Mobile Edition
Print
Get the Mag
Weekly UpdatesThe situation of steeply seasonal resorts, such as Nova Scotia's Quarterdeck Beachside Villas and Grill, requires innovative thinking. For the Quarterdeck, this would include finding ways to shift demand from high-season to off-season times, or perhaps even a more radical approach, including selling the villa units as condominiums.
Keywords: seasonal resorts; off-peak demand stimulation
**********
The hospitality industry is a business with high fixed costs and low variable costs. Regardless of occupancy levels, buildings depreciate in value, staff must be paid, and the property has to be maintained. When rooms are occupied, the rule of thumb holds that variable costs are about 25 percent of the room rate. In the case of summer resorts in cold climates, hotel rooms represent perishable excess capacity during the winter months. This combination of high fixed costs, low variable costs, seasonal excess capacity, and highly perishable inventory suggests a classic solution to the problem--namely, rate discrimination by time, coupled with innovative attractions to generate demand during the off-peak and shoulder seasons to eliminate or mitigate excess capacity and help keep the labor force intact.
As described in the accompanying case study, the Quarterdeck Beachside Villas and Grill, of Summerville Beach, is a sixteen-unit upscale seasonal seaside resort with a highly rated restaurant located on Nova Scotia's south shore. Run by Doug Fowler, a motivated owner with partners, it caters to the local surrounding market, with 56 percent of its clientele coming from the province of Nova Scotia, and the bulk of those guests from the province's capital, Halifax. Offering friendly and personalized services, almost two-thirds of the inn's guests are repeat customers or are referred to it. Another 13 percent of guests come as drive-bys. It is, in a capsule, a cozy establishment that provides personalized services and is rewarded by repeat purchases and word-of-mouth recommendations. Annual room revenues of about $500,000 a year (mostly earned during the busy summer months) are augmented by the excellent restaurant and rentals of kayaks, body boards, and surfboards.
The case study purports to do the following three things: clarify target markets, estimate demand, and make recommendations to stimulate demand, especially in the winter months. The authors do a decent job of the first, a questionable job of the second, and an excellent job of the third. Here is my analysis of their analysis.
Target market. The authors are correct in identifying the target market as affluent people living in the surrounding area, mostly in the province of Nova Scotia, with Halifax as the hub. The authors also make reasonable recommendations as to how the target market can be reached.
Demand estimate. I question, however, the authors' claim that adequate demand exists within the province, even given that Nova Scotia has 17,100 people who earn incomes greater than $75,000 and the majority of those people reside in the Halifax area, or are within driving distance of the Quarterdeck. The problem with the demand assertion arises from basing demand calculations on the fact that the resort has only thirteen rooms available in the winter months and sixteen during the summer peak season. Following the authors' logic, if the Quarterdeck were twice its present size, there might not be adequate demand. This line of reasoning totally ignores the service elasticity of demand. That is, whether there is adequate demand for the Quarterdeck depends not so much on its size but on how it is perceived and, more important, what attractions it can offer in the winter months.
The authors advance a convincing set of recommendations as to how to advertise and reach the target market, how to collect useful additional data, and how to provide new attractions to get people to come during the winter months, none of which need be repeated here. I would like to add one more recommendation, though, to close the loop.
Building winter demand. Looking at the unused room capacity in the shoulder and off-season, it is crucial that the resort attract more visitors during those periods. As it stands, room occupancy is close to capacity during the months of July, August, and September but below 20 percent from December through February. I would like to suggest that the Quarterdeck start a formal hotel loyalty program. This would replace the understandable, but mistaken, policy of rewarding important guests with free rooms during the busy summer months.
Here is how it should work. Many small hotels have loyalty programs that reward patronage with free room-nights based on the number of paid room-nights, rather than points earned through dollars spent. For every five paid nights during the summer, for example, the Quarterdeck could offer one free night during the off-peak months. This would help to increase occupancy rates during the winter, especially if the guests decide to stay more than one night. Because the out-of-pocket costs of accommodation are so low for the inn and the probability of displacing a paying customer during the off-peak months is negligible, this would represent a low-cost proposition for the resort. At the same time, this program would obviate guests' expectation of graced rooms during the high season, thereby increasing room revenues. Another advantage of starting a hotel loyalty program is that upon registration, one can collect all the pertinent information about guest preferences such as favorite newspaper, preference for tea or coffee, and special activities favored.
Focus on real estate. In closing, let us consider a contrarian thought. Perhaps the Quarterdeck should get out of the resort business. Seasonal resorts that provide accommodation are highly disadvantaged in that their capacity is fixed in every sense of the word. Airlines and cruise lines can increase or reduce capacity simply by moving airplanes and cruise ships around to match seasonal demand. Even fixed-location ski resorts can increase capacity during the busy winter by operating more ski lifts over longer operating hours. But seasonal resorts like the Quarterdeck are geographically stuck with fixed capacity.
Note again that the annual room revenue is only $500,000 for the entire resort. Once one factors in wages, supplies, utilities, maintenance, insurance, and Doug's time, one wonders whether net profits represent a fair return on assets. Unless the Quarterdeck manages to turn things around and fills its rooms during the winter months through rate discounting, the proposed loyalty program, and new attractions, it might be better for Doug to sell the sixteen self-contained units as year-round condos or vacation homes. To keep busy, he could use some of the proceeds from the sale to winterize his first-rate restaurant and keep it open all year round as an upscale beachside establishment and amenity for those who purchase the units.
Response
Prior to 2005 (when the Quarterdeck had different partners), Doug investigated the possibility of selling off the units as condominiums, turning the Quarterdeck into a time-share property or operating as a condo-hotel. The partners spent more than $100,000 investigating this possibility (on consultant fees, surveys, and market research). It was determined that the idea simply would not work. For starters, real estate in the area is relatively inexpensive, so people can find more land for less money elsewhere. The planning committee for the area said that the water source was not large enough on the property (however, this could have been fixed). To run as a timeshare, more amenities would have to be added because people expect more from a time-share. Last, running the Quarterdeck as a condo-hotel would not have worked because the season was too short to get any rental income for both management and the condo owners. Also, the lack of units decreased the potential income, making it an unattractive proposition in the eyes of the Quarterdeck's owners.
--Robert J. Kwortnik Jr. and James Vosburgh
Rex S. Toh, Ph.D., is a professor and marketing program director in the Albers School of Business and Economics at Seattle University (rextoh@seattleu.edu).
FEED