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May 2009

The "Not the 2007-08 Economic Analysis"

How this author manages to not look at the annual industry economic report, but still come up with some good advice.

Written by Jeff Harbaugh | 0 comment

Every year, SAM comes to me and says, “Jeff, people want to know what you think about the Economic Analysis.” Now, my ego is as big as the next person’s, but I know what they really mean is, “Jeff, nobody else is willing to do this.”

This year, I got the upper hand. I gave them some line about “more important strategic issues” and “not wanting to get lost in the minutiae,” and they fell for it! So I’m not going to put on my green eyeshade and pore over the numbers until I go blind, like I have in the past.

If I did, though, I’d report some of the same numbers you can and probably have read in the Executive Summary, and tell you, like I have for the last two years, that it’s good to be big and bad to be stuck in the middle. I’d focus on a handful of specific numbers and hopefully say something insightful yet glib, perhaps bordering on amusing. I’d remind you that the balance sheet numbers are problematic at best, influenced as they are by a few big transactions and our seasonality (nobody actually has negative working capital and stays in business). And this year especially, I’d probably point out that the report excludes the impact of real estate.

Also, I would certainly have pulled out this quote from page 12: “The ability to increase total revenue per skier visit is an indication of the overall financial health of the industry.” Then, further down on the same page, the report notes, “…total revenue per skier visit was up only in the Rocky Mountain region, and flat or down in the other four regions.”

Given the second statement, I have no idea how the first statement can be accurate. If four out of the five regions were flat or down, how is this an indication of the “overall financial health of the industry?” In a record visit year, four out of five regions couldn’t increase total revenue per skier visit? Yikes!

Also, the finance/accounting part of me has to point out that total revenue per skier visit can go up, but if visits declined, the “overall financial health of the industry” could suck.

Which brings me to something else the report says.

“Additionally, the average prices for daily lift tickets, as well as for adult and child season passes, increased, a healthy sign signaling pricing power in the industry, particularly because the increased prices did not have a negative impact on business volumes.”

Read that statement carefully. For it to be true, we have to know that business volumes would not have been up even more without an increase in the average price of daily lift tickets. We do not know that. And therefore, the rise in ticket prices is not necessarily an indication of pricing power.

So I’m not going to do my usual detailed analysis. First, while I recognize that part of the purpose of this report is to represent the industry well, statements like the two above leave me unsure about the analysis—or at least about the conclusions.

Second, I believe what most resort executives do is compare their specific resort to others of similar size in the same region. For my broader analysis, I’ve always thought there weren’t enough resorts in each sample when you broke them down by size and region to make the analysis valid. That’s even more of an issue this year, as the number of participating resorts has fallen from between 105 to 113 in recent years to 98. I wonder why fewer participated.

Far more important, however, is that we’ve got to look at the forest this year and forget about the trees. If I were to do the kind of analysis I’ve done in the past, I’d somehow be buying into the idea that it was business as usual; that the economic conditions existing last season were the same that exist now, and are going to exist at least for this coming season.

I’m concerned there would not be much value in that.


THE VIEW FORWARD

We’re in a recession. The worst any of us have ever seen. It’s not going to be Great Depression II with 25 percent unemployment (unless trade protectionism gets out of hand). But it’s bad, and its social/ economic impact is going to endure long beyond the statistical end of the recession.

Here’s an exercise for you. Go find somebody who lived through The Great Depression. (Hurry while they’re still around; I talked to my 88 year old mother.) Ask them about their lifelong saving and spending habits. They saved and were cautious in their spending for literally decades because of the impact of the depression. Even when they had piles of money. As recently as 1983, personal savings as a percentage of disposable income was over 10 percent. It fell to negative 1 percent in 2006.

The Bureau of Economic Analysis says it hit a positive 5 percent in the U.S. in January, 2009.

Point is, you don’t dare look at the rosy Economic Analysis of 2007-08 and think, “This is great! It’s business as usual.” Unless, of course, you’re confident that good snow (and snowmaking) and cold weather is all that matters. In that case, don’t bother reading what I have to say, and you can ignore the economic report. The only thing you should do as a resort manager is maximize your flexibility in dealing with variable weather conditions.

I actually think that might have been the right approach when stock prices and housing prices were going to the moon and the future was endlessly bright. Maybe snow was all that mattered.

But now? We’re going to come out of this recession, though not as quickly as many people think. Coming out of it, however, doesn’t mean going back to the way things were in, say, 2006. Savings will stay high and consumer spending will rise only slowly. Housing prices are not going to leap up again. Credit is not going to be as easy to get as it was. Baby Boomers looking to retire and seeing their houses worth 25 percent less and their IRAs down 40 percent are going to be cautious. People without jobs probably don’t buy season passes.

The behavioral changes caused by this recession are going to be significant and lasting. We don’t know how significant because we’re still in the middle of it. Maybe it’s easier to think of it this way: when the recession ends, we’re going back to normal. But “normal” was never annual GDP growth of five percent (it’s more like three percent). And normal was never housing prices going up double digits each year. And normal was never a negative savings rate. These abnormal conditions just lasted so long that we started to think of them as normal.

Question is, how will you figure out how your business will look in truly normal times again?


HERE’S A SUGGESTION . . .

Now that the season is over, and before you make all your plans for next year, take your management team sky diving. Or rock climbing or fire walking or bungee jumping—whatever it takes to shake you out of your old ways of thinking. Maybe a trip to the local bar will do it. Wherever you go, it has to have a big old white board. And there has to be a designated writer-downer.

The first thing you write down are some bullet points that describe the economic and business environment you expect us to be in two years from now. Don’t necessarily listen to me—maybe I’m just a pessimistic, wrong-thinking fool. Make your bullet points as specific as you can to your location.

The second thing to write down are the five (the number may vary) bedrock assumptions that are implicit in how you run your resort and why it is successful—your competitive strategies, if you will. If you can do this in a few minutes, you probably aren’t doing it well (unless you’ve already done it before). A good discussion that generates these key assumptions usually contains a few surprises and can take quite a while.

Look at the coming economic environment you’ve described. What’s the impact on your assumptions?

Now, complete the following sentences:

• “The people who come to our resort can be described as __________.” Hint: there can be more than one class of customer, and the description can be as long or short as appropriate.

• “In the emerging economic environment I’ve described, they will continue to come with the same frequency and spend the same amount of money because __________.”


A FATEFUL INTERRUPTION

My god, this is just cosmic. I’m literally right at this point in writing the above sentences when Outlook goes “ping” and I see I have a “Today in the news” email from SAM, telling me “Colorado visits down 6 percent through February.” Then I click through to see the whole story and learn that Colorado Ski Country USA thinks this 5.9 percent drop means “skiing is falling on the ‘necessity’ side of the ledger for most participants, who may be economizing in many areas of their lives but not when it comes to ski days.”

It is of course their job to be positive, and there’s reason to be positive given the quality of the snow and the numbers so far this year given the economic conditions. But equating skiing and boarding with food and water seems to me to be pushing it. On the other hand, it would be great if they were right, because then there would be no need for me to write this, no need for SAM, no need to ever make any improvements at your resort and, come to think of it, no need for CSCUSA.


BACK TO MY SUGGESTION

If, like me, you believe sliding down a mountain may not always rise to the level of a necessity, perhaps the analysis I’m suggesting above might be of some value. At the risk of generalizing, what we all have to figure out is if high income people who have seen their net worth decline in a way they have never experienced and never expected to experience will continue to come to winter resorts and spend the same amount of money doing it. “How do we get them to economize on something else?” might be another way to ask it.

Or maybe, “How will their behavior change?” This year, we’re seeing destination resorts get hit and day resorts prosper. Is this temporary? Or will some of the changes in long-term economic behavior I’ve suggested be more permanent?

I hope you now understand why this rant hasn’t been about the Economic Analysis. For all the good information it contains, it can’t help you figure out how things will look in what I propose is a new economic reality.

Try to make a break with the past as you think about that.



Whatever Happened to Conversion?

Remember when, as an industry, we rung our hands about the aging of our customer base and the fact that we were doing such a lousy job of converting people who tried snow sliding to committed participants? There was a lot of money spent analyzing and creating programs to address what was perceived at the time as a survival issue. There were seminars, speeches, press releases, and lots of coverage of what resorts were doing. What was that—three or four years ago?

I was just wondering, whatever happened to all that? It seems to me it’s more important than ever right now, but I don’t recall reading a thing about it recently. I’m pretty sure the traditional customer base hasn’t gotten any younger. Any progress made? Any new, innovative programs out there? Or did the number of skier days just continue to go up to the point that we felt we could declare victory and go home?

Maybe it’s time to dust off that report and renew some of those discussions.

Oh—and one other thing. Get a copy of “The Black Swan—The Impact of the Highly Improbable,” by Nassim Nicholas Taleb. He should have been the featured speaker at this year’s NSAA convention.

—JH