{"id":12700,"date":"2016-11-04T16:55:24","date_gmt":"2016-11-04T20:55:24","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/vail-resorts-is-diversification-enough\/"},"modified":"2016-11-04T16:55:24","modified_gmt":"2016-11-04T20:55:24","slug":"vail-resorts-is-diversification-enough","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/vail-resorts-is-diversification-enough\/","title":{"rendered":"Vail Resorts: Is Diversification Enough?"},"content":{"rendered":"

Vail Resorts owns and operates the most-visited mountains in the United States. Its properties include Vail Mountain (Colorado), Park City (Utah), and Heavenly Mountain (California). In the fiscal year ended July 2016, over 80% of its revenues were generated at its resorts, including lift tickets, lesson fees, rentals, and retail operations.[1]<\/a><\/p>\n

Customers visit Vail resorts for their outdoor sporting facilities, most notably skiing and snowboarding. Insufficient snowfall reduces customer visits, limiting Vail\u2019s profit opportunity on a highly fixed cost base. Vail manages variable weather conditions with technology such as artificial snowmaking, at considerable cost. Excessive snowfall is not ideal, either, as it increases grooming costs and limits customer access. Given the importance of snowmaking, water and energy are critical resources.[2]<\/a><\/p>\n

Recently, Vail has contended with rising temperatures and declining snowfall in its core West Coast and Rocky Mountain geographies. Snowpack[i]<\/a> was well below historical averages in both the 2014-2015 and 2015-2016 winter seasons in Central California, which hosts Heavenly Mountain and other Lake Tahoe properties (Figure 1).[3]<\/a><\/p>\n

\"Figure<\/a>
Figure 1: Central California snow water content, as a percentage of April 1 historical average<\/figcaption><\/figure>\n

Despite similarly weak snowfall in the 2012-2013 and 2013-2014 seasons, some industry observers dismiss the recent decline as an anomaly, given near-record snowfalls in Central California as recently as 2011. However, while recent precipitation levels were volatile, they exhibited a clear downward trend. In 2014, Christoph Marty, a researcher for Switzerland\u2019s Institute for Snow and Avalanche Research, confirmed that \u201cthere will be less snow in the long run.\u201d[4]<\/a>[5]<\/a><\/p>\n

\"Figure<\/a>
Figure 2: Drought Conditions in California Ski Resorts<\/figcaption><\/figure>\n

Diversification, including geographic expansion, has been a key part of Vail\u2019s strategy to mitigate climate change risk. In August, Vail announced an agreement to acquire Canadian ski resort Whistler Blackcomb for approximately $1 billion. As per Whistler CEO Dave Brownlie, the transaction would help both companies contend with \u201cthe unpredictability of year-to-year regional weather patterns.\u201d[6]<\/a> Whistler follows Vail\u2019s recent acquisitions in Wisconsin and Australia.[7]<\/a><\/p>\n

Post-Whistler, Vail CEO Rob Katz indicated that management remains \u201cin the hunt for any future targets in the ski industry,\u201d with a focus on the U.S. Northeast and Japan.[8]<\/a> The company has also been aggressively building out its summer offerings, although these activities are unprofitable.[9]<\/a><\/p>\n

Additionally, Vail has made considerable investments in artificial snowmaking. The long-term expense of operating these machines may be crippling: energy costs contribute an estimated 15-25% of a resort\u2019s total operating expenses, half of which is directly related to snowmaking.[10]<\/a><\/p>\n

Water is another critical resource: a typical ski trail requires over 400,000 gallons of water per foot of artificial snow. Ski resorts demand the most water in early autumn, when supply is lowest\u2014a challenge that has prompted Vail to purchase water rights and build storage reserves.[11]<\/a><\/p>\n

Recommendations <\/em><\/p>\n

Vail has made progress \u201cdiversifying away\u201d from the climate change problem. However, lower snowfall is likely to affect all geographies, and its summer offerings compete with several leisure activities. Therefore, the company must protect its winter sports business.<\/p>\n

The cost of operating snowmakers may become unsustainable with reduced natural snowfall. Vail should explore less energy-intensive snowmaking equipment and processes. Vail also faces water supply risk in states such as California, where it does not own water rights.[12]<\/a> The company must explore options to secure access to water.<\/p>\n

Vail is advantaged as the industry leader; it is a well-capitalized, multi-property organization that can withstand one or two problematic seasons. It will likely gain market share as its smaller competitors explore exit strategies.<\/p>\n

As a leader, Vail also has ethical obligations. Vail must collaborate with the broader industry to develop best practices around sustainability. For example, it can support the National Ski Area Associations\u2019 Climate Challenge,[ii]<\/a> which promotes practices such as high-efficiency snowmaking.[13]<\/a><\/p>\n

Finally, Vail is a highly visible organization serving an affluent, \u201coutdoorsy\u201d customer base. It should use this platform to promote climate change awareness and encourage sustainable behaviors at the consumer level.<\/p>\n

(797 words)<\/p>\n

[i]<\/a> Snowpack is a measure of the amount of precipitation a region receives as snow.<\/p>\n

[ii]<\/a> Whistler Blackcomb is currently a member of the NSAA\u2019s Climate Challenge.<\/p>\n

 <\/p>\n

References<\/p>\n

[1]<\/a> Vail Resorts 10-K, fiscal year 2016: https:\/\/www.sec.gov\/Archives\/edgar\/data\/812011\/000081201116000115\/mtn2016073110-kforq4.htm#s8D53DFFD5FE75DF9A6F1BE940AB98C87<\/a>, accessed October 2016.<\/p>\n

[2]<\/a> Ibid.<\/p>\n

[3]<\/a> California Department of Water Resources: www.water.ca.gov<\/a>, accessed November 2016.<\/p>\n

[4]<\/a> New York Times, \u201cAs Snow Fades, California Ski Resorts Are Left High and Very Dry,\u201d November 23, 2014: http:\/\/www.nytimes.com\/2014\/11\/24\/sports\/skiing\/as-snow-fades-california-ski-resorts-face-a-brown-future.html?hp&action=click&pgtype=Homepage&module=second-column-region&region=top-news&WT.nav=top-news&_r=3#<\/a>, accessed November 2016.<\/p>\n

[5]<\/a> Bloomberg News, \u201cFake Snow, Real Money: The High-Tech Fight to Save California Skiing,\u201d March 6, 2015: http:\/\/www.bloomberg.com\/news\/features\/2015-03-06\/fake-snow-real-money-the-high-tech-fight-to-save-california-skiing<\/a>, accessed November 2016.<\/p>\n

[6]<\/a> The Wall Street Journal, \u201cVail Resorts to Buy Whistler Blackcomb,\u201d August 8, 2016: http:\/\/www.wsj.com\/articles\/vail-resorts-to-buy-whistler-blackcomb-1470656971<\/a>, accessed November 2016.<\/p>\n

[7]<\/a> Vail Resorts 10-K.<\/p>\n

[8]<\/a> Bank of America Merrill Lynch Global Research, \u201cNotes from the road: Vail management meetings in NYC,\u201d August 12, 2016, accessed November 2016.<\/p>\n

[9]<\/a> Bank of America Merrill Lynch Global Research, \u201cIt\u2019s summer, so time to think about skiing! Raising PO\u2019s for MTN and SNOW,\u201d July 19, 2016, accessed November 2016.<\/p>\n

[10]<\/a> Stanford Law School, Steyer-Taylor Center for Energy Policy and Finance. \u201cClimate Exposure Impact on Equity Valuation: Case Study of Vail Resorts, Inc..\u201d by Donna Bebb, Research Fellow, 2015: http:\/\/media.law.stanford.edu\/organizations\/programs-and-centers\/steyer-taylor\/Vail_Final.pdf<\/a>, accessed November 2016.<\/p>\n

[11]<\/a> Ibid.<\/p>\n

[12]<\/a> Ibid.<\/p>\n

[13]<\/a> National Ski Areas Association, \u201cSustainable Slopes: Annual Report 2016,\u201d http:\/\/www.nsaa.org\/media\/276021\/SSAR2016.pdf<\/a>, accessed November 2016.<\/p>\n","protected":false},"excerpt":{"rendered":"

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