New England Ski Business Is Shrinking Substantially

Case Type: improve profitability.
Consulting Firm: Capgemini first round full time job interview.
Industry Coverage: sports, leisure, recreation.

Case Interview Question #01061: Our client is New England Ski Resorts Association (NESRA), the trade association for ski resort owners and operators in the New England area (a geographical region which comprises six states of the northeastern United States: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont).

It is 2016 now. The profitability of NESRA member resorts has been going down for two years. Business at Mad River Glen in Vermont is off more than 40% from two year ago. At Killington Resort in Vermont, business is down 30%; two hours north, Stowe Mountain Resort’s business is down 15 to 20%. Closer to Boston, Wachusett Mountain is down 20% – and the list goes on.

The New England Ski Resorts Association has hired us (1) to find out why and (2) to recommend what to do about it. How would you go about it?

Possible Answers:

1. Suggested Framework

Profitability framework: Profit = Revenue – Costs = (Price * Quantity) – (Fixed Costs + Variable Costs)

a. Revenues
* Price per lift ticket has not gone down
* Number of skiers has gone down dramatically
- Is this demand or supply-based?
- Supply: Has the weather been warmer in the past 2 years? — No
- Demand: Are people going other places to vacation?
i. We could look at lift ticket sales in other skiing locations (in and out of New England)
ii. Conduct customer survey to find out why

– It turns out that more people are going skiing out West instead of in New England.
– Why? Costs: Equipment, transportation, lodging and lift tickets — transportation is more expensive in the West, so skiers are paying a premium.

b. Costs
* Fixed costs have not changed
* Variable costs have not changed
* Cost structure:
- The mountain, lifts, ski patrol, snowmaking, etc. are fixed costs.
- Variable costs will be a very small portion of the total costs.

c. Recommendations

* Increase number of skiers
– Reduce prices
– Offering regional passes
– Offering additional services

* Increase revenue per skier
– Increase prices
– Adding on lodging
– Increase equipment sales

* Drive costs down

* Spread fixed costs over the entire year, instead of only three or four months, by building golf courses, water slides, etc to generate revenue during the summer.

3. Sample Interview Transcript

Interviewer: How would you go about it?

Candidate: I would like to begin with the profitability equation to try to determine where the problem is, then drill down to look for its causes and figure out what to do about it. Let’s begin with the revenue side. Has the average price of lift tickets gone down?

Interviewer: No.

Candidate: Has the number of skiers gone down?

Interviewer: Yes. It’s plummeted over the last two years.

Candidate: Well, that seems to be the problem, then, but before I go into the details I just want to check the cost side to make sure that nothing has changed there. Have fixed or variable costs gone up over the last two years?

Interviewer: No.

Candidate: Let’s go back to the declining number of skiers. I think the first thing is to figure out why the number of skiers is going down, then make some suggestions about what to do about it. There could be demand-side or supply-side reasons why the number of skiers at New England resorts is going down. On the demand side, people could be skiing elsewhere; or they could be doing other kinds of recreation instead, like going to the Caribbean; or they could be cutting back on recreational activities. On the supply side, some external factor like two years of warm weather could be causing fewer people to ski.

Interviewer: The weather has been fine, so how would you determine why the number of skiers was going down?

Candidate: We could look at trends in ticket sales at ski resorts outside New England area: if sales are going up elsewhere, then perhaps people who were going skiing in New England are now going to the Rockies or Europe; if sales are going down elsewhere, then it may signal that skiing is becoming less popular nationwide. Ski resorts themselves would probably not share this information with us, but there may be other organizations like our client that aggregate such information. To check any inferences that we made from these data, we would want to talk with people and ask them why they were no longer skiing in New England.

Interviewer: How would you find people who used to ski in New England but no longer do?

Candidate: Probably the easiest way is to rent mailing lists from ski magazines, focusing on subscribers who live in New England or New York, and do a telephone or mail survey. In the survey, I would ask people how often they ski in New England, how often they ski elsewhere, how often they do other recreational activities like go to the beach, and whether they had changed those habits over the last two years.

Interviewer: Good. Say you find out that skiing is as popular as ever, but that more people are now going out west instead of skiing in New England. What do you think could cause a shift like that?

Candidate: The four main costs of going on a ski vacation are equipment, transportation, lodging, and lift tickets. I would say that equipment, lodging, and lift tickets are more or less the same in the Rockies and in New England. But someone living in New York or New England will have to fly out west, which is a lot more expensive than driving up to Vermont. That suggests two possibilities: either a raging economy is making people feel wealthier, so they’re willing to pay more and fly out west, or (more likely) airlines have cut their fares, meaning that people would be paying a smaller premium to go out west.

Interviewer: That’s exactly what happened. What would you do about it?

Candidate: I would want to look at ways to drive the number of skiers or the revenue per skier back up, or drive costs down. We might be able to drive the number of skiers back up by reducing prices, offering regional passes, or offering additional services like a more comprehensive resort experience. Or we might be able to drive the revenue per skier up by increasing prices or adding on lodging, equipment sales, etc.

Interviewer: How important do you think the skiers will be to improving profitability at these ski resorts?

Candidate: I think they’ll be very important, unless we can drive costs down substantially.

Interviewer: What do you think the cost structure of a ski mountain is like?

Candidate: I would guess that it is almost all fixed costs: the mountain, lifts, ski patrol, snowmaking, etc. – you have to have to pay for all that whether you have 20,000 or 2,000 skiers in a day. So variable costs will be a very small portion of the total.

Interviewer: True. Can you think of any other ways to recover those fixed costs?

Candidate: Uh….

Interviewer: Right now you’re only spreading your fixed costs over three or four months of the year, when people are skiing. What about the rest of the year?

Candidate: Aha! This must have been when ski resorts started building golf courses, water slides, and so forth, so that they could get some revenue during the summer months as well.

Interviewer: Exactly.