administrative (G&A) expenses and sharply cut marketing outlay. As a result, we’re not telling all those existing and potential clients what we’ve done for them and why they should come visit us. We haven’t invited them to enjoy the fruits of our labors.
The failure to market our product is the single most important factor in our business stagnation. It offsets the boost we should be receiving from the many improvements the industry has made in its product.
But the numbers suggest we’ve made other mistakes, too.
The Method to Our Madness
In the March issue of *SAM*, we reviewed NSAA’s annual Economic Analysis Report numbers for the 2001-2002 season to demonstrate how the data could be presented in a more user-friendly form. Now, we’ll take a hard look at what the long-term data reveals about the industry over a five-year period.
We first looked at information from the 1997-98 through the 2001-2002 NSAA Economic Analysis reports, using the results of the “average” ski resort. It’s a good model for showing how the industry does as a whole. To simplify our presentation, we restated the results for the year 1997-98—five years ago—in the financial-statement format we employed last issue for 2001-02 and compared the two seasons. 1997-98 was quite similar to 2001-02 and was representative of a good year in the ’90s. Skier visits totaled 54.1 million, just behind the 54.4 million of 2001-02.
We subtracted Real Estate results because they are not included in the most recent NSAA economic report, and because they can distort the results. When it comes to analyzing our industry, our core businesses—mountain operations and related profit centers—are the best indicators of long-term financial health.
One caveat: we believe that our methodology is representative of the industry, but acknowledge potential for error. Though NSAA and RRC do a great job in compiling the report, the actual resorts that contribute to the report vary somewhat from year to year. So, the results presented here are not a precise apples-to-apples comparison. NSAA has told *SAM* that the organization may produce a five-year analysis of the industry in the coming year, using data only from resorts that have consistently reported. This would be a valuable step, allowing precise measurement of long-term trends and health of the industry.
Still, our present methodology provides a solid representation of the industry’s results over the last five years, and they aren’t pretty.
Revenue Analysis
**Volume:** Skier day volume remained flat in 2001-02 compared to 1997-98. The industry may be growing, but certainly not fast.
- Revenue increased faster than the rate of inflation. Inflation from 1998-2002 was only 12.1%, while total revenue increased by 21.58%.
- Revenue increases came solely from increases in prices and greater capture in other operations.
- Mountain Operations revenue grew at a much smaller rate, 13%, barely surpassing the inflation rate.
- Other Operations grew at a much faster rate—30.51%.
- Skier Day Ticket Yield increased by 13.7%, just slightly better than the rate of inflation, growing from $24.84 per skier to $28.26 per skier.
- Lift ticket price increases didn’t hold up. While the average lift ticket price increased by 16%, yield only went up by 13.7%. Increased discounting and promotions were required to maintain volume.
- Revenue increases in Other Operations were quite dramatic, growing 30.51%. Revenue grew the fastest in Rental (54%) and grew the least in Retail (9%).
Other Operations Revenue grew from 49% of total revenue to 52.6% during this period of time. This increase in Other Operations Revenue, with its lower profit margins, contributed to the decrease in profitability as a percentage of revenue for the entire company.
Profitability Analysis
**Profitability.** The profitability of the ski industry has declined significantly over the last five years.
- EBITDA as a percentage of revenue has decreased from 23.0 % to 19.2%. This is a decrease of 16.5% and is below the returns necessary for an industry that is so capital-intensive and variable in its revenue.
- Pre-tax profits have decreased by 44.3% to an extremely anemic 3.0% of revenue.
The reasons for the decline:
- Expenses have risen faster than revenues, especially G&A costs.
- Mountain operations, the most lucrative profit center, has experienced margin declines.
**Expenses.** Expenses have increased dramatically, and at a much faster rate than revenues.
- Total Operating Expenses increased by 29.32% while Total Revenue only increased by 22.4%.
- Gross Margins have actually improved dramatically in F&B, Retail and Lodging, producing a positive effect on the bottom line. The industry is managing these profit centers better with improved systems, procedures and obtaining purchasing discounts. But Gross Margins in these Other Operations are still significantly less than the Margins in Mountain Operations. Ironically, as revenues in these areas have increased, they have lowered the overall margin of the company. Only Rental achieves higher Gross Margins than Mountain Operations.
The increases in expenses came from:
Property Operations: This category didn’t even exist as a line item five years ago. Since then, it has added more than $500,000 of additional expense to the “average” ski area—and the average ski area doesn’t have significant property operations! We can only guess at how exorbitant these costs are for areas with large property operations.
This line item represents the expense of the “cost and maintenance of buildings” and is somewhat of a gray area. At many big resorts, new retail and village operations have carrying costs and maintenance costs that cannot be completely passed through to tenants. The difference between the total carrying cost and rental income makes up the majority of this loss. This difference can be greatest for very new villages: It can take five years before a resort village tenant is paying full rent. But even at full rent, the village may still not cover its carrying costs.
G&A: G&A rose a whopping 74%, increasing from 7.8% of Revenue to 11.2%. These costs are the single largest factor in the reduction of ski area profitability. G&A is defined as the aggregate costs of Accounting, Administration, Allocated Corporate Overhead, Data Processing, Personnel, Planning, Purchasing and Risk Management. It does not include the cost of liability insurance (this is included in unallocated expenses) or medical insurance (this is included in direct costs).
Each component of G&A is non-revenue-producing. Cynics in the business world have long considered these costs as “UCO,” or Useless Corporate Overhead. While these functions are in fact needed in any industry, the costs in ours are clearly out of control.
Some of this increase is probably a good thing, as it stems from the addition of new positions, such as IT departments that helped improve productivity and margins in Rentals, Food and Beverage and Lodging. However, at multiple-mountain companies, consolidation was supposed to make G&A more efficient; instead, it appears to have added another layer to head count and expense. And yes, some management salaries at the very top have increased enormously.
Mountain Operations Margin: The real driver of profitability in a ski area is ski operations. It’s both the largest revenue center and the most profitable. If you aren’t achieving your margins here, you’ll never make your profit margin for the company from Other Operations. And the news here is not good: The Gross Margin of Mountain Operations decreased by 5.37%, to 58.7%. This is because Mountain Operations revenue increased by just 13.0% while expenses increased by 22.84%.
Why is profitability down? Why is volume flat? The answer: Marketing Expense decreased. Don’t blame global warming, don’t blame the war and don’t blame the weather. Blame the bloated corporate office. While G&A soared, marketing expenditures decreased from 6.7% of revenue to 5.3%. Without an adequate marketing budget, it is impossible to grow revenues adequately. There is no gas to power the engine. At a time of significant economic and demographic changes, this industry has not been bringing in new people.
The problem is that the culture of most resorts is operationally oriented, rather than marketing oriented. That must change if resorts are to reach out and grow the market.
Balance Sheet Analysis
The balance sheets of ski areas have become more risky.
- Equity has decreased by 3.7%.
- Long Term Debt and Subordinated Debt combined have risen by 24%.
- Liabilities as a percentage of assets have increased from 41.6% to 46.5%.
- Current assets have decreased by 25%.
- Assets have only increased 3.4% and have been funded by increases in debt.
Risk Ratios
Equity/Assets: The Balance Sheet of ski resorts shows that resorts are incurring more risk. They have added long term debt to finance improvements, and as a result, Equity has decreased. The Equity to Asset ratio has decreased from 58.4% to 53.5%.
Debt to Cash Flow: With EBITDA remaining flat, the ability to pay off this debt has also decreased. The number of years to pay off debt from cash flow has increased from 2.73 years to 3.53 years.
Efficiency Ratios
EBITDA/Assets: Flat EBITDA means that the Return on Assets in the industry has decreased significantly over the last five years, from 12% to 10%.
Pre-Tax Profits/Equity: Pre-tax profits have decreased by 41% to an anemic 3.1%. They remain significantly below the level required to attract capital.
EBITDA as percentage of Revenue: This is a critical ratio in determining cash flow and the ability to fund improvements and interest expense. EBITDA has remained flat over the last five years and the ratio has decreased by over 16%. It remains in the unhealthy range.
As we said earlier, the only way to correct this weak financial condition is to significantly increase our marketing efforts. As obvious as it may seem, the industry needs more customers to generate revenues, pay the bills and reduce debt. The industry needs to do more than try to squeeze additional revenue from its existing customers—we’ve done that, and it hasn’t increased revenues enough. The solution? Resorts must find ways to develop new customers and markets. While many resorts individually have been highly successful in creating new clients, the industry as a whole has not.
Conclusions
The ski industry is a labor of love for most of us. We’ve devoted an extraordinary amount of our lives to it, which makes it all the harder to admit that the industry is in poor health, with potential for further decline. But it’s clear that we have been our own worst enemies in the past five years. To be specific:
- We failed to invest in marketing to grow our business.
- We overspent on overhead, cutting significantly into profitability.
- We invested in lower margin businesses.
- We took on more debt.
With the challenges currently facing the ski industry—including dramatic demographic shifts and possible climate change—the industry needs to stop shooting itself in the pocketbook and give itself a shot in the arm with additional marketing. Only then will there be a new Golden Age of skiing.
