If you were planning to host a party of 100 guests, you wouldn’t build a multi-billion dollar replica of Yankee Stadium to accommodate them. And if you were planning on 100 guests, you wouldn’t prepare food for 10. Those are ridiculous exaggerations, of course, but here’s the point: Capital investment in any facilities and services should match a reasonable expectation of guest capacity.

Eight years ago, Barb Green, owner and CEO of Blue Mountain, Pa., was looking at the flip side of the Yankee Stadium paradigm—the resort’s food and beverage space was counterproductively undersized. Located within a half-hour drive of one million people and within two hours of 30 million people, Blue Mountain had a sizable potential market more or less at its doorstep.

And tourism in the Poconos was booming. According to the Pennsylvania Tourism Office, the state was experiencing 9.9 percent growth in tourist visits between 1998 and 2003. The Poconos represented an important part of that surge, accounting for seven percent of the state’s total tourism volume. But with a seating capacity of only around 100 in its Summit Lodge restaurant, the resort wasn’t anywhere close to maximizing its food-and-beverage revenue stream.

But how much growth was possible? Green and company behaved judiciously and incrementally to find out.

Come Up With A Plan

For starters, Blue Mountain brought in the SE Group to prepare a detailed development assessment for the entire resort—a.k.a., a master plan. This included a market analysis, a site analysis, an analysis of development potential, and an overall feasibility assessment. The final product was aimed, as the report noted, at transforming Blue Mountain from primarily a ski area to a “four-season regional destination resort.”

The assessment obviously came with a price tag, but, according to Green, “it was not significant in the scheme of things.” And it was a small price to pay to steer clear of potential capital-investment missteps—throwing too much money at a misjudged market potential, or misdirecting capital toward projects that might not be of highest priority. The lesson here is that the relatively small cost of hiring experts for guidance is almost always money well spent.

The assessment provided an overall picture of the resort and its potential in all areas of operation—mountain ops both winter and summer, guest services, facilities, food and beverage, real estate, and so on. In its initial response to the report, resort decision-makers decided to focus on areas “where we had deficiencies,” says Green, “and the worst was food and beverage.” Another lesson: focus your initial investment on areas where it is needed most.

The SE report noted “a significant deficit of seating space,” meaning “a poor guest experience” and “lost revenue opportunities.” According to SE’s analysis, the square footage of the Summit Lodge restaurant was less than 50 percent of the lowest recommended threshold.

One Step At A Time

Even so, Green chose to proceed with small-steps prudence. What if millions of dollars were invested in new facilities, and they (customers) didn’t come?

Green opted for a phased approach, starting with a test phase of development with a relatively modest $250,000 price tag. The project involved building a horseshoe-shaped patio intended to expand outdoor winter seating, although obviously it would benefit summer business as well. The size of the expansion was based on the resort’s visitor counts as well as a look at what nearby competitors were doing. And, as Green happily notes, “it was cheap to do.” If it worked, more investment and more expansion would follow. If it didn’t, the loss would be minimal.

The success of phase one sparked a more ambitious expansion—the $1.4-million development of a larger outdoor courtyard around the initial horseshoe, increasing capacity by 300 seats. And that expansion was soon followed by another $2 million in improvements to the Summit Lodge—“putting a new skin on it,” as Green puts it—including new windows and air-conditioning.

That investment was critical in enabling the resort to tap into the potentially lucrative summer wedding business. Lack of air conditioning, in particular, limited Blue Mountain’s ability to court wedding planners. With the improvements, Blue Mountain was soon hosting four to six weddings a weekend for nine months of the year, generating more than $1 million in wedding business.

Quantity Meets Quality

Of course, increasing capacity is really a job only partly done. The current generation of resort guests, says Green, expects quality, especially in food service. And even before the initial expansion, the SE report cautioned about “pressure on the food service operations.”

It’s important to match a larger guest population with the capacity to serve them. “We could keep adding tables,” says Blue Mountain’s CFO Dave Deal, “but we had to keep up quality, too. The staff was stressed. We were doing $4 million [in business] out of a kitchen designed to do $1 million.”

So, in its most recent phase of capital investment two years ago, the resort sunk $15 million into a widespread facilities upgrade. (The initial budget was $10 million, but “it got away from us a little,” Green concedes.) Rental and ski-school facilities in the Valley Lodge at the base of the mountain were consolidated and upgraded, administrative office space was consolidated and improved, and the Summit Lodge kitchen was expanded and revamped. For the kitchen project, Blue again leaned on experts “with the talent who know how to do this,” says Green.

The $15 million upgrade, says Green, “might not have been sexy,” since it focused mainly on back-of-shop stuff. But it greatly improved the resort’s operational efficiency, and it “set us up for real quality guest services,” she says. And quality improvements came with cost benefits—according to Deal, the larger but more efficient Summit Lodge kitchen led to a reduction in food costs, from 36 percent to 22 percent of revenues.

Return on investment is a common metric for measuring the sensibility of capital improvements. But Green says that Blue was guided more by affordability—how much money could be raised without stressing the budget—and a realistic assessment of the resort’s market potential. Relying on statistics from the National Ski Areas Association, says Green, “we didn’t want to be out of whack with industry trends.” The resort also took a close look at what its principal competitors, primarily Camelback and Mountain Creek (in New Jersey), were doing.

Another metric, of course, was what sort of increased revenue stream could be generated. Greater capacity should be matched by greater revenue, and so far, so good. According to Deal, summer revenues have jumped from $300,000 a year to $2.8 million, with overall revenues growing 15 to 20 percent a year since the initial expansion.

Next Steps

So far, the capital improvements at Blue Mountain have been a three-part story: determining the four-season market potential, increasing capacity to tap that potential, and improving overall operations to match increased capacity. What next? Green acknowledges “a need to always give people new attractions” to “get people excited.”

Lodging is one area in which Blue suffers from a capacity shortage—there is essentially none at the mountain. The nearest lodging of any sort is 20 minutes away, and that’s a competitive disadvantage, particularly in the corporate conference and wedding markets, against Camelback and Mountain Creek, both with more convenient lodging options. The SE report states simply: “The market analysis has determined that Blue Mountain could successfully develop both vacation-oriented and primary residential real estate.”

Lodging and real estate, however, do not come cheaply, and there are no inexpensive tests to determine need. So Green is prepared to bite a hefty bullet, with plans to put $35 million into the construction of an 80-room condo hotel next spring. Deal says that could help Blue double its wedding business. The capacity to host corporate meetings should grow dramatically as well.

Green says, however, that any lodging expansion must respect Blue’s principal, non-capital asset: its surrounding environment. “Part of our calculation is (where we stand) with competitors. ‘Back to nature’—we don’t want to interfere with that. Camelback is pretty built up. At Blue Mountain, you feel as if you are finally getting away.” Adding lodging runs the risk of injuring the resort’s vital competitive edge as a smaller, more natural getaway. Striking the right balance will be key.

Lessons Learned

What, then, are the takeaways from the Blue Mountain model in assuring that any capital investments match a resort’s capacity to put them to full use? First, determine an opportunity. Tourism was growing, but Blue Mountain’s facilities were clearly undersized for tapping into that growth. It was also winter-heavy, with a sizable vacuum to fill in non-winter months.

Next, hire experts to analyze strengths and deficiencies, to determine where new investment can best be directed. Resorts, of course, often develop master plans, but these are often pie-in-the-sky, what-we’d-do-if-we-had-the-money documents. What Blue got was a realistic, nuts-and-bolts overview of where it stood in 2008 and where it could be 10 years later.

Then, the resort took cautious, measured steps. Blue Mountain’s strategy was to make whatever minimal investment would enable a meaningful market/capacity test, then move on incrementally from there.

Finally, while return on investment can be a useful metric, affordability—the amount that can comfortably be raised through banks and private investors—and the projected increase in revenue stream also figure into the equation. In Blue Mountain’s phased approach, affordability was the initial driver. Then, as the revenue stream grew, and especially as the door to four-season operations began to open, additional investment was warranted.

And as Blue discovered, increased capacity in one area of operations can have a domino effect. Greater seating capacity necessitated a greater kitchen output, and more visitors necessitated upgrades elsewhere at the resort.

For any resort, there is a theoretical optimal balance between capital investment and operational capacity. Yankee Stadium has a seating capacity of 54,000 because, for any given game, most or all of those seats can be filled. McCoy Stadium, home of the Triple-A Pawtucket Red Sox, seats 10,000 people, for the same reason.

The analogy, of course, is simplistic. Ballparks are singularly focused, designed exclusively to stage a ballgame for a few hours. Ski areas—or multi-season resorts—have multiple businesses to manage, some of them 24/7: an array of disparate recreational activities, various guest services, lodging, and so on. But regardless of the size of the investment, all capital must account for, as at a ballpark, potential guest capacity.

Time to play moneyball!