by Dari Quirk, MBA and Greg Hartmann, CHA, HVS Denver Office
At first glance, it might appear that the United States ski industry is stagnant, with skier visits increasing on average less than 1% annually over the past ten years. However, today's ski industry is anything but stagnant, and is characterized by fierce regional and national competition among ski areas, active resort acquisition and consolidation, new and proposed developments, and vast, untapped international skier demand. This article looks beyond the apparent and examines some of the many facets of the US ski industry which make it a dynamic - albeit often misunderstood - industry.
When evaluating the US ski industry, most analysts first consider skier visits. A record number of skiers flocked to the slopes during the 1993/94 ski season, as skier visits for the US totaled just over 54.6 million for the year - an increase of 1.12% from the previous season. Early reports for the 1994/95 season indicate that visits anticipated to be down slightly from the 1993/94 figure due to "challenging" weather conditions. The National Ski Areas Association (NSAA) reported that for 1992/93, the average resort in the central Rockies was the most profitable in dollar terms, earning $2.061 million. Eastern ski resorts returned the most on investment, reporting a 46.1% return. This table tracks skier visits in the US for the past 13 years.
Total skier visits have remained relatively flat over this 13-year time period, increasing by only 0.62%. However, dramatic changes can occur in skier visits from year to year, as illustrated by decreases in skier visits as large as 7.6% in the 1982/83 season to increases as large as 8.8% in the 1991/92 season.
The US ski industry is typically divided into five regions: Northeast, Southeast, Midwest, Rocky Mountain, and Pacific West. This table shows the distribution of total US skier visits among these five regions. The Rocky Mountain region captured approximately 32% of the skier visits for 1993/94, reaching a total of 17.5 million skier visits. For the past 13 seasons, the greatest number of skier visits have occurred in the Rocky Mountain region.
Recently, the Rocky Mountain and Northeast regions have been the primary catalysts for growth in the ski business. Improved air travel and the development of lodgin and condominium facilities have enabled skiers to visit distant resort areas rather than utilitze skiing facilities closer to home. However, the statistics only paint the picture concerning existing demand, and do not reflect factors such as potential demand, revenue, appreciation, and real estate developments.
A significant source of potential skier visits for the US is the international skier market. Statistics on this groups of skiers are extremely limited, making it difficult to quantify. However, BEWI Productions, Inc./SKI USA, a US company that markets US resorts to international skiers, estimates that 4% to 5% of national skier visits originate from outside of North American, and that this amount is increasing at 10% per year. Additionally, BEWI estimates that 90% to 95% of international skiers choose a Western ski resort as their destination, and 70% of international skiers choose a Colorado ski resort.
Because of the distance they travel and the length of their vacation time, international skiers typically stay longer at a resort, spend an estimated five times more than domestic skiers, and visit more than two resorts on their trip. When you consider that the vast majority of skiers in the world reside outside of North America, international marketing efforts by US resorts would appear to be a worthwhile and potentially highly lucrative undertaking.
As an industry matures in its life cycle, consolidation often occurs as smaller players are taken over by the larger players, who benefit from deeper financial pockets. Often these larger players are seeking to reduce the number of competitors in the industry, to increase market share, to reduce risk, and to develop economies of scale. These dynamics are currently taking place in the US ski industry. The total number of resorts in the US has decreased by approximately 30% in the last 11 years. As reported by NSAA, during the 1983/84 ski season, 735 ski resorts were in operation, as compared to 516 during the 1993/94 season. Smaller resorts are either dropping out of the market or being combined with other resorts. It is interesting to note that the ski industry's three largest companies, based on skier visits - S-K-I Ltd., Ralcorp Holdings, Inc. and Apollo Ski Partners, Ltd. - together represent approximately 13% of national skier visits, as estimated by NSAA. Additionally, the consolidation trend shows no signs of slowing down, as S-K-I Ltd. reportedly looks to the West for available properties, while more resorts are being placed on the market and independent resorts continue to lose market share against the consolidated giants of the industry.
The maturity of the US ski industry, as seen by the relatively stable number of skier visits over the past 13 years, bomvined with a shrinking supply of independent resorts, has created a highly competitive environment. Consequently, resorts are being forced to develop distinctive marketing tools which are capable of attracting and maintaining skier visits. One popular approach to this challenge has been an interchangeable lift ticket. With the great amount of ownership consolidation occurring in the industry, many resorts are able to offer skiers a lift ticket that is interchangeable with another resort under the same parent company. In addition, when companies that own multiple resorts are not able to offer an interchangeable lift ticket due to locational limitations, they are offering other incentives to entice skiers to their slopes. For example, S-K-I Ltd. offers a discounted "Skier's Mountain" card, good for lift tickets at any of its five New England resorts. LBO Holdings, Inc. is offering a discounted multi-mountain lift ticket and a frequent-skier card known as "The Edge" that can earn skiers free lift tickets for its three New England resorts.
While the number of resorts operating in the US has been decreasing every year, very few new resorts have opened. Essentially, no new, large, destination resorts have opened in the US in the past 13 years, due to the environmental concerns of the US Forest Service and other special interest groups, as well as the difficulty in securing financing for such a seasonal and volatile business. Additionally, a new resort can take up to 20 years from conception to operation, excluding return on investment forecasing. Consequently, the preferred trend has been to expand existing resorts rather than to develop entirely new mountain facilities.
As evidence of these development difficulties, only one new destination resort is slated to open for skier business in the near future - Lake Catamount, located near Steamboat Springs, Colorado - in 1997/98. At full build-out, this resort is anticipated to be approximately half the size of Steamboat Ski and Summer Resort, and it will probably take another 20 years after opening to reach that point. Development plans for Catamount began in the early 1970s. The time necessary to see this resort come to fruition may be the best proof of all that we may not see another destination ski resort developed for another 20 years, if not longer.
In addition to expanding ski terrain at existing resorts, real estate development has recently been the focus of many resort owners. Developing or expanding resort base areas and adding or renovating ski hill facilities is another approach being taken by many resorts to add value to the ski experience and ultimately the market value of the resort. These improvements range from entire base villages under construction at Telluride, CO and proposed at Winter Park, CO to recently expanded base areas at Killington, VT and Sunday River, ME to new mountain facilities at Alyeska, AK to extensive overhauls planned at Arrowhead, CO and Kirkwood, CA.
As previously mentioned, the maturity of the ski industry had led to a considerable amount of resort consolidation. An examination of recent resort sales illustrates this trend, as well as shows the difficulty of applying the sales comparison approach to ski resort valuation.
Ski Table 3 highlights eight recent transactions, including one combined sale, which involved nine North American ski resorts. More than half of these transactions incorporated resort consolidation of some type.
The following units of comparison have been calculated for each resort sale: sale price/VTF/HR (vertical transportation feet per hour), sale price/skier visit, sale price/skiable acre and sale price/capacity.
Because many of the ski resorts transferred were privately held, it is difficult to confirm all of the details of each transaction. In addition, resort statistics differed from source to source, such as industry reports, industry experts, and resort representatives. However, we have disclosed all pertinent information which we were able to ascertain, but make no representation as to its accuracy.
Many of the sales over the past five years which carried high price tags, such as Breckenridge (which sold twice), Alpine Meadows and Park City, and Steamboat (not shown in the table), included a significant portion of developable real estate along with moutain facilties. The interest in the real estate component stems from the belief that although the ski resort itself may not be overly profitable, the development of residential and commercial real estate provided a far greater return on investment.
Unfortunately, a paradox occurs along with this belief. The fact is that the greatest return on investment for real estate developers in ski areas is generally on single-family homes, with townhouses, condominiums, timeshare facilities, and hotels following, respectively. However, the propensity to generate skier demand per day per unit by a particular type of accomodation is done so in exactly the opposite order. Owners of single-family homes - and to a lesser extent, townhouses - typically visit their unit on weekends and holidays. The owners who rent their properties generally do so on a long-term basis (by the season, month, or week) to individuals who tend not to ski every day. Additionally, these individuals tend not to use the ski resort's mountain facilities such as restaurants and retail shops, preferring to eat in and shop in town, away from the base area.
Skier demand generated by hotels - and, to a lesser extent, timeshare facilities - often equates to one skier visit per day per guest. Because of the shortened duration of their trips, these skiers buy undiscounted or minimally discounted tickets, and utilize the mountain facilities regularly. The profitability of a ski mountain is greatly enhanced by a larger percentage of this type of skier. Unfortunately, because that same hotel may suffer during the sprint, summer, and fall months, the return on investment for the hotel developer is greatly diminished.
This two-edged dilemma leaves ski resort owners with the difficult task of weighing the benefits of greater profit from real estate against the effects of fewer skier visits and lower revenue from mountain facilities and vice versa. In ski areas where various festivals and additional mountain sport activities can create off-season demand, and where meeting and conference business can augment the spring and fall shoulder eseasons, some of the low returns of hotel development can be enhanced. However, until such time as hotel profitability in a ski area can be strong throughout the year, it will be residential development that will most likely provide the greatest net returns to its owners. Therefore, each ski area must analyze its respective market to determine what type of real estate mix is best for their resort.
Ski resort ownership is ultimately the business of creating and enhancing value, both through cash flow maximization and asset appreciation. In order to understand the investment potential of a ski resort, investors in ski facilities must be thoroughly aware of the many forces that can impact and change the value of their properties.
Despite the overall maturity of the US ski industry, efficently managed and creatively marketed resorts can increase skier visits and market share. In addition, with lift ticket prices for some popular resorts nearing the $50 mark, these highly fixed operations can realize significant improvements in their bottom line figures. However, forecasting the future of the US ski industry is as difficult as forecasting the weather. The industry is affected by a large and diverse group of variables - including, but not limited to - the amount of snowfall, disposable personal income, inflation, and the overall state of the economy.
Finally, it would appear that international tourists - many of whom will find improved air service to the Rocky Mountain region through the newly opened Denver Internatinal Airport - offer a substantial source of untapped skier demand. This potential demand growth in supply, bode well for the macro economics of the US ski industry. <
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