Timesharing - Enviable Growth Lures Major Hospitality Companies into Industry
By:
Fall 1996
Timesharing once the proverbial black sheep of the hospitality industry today occupies a coveted position as one of the fastest-growing sectors of resort development and travel globally. Since 1980, timeshare resorts have grown at an annual rate near 20 percent worldwide, while sales volumes now approach $6 billion annually. The industry sailed through the recession earlier in this decade with hardly a ripple. Not surprisingly, it continues to attract keen interest, particularly as the emerging markets of Asia/Pacific report escalating rates of expansion.
Timeshare's reputation clearly has regained some luster since its early years, particularly in mature markets where regulatory frameworks have curbed earlier abuses, including questionable marketing and sales practices. Entry of global hotel brands has heightened credibility, as these companies have seized opportunities to leverage their customer bases and operational skills in a new industry. And this fall brought the surprise acquisition of Resort Condominiums International, Inc. (RCI), the global organization that pioneered timeshare exchange and has been called the backbone of the industry. With this acquisition scheduled for completion by year end, HFS, Inc., the world's largest hotel franchisor, assumes a dominant position in timesharing in a single stroke.
Numerous questions confront the industry at this juncture. Can timesharing sustain record growth, while dealing with challenges that include the high costs of marketing and regulation in emerging markets? What is the industry's future as hotels and other hospitality companies diversify into timesharing, seeking to fulfill the rising expectations of customers and investors alike?
Global Momentum
Certainly the entry of HFS in timesharing has sounded a clarion note for the industry's future prospects. Founded in 1974, RCI was the first organization to see the potential of an international network of timeshare ownership exchange. Today, the exchange organizations are dominated by RCI and Interval International , which share a far-flung market, making it possible for members to "swap" an interval at their own resort with comparable properties at member resorts elsewhere in the world.
RCI had already expanded into related services such as an in-house travel agency and Vacation Net, an on-line travel service, as well as partnering with timeshare developers and offering consulting services to them. Now we can expect that HFS will" knit" together RCI customers with its own vast customer base, offering a highly synergistic menu of products and services - including lodging, car rentals through the acquisition of Avis, residential brokerages and numerous other preferred vendor relationships. By integrating the RCI reservation systems, HFS can further leverage the customer bases of both enterprises and their brands. RCI is no small addition to HFS's growing customer base, generated in part through its 5,200 hotel properties. RCI commands a membership of more than 2 million timeshare owners and 3,000 affiliated vacation resorts- 70 percent of the world vacation ownership market. (See article,From Physical Assets to Customer Equity Leveraging the Real Values in the Hospitality Industry, page 19.)
All this bodes well for the timeshare industry, which continues to post record growth. Originating in the European Alps in the 1960s, timesharing has long since won a secure place in the travel and leisure industry. More than 3 million households own vacation ownership interests in more than 4,200 properties globally. Sales at six timeshare resorts in Orlando, Florida illustrate the industry's growth. Each of these resorts located near Disney World have sold more than $400 million in timeshare units in each of the last three consecutive years, including Westgate the number one selling timeshare in the world. North America leads in timeshare ownership, but European resorts also enjoyed steep growth between 1992 and 1994, growing from 791 resorts to 1,188 - one-fifth of global owners. More than a half of Europe's timeshare resorts can be found in Spain, with the Canary Islands now the world's largest concentration of timeshare ownerships. Orlando, Florida, is just behind in second place.
Meanwhile, Marriott became the first branded U.S. hospitality company to expand with timesharing in Europe, and this move signals the advance of globalization. Marriott Vacation Cub International this year began sales of its timeshare resort in Marbella, Spain. There also are plans afoot for European ventures in the United States, as well as some companies partnering on these projects, including Fairfield and The Global Group. As the number of owners in the United States and the United Kingdom has almost doubled since 1988, there also has been significant growth in owners in the rest of Western Europe, albeit from a much smaller market base, as well as in South Africa, South America, Australia, Mexico and other emerging markets. And an RCI Asia Pacific Oceana spokesperson reports that the Asia/Pacific timeshare market, still in its infancy, has grown 60 percent annually in the last three years.
Timesharing - How it Works
Specialized knowledge of how the timeshare product is financed, developed, marketed and operated is somewhat limited in the hospitality industry at large. In the United States, timesharing in its simplest form offers buyers a fee simple interest in a timeshare property, generally conveying a weekly interval each year in an attached, multi-family residential unit. Timeshare purchasers pay a one-time price for the interval, which the buyer can sell, give or will to a third party similar to any other real estate interest. In Europe, however, the concept of a fee simple purchase does not apply; buyers generally acquire a right to use the property, rather than a direct real estate interest. The timesharing concept thus varies according to laws applicable to both the jurisdiction of the property and its potential buyers.
Typically, a timeshare resort operates in a fashion similar to that of a hotel, with owners and "exchangers" checking in as guests for a one-week period. Owners generally pay annual maintenance fees for the week intervals to cover their pro rata share of ongoing operating expenses. While one-week intervals are most common and provide a standard for exchange purposes, timeshare properties also may offer other combinations, including split-weeks and intervals every other year. The lifetime term of timeshares also varies widely in right-to-use timeshares, most commonly 20, 30, 50 or 60 years. There are exceptions, however. At Marriott's European Marbella development, the term is 80 years.
In recent years, timesharing has experienced a metamorphosis with the emergence of high end properties designed as elaborate resorts. The entry of global hotel and leisure "brands" - including Marriott ,the Disney Vacation Club and Hilton Hotels - has been a major influence. Marriott is the largest hotel company operating timeshare properties in the world, with a total of 25 resorts currently. Disney entered the market in 1994 with its Disney Vacation Club, initially developing timeshare properties near its Florida theme park, Disney World. Involvement of global brands, however, is primarily a U.S. phenomenon. No major European hotel chains have yet entered this market in any extensive way, and the same currently holds true in Asia/Pacific. This will undoubtedly change as these markets grow.
Meanwhile, the hotel and leisure branded companies have captured a market edge in development of highend timeshare properties, which typically offer major resort amenities. Chain affiliation and brand-name recognition create important synergies, allowing these companies to leverage timeshare sales to a captive customer group. In turn, prospective buyers are assured of a familiar standard of quality and service. The experience gained operating and managing hotels can often be transferred to the successful operation of timeshare resorts. These resorts tend to operate as part of a dub system, integrated with the hotel or leisure chain and its guest loyalty programs. The global brands also enjoy the financial backing of a secure parent company, alleviating the sales pressure that many companies are subject to in the initial operating years.
Mid-market timeshare projects are generally large-scale developments with excellent amenity packages. These properties offer a good quality product that can be produced at a lower cost, and most rely heavily on RCI and II to facilitate exchanges. Westgate is the leading U.S. company in this category, while leaders in the United Kingdom include house builders, such as George Wimpey Plc and Barratt Developments Plc. In a third category of less expensive properties, many timeshares have been converted from other uses, including hotels, and are generally charactarized by one-bedroom and studio products, with limited amenities and secondary locations. These timeshare properties generally have limited on-site facilities and lack a resort "feel."
Global branded companies enjoy certain advantages in timesharing, but both smaller and independent companies are also expected to grow rapidly in the near future, particularly with crossover alliances with the hotel industry. HFS, for example, licensed its Ramada hotel brand name to the timeshare operator, Mego Financial Corporation, for use in its timeshare resorts.
Timeshare Economics - Risks and Rewards
While growth of timesharing has outpaced the hospitality industry during recent years, development of these vacation properties is not for the faint of heart. The cost to market timeshare properties is high, even for properties owned by hotel brands, which have an established identity and loyal customer base. Cost structures currently lack transparency. Consumers in the past have generally not been fully aware of the costs making up the timeshare price - including the very large percentage devoted to marketing. Established branded hotel and leisure companies have the marketing advantage due to their market identities, and this is likely to have serious ramifications for the remaining timeshare players, who will need to streamline marketing approaches to compete for business. In addition, the resale market for timeshares is extremely thin. Timeshares often resell at a very significant discount to original cost, plus a commission charge. Specialized organizations continue to enter the market to handle resales on behalf of timeshare owners and consumers. This is still limited, however, as these organizations generally offer fewer options than the timeshare exchange market.
Timeshare marketing in the United States and Europe is currently undergoing rapid change with approaches variously called vacation certs, mini-vacs and fly-and-buy. Each involves attracting potential timeshare customers by offering short vacation trips, which have been heavily discounted for air and lodging. Some companies report that this approach substantially reduces the overall costs to market timeshares, while generating an additional stream of revenue. Prospective buyers attracted by these vacation offers tend to be more sophisticated and predisposed to purchase a timeshare unit than people pursued through 'off premise contact" (OPC), the traditional method of marketing in the timeshare industry.
To the extent that marketing costs can be controlled, the economics of timeshare projects can be quite profitable if the developer/owner can weather the initial cash-hungry phases of development. Indeed this has been one of the reasons why branded hotel and leisure companies have been attracted to the market Consider a 100-unit timeshare property selling units at $10,000 each based on a 50 interval weeks a year. That unit is theoretically worth $500,000 and the entire property $50 million. Nevertheless, marketing a property takes the lion's share of revenue and those costs are reportedly rising - from 42 percent of revenue in 1990 to 50 percent in 1995. Similarly, building costs as a percentage of total development costs also rose during this same period - climbing from 25 to 30 percent - as timeshare properties compete in a market characterized by rising customer expectations. And general overhead costs for many companies can also be greater, as timesharing operations become more rigorously managed. All this may add up to thinner profit margins for many companies, making operational efficiencies more critical to safeguard profitability in the long-term.
Timeshare developers also make money by providing buyer financing. The interest spread between taking back mortgages on units at interest rates above the developer's capital costs can generate a significant revenue stream. Indeed, financing can generate up to 50 percent of total profitability at some U.S. resorts. In Europe consumer financing is somewhat more complex due to the number of jurisdictions involved, and varying consumer credit regulations can make the offer of consumer credit cumbersome from an administrative point of view.
The Future of Timeshare
All signs suggest that the growth in timesharing will continue unabated for the remainder of this decade. The shape of the industry is in flux, however, with key trends shaping the industry:
Internationalization. Diverse factors are promoting globalization of the industry as customers seek to travel outside their own country. One issue to watch - enabling and regulatory legislation for condominiums and timeshares is generally undeveloped in emerging markets, raising fears that the bad name given the U.S. industry in the 1980s may be replicated in areas where the regulatory environment is relatively loose. RCI is actively working to organize trade associations in emerging markets to endorse standards and codes of ethics.
Industry Concentration. The trend toward a concentration of the players in the market is spurred by the branded hotel and leisure companies, which focus not so much on selling a "unit" but marketing a "vacation club" concept, assuring future vacations at a guaranteed price. Under this concept, the chains allow timeshare buyers to purchase points that can be redeemed throughout their hotel and timeshare product base. As with the existing travel sector, new technology will play a major role, fostering strategic alliances with other industry providers, including airlines, insurance companies and finance companies. Nevertheless, there are likely to be problems associated with selling a longterm product. Chief amongst them is the question of maintaining quality resort properties without subjecting buyers to uncontrolled and unreasonable increases in maintenance fees.
New Timeshare Markets. Urban timeshare properties are generally more costly to develop and operate than resorts, as well as being more complex to manage because they often offer intervals of less than a week. Nevertheless, there are a number of key developments underway. A $70 million project in New York, for example, will create one of the world's largest urban timeshare properties with conversion of the top 10 floors of the Park Central Hotel in midtown Manhattan.
At the same time, the industry continues to look at the possibility of timesharing cruise ships primarily under right-to-use arrangements, to avoid complexities involved with conveying a real estate interest. RCI currently has several houseboats and cruise berths in its system, primarily in the Mediterranean and on the Nile River. Bu the timesharing of cruise ships is still embryonic in development.
Product vs. Marketing Costs. It is also likely that the future will bring a change in the economics of developing timeshares with a higher proportion of the purchase price actually represented by product cost. This will favor the larger participants with well-known brand identities due to their existing customer loyalty programs and the pulling power of their reputations in the hotel and leisure community.
The timeshare industry thus continues to grow in allure to industry providers, as well as to consumers seeking to benefit from this vacation concept with its global exchange potential. clearly, the industry's negative image has brightened, and consumer acceptance has been achieved on a wide scale. while the industry dearly faces challenges that will need to be overcome, timesharing will undoubtedly offer important opportunities for expansion for companies in the hospitality industry - both major branded hotel companies and independents. Indeed, it appears likely that the industry can sustain a high growth rate through the decade, particularly as North American and European markets mature, and demand accelerates in the economies of Asia/Pacific.
(Deborah S. Anthony is a tax Partner in Arthur Andersen's Hospitality and Leisure Services and is based in the London office. Linda M. Coates manages the firm's Hospitality Consulting Services in Atlanta. Ailish Keating is a Senior Consultant in Hospitality Consulting Services. She is based in New York)
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