As we enter what some are already calling “the recreation decade,” is our industry star shining bright? Or is our star a fading one, dimmed by constraints on growth — environmental, financial and consumer?
As always, the future lies somewhere between the extremes. Also, as always, those who succeed will be those who keep their eyes firmly on the basics, perhaps improving on them, and who are not diverted by trendy alternatives.
Major issues for the decade (not necessarily in order of importance, but potentially interrelated) are profitability, labor, consumer loyalty, service and other sales opportunities, such as real estate development.
The opportunities for significant real estate profits in the ’90s will, I believe, be selective and constrained; real estate potential will not be the major reason for ski area expansion, or for new developments. Yes, some markets, east and west, are going to be strong at times, but the massive development of the scale we experienced in the past two decades has gone, and may never occur again.
I believe the market has turned from one driven by the “personal satisfaction/tax motivated” buyer to one that is almost totally driven by personal desire. The individual or family acquiring a property in a resort will plan to use it; only secondarily will income potential or tax benefits be a concern. If this is true, then the massive, and many times speculative, development of the past decades will not return.
By a “personal desire” buyer, I refer to the urbanite who is looking for a place to which he and his “family” can escape for a weekend, holiday or vacation. This probably is not the ideal buyer from a resort owner’s standpoint, since it may not, as in the past, develop an additional rental bed base. But our fast-paced society and the change in tax laws have focused the owner/buyer on personal use. It probably also indicates that the areas seeking development will have to offer a variety of activities to attract buyers. Multi-seasonal activities such as golf, tennis, convention facilities, horseback riding, entertainment and shopping will, to varying degrees, be more important than ever in competing with the beaches and other attractions of our country. But, we have an advantage. Mountain resorts have at least two great seasons, summer and winter, to offer to consumers, whereas much of the competition — beaches or the sunbelt — offers one great season, with little attraction in the counter-season.
Many ski resorts are already better positioned to push into the multi-season business than the competition. Many have modern plants, and have begun to develop the economic viability for multi-seasons. Mountain resorts are great places for conventions or business meetings, and will only continue to be more so in the future to further nurture economic viability.
Also, while many of the country’s beach areas are becoming more congested, and their access increasingly clogged, it could be said we enjoy a competitive edge. But, mountain resorts must also control their surroundings to make sure the same thing does not happen. The competitive edge cannot be taken for granted.
In considering the real estate question, it is important, too, to understand that proximity can be measured in many ways. It is not just distance, it is not just time, it is not just the combination of the two. There is also style, comfort and convenience in the equation. What is proximate for one may be seen very differently by another. For instance, a good dependable airport near a resort may be as good as a new highway to another owner/buyer. This will encourage some development both near and far from major population concentrations.
What about hotel development? Yes, there will be some, but in very select and specific situations. Throughout our country, many hotels are suffering from an oversupply of competitive space and high development cost. A hotel developer in a resort will need to project high occupancy rates, summer and winter, and be able to command high rental rates to justify development. This means that multi-season amenities and good convention space will be a must. Even then, there will be a higher degree of risk involved than in a good metropolitan development.
In many parts of the country, real estate prices are again firming up and existing inventory is being absorbed, thus leading many to speculate that development opportunities are on the horizon. However, I also believe that this may be a false horizon. While inventories are shrinking, and prices escalating, it appears to me there is also a latent seller waiting in the wings to keep feeding the inventory for years to come. This potential seller, probably somewhat unique to resort properties, has been able to ride out some of the less than attractive real estate markets of the past few years with no real financial pressure, but because of changing family or other situations, is ready at the right time, market and price to become a seller. Currently unseen, but in the future, this is a supplier of inventory.
The other limiting factor on real estate in almost every part of the country will be continued and increasing governmental or environmental regulation. This pressure will slow new development or cause economically prohibitive high prices of such development.
Despite the above, the far-sighted resort operator, with capital to invest in the right location, and in touch with his surroundings, may well have opportunities to profit from real estate during the next decade. Timing is, and will be, everything! But then, this was always so.
I believe the industry will continue to consolidate during the coming decade. Unfortunately, areas will continue to disappear because they cannot overcome plant or operating obsolescence. The entrepreneur will continue to disappear and be replaced by the professional manager, multi-area or corporate owner. Certainly, these will continue to bring more sophisticated operating systems and new financing to resorts. However, the new generation will still have to cope with the need to provide an ever-increasing level of service and quality of experience.
There have been some history-making sales of major resorts in the past couple of years, and in all likelihood, there will be more to come in the future.
While some of the sales have hit all-time highs, there will still be properties available which will allow for returns commensurate with the risks of a weather-related business. It is for this reason that the development of new resorts will continue to be limited. If an existing property can be acquired that can provide a reasonable rate of return, as well as an existing skier-day base, it is a more attractive investment than the risk associated with starting a business from scratch.
Investment in a resort may or may not require available real estate. Many of those companies that are in the “uphill transportation” business will continue to be very profitable. Therefore, real estate may or may not enhance the profitability of an operation, and, in my opinion, should not be the primary reason for an acquisition or new development.
Despite all we hear about the cost of skiing, I do not believe the price of a lift ticket is yet out of line with alternative experiences. In the future, the industry will have the opportunity to increase its revenues, but will have to balance this with the consumer’s experience.
Consider the golf analogy where research indicates we are facing a shortage of golf courses in this country. We recognize a golf course has a finite capacity in that you can only provide tee times every few minutes. To shorten the interval between starts makes the whole system go tilt and destroys the paced golf experience.
Likewise, to maintain consumer loyalty, ski areas will be challenged to maintain a quality experience in the face of technological advances. Yes, high-speed lifts are upon us.
The industry has found a way to move more people through the “First Tee.” However, as on the golf course, the operator is going to have to analyze carefully and be sensitive to what this does to the rest of the experience. In many cases, it will enhance it, but in some cases it will detract from the experience. I would contend that where it enhances the experience, pricing opportunities (and thus profitability) should be positive. Where it detracts, there is a great possibility that the client will exit the sport. The public will pay a lot for a good experience, but may turn to find alternatives in the case of a bad one. Research indicates this to be true in many upscale activities, and our ski resorts and hospitality amenities are no exception.
Providing the experience may also relate to another challenge: the attraction and retention of service personnel. Labor is, and will continue to be, on every manager’s lips during the 90’s. Labor reduction will be one approach — for instance, replacing two fixed-grip lifts with one high-speed one, and reducing the labor required to operate by two or three. Or, perhaps the use of a fully-automated snowmaking system that requires a control room operator instead of crews working in the wet, cold and dark on a mountain. The deletion of staff may, over time, pay for the automation of technically advanced equipment.
However, in providing quality service to the consumer, not all jobs can be successfully automated. Indeed, the “high-touch” and caring service that will be demanded may require heavy staffing commitments. Skiing is still an exciting, thrilling and exhilarating sport, and this is what helps attract the customer. Fortunately, in many cases it attracts the service personnel also.
Operators will continue to be challenged to find ways to enhance job situations and to attract the type of staff they desire. It will take awareness, leadership, understanding and creativity to attract those they desire and need. Much of this motivation will have to come from the top.
Is there an opportunity for growth in the decade ahead? I believe there is in many markets throughout the country. While some destination areas are achieving high utilization factors throughout the season, the bulk of the industry still encounters great peaks and valleys, only compounding their operating challenges. Systematic marketing designed to fill the valleys without creating further pressure on the peaks will require creative approaches. Other service industries, such as airlines and hotels, have certainly started using “yield management systems” to try to overcome the cyclical nature of their business and maximize return. I assume the ski business will also embark on this approach. The yield management approach would certainly indicate that much of the across-the-board discounting utilized currently will be creatively replaced in the future. This sophistication will enhance the operator with better profitability.
Will profitability continue into the ’90s? Why not? For many astute operators who carefully control and carefully operate their companies, there does not appear to be any reason for a deterioriation of profits or return on equity. Despite the trend suggested in some studies, cash flow analysis still indicates a healthy business. The sale of a resort at a high price — and there have been several recently — causes a major increase in depreciation and a decrease in financial bottom line. This, when included in industry studies, may give the appearance of an industry in decline. However, it may also disguise the fact that cash flow is actually increasing. In a capital-intense business, particularly for privately-held companies (which most still are in the ski industry) cash flow can be much more important than the reported bottom line.
Keeping the big picture simple, the ski resort industry has a unique and exciting experience and diversion to offer our fast-paced, urban society. Clearly, there is a demand for this experience. While the demand can be stimulated, it does not have to be created. Skiing is, and is seen as, a desirable activity. There may be changes in how we operate, how we deliver the experience in the decade ahead; but what will be constant, I believe, is that there will continue to be great opportunities. Count on it!
Chuck Lewis started his ski career at Vail, went on to build Copper Mountain, became an investment specialist with Boettcher & Co., and is currently a principal in LWP Services, a financial and insurance service subsidiary of Pettit Morry.
