Location vs Price?

[bisney]

@ Grumpy

I'm not sure that I completely understand your post but your suggestion is to have Disney enforce tiers of ownership amongst DVC owners based on DVC profit? I'm assuming you understand that Disney makes money off of many other streams of revenue such as merchandise, concessions, admissions, etc as well as guaranteeing their parks stay busy with customers in their DVC resorts (regardless of if they are renters, direct or resale owners). For Disney to create a class system based on type of ownership by setting up restrictions (making it harder for mass accessibility) makes absolutely no sense to me.

I've read through some of your previous posts (with some difficulty) and it seems as though you believe there are some owners who abuse the system through renting points or are part of some DVC conspiracy where Disney employees are given preferential treatment. If so, I would encourage you to blow the whistle and provide concrete evidence which would help ALL of the owners by making a fairer and more transparent system.

Personally, I believe whether someone purchased directly from Disney or purchased resale is irrelevant. We almost bought direct from Disney but realized that we could purchase the same product at less than half the price so it made sense for us to do so. To each their own. If you have a problem with people buying at a "cheaper" resort and moving to a more "expensive" resort, then your problem lies with DVC and arbitrage in general. Those who bought from Disney seem quite happy with their purchase in general and those that aren't have the assurance that their timeshare carries value in the resale market if they want out.

 

[tjkraz]

I'm not sure that I completely understand your post but your suggestion is to have Disney enforce tiers of ownership amongst DVC owners based on DVC profit? I'm assuming you understand that Disney makes money off of many other streams of revenue such as merchandise, concessions, admissions, etc as well as guaranteeing their parks stay busy with customers in their DVC resorts (regardless of if they are renters, direct or resale owners). For Disney to create a class system based on type of ownership by setting up restrictions (making it harder for mass accessibility) makes absolutely no sense to me.

Couple things...

About 3 years ago at the DVC annual meeting, a member asked executives why they didn't do more for owners with a high number of points. I believe this individual stated that she owned 1600 points, and specifically wanted to know why she did not receive any preferential treatment for being such a loyal customer.

The head of DVC (at the time) stated that they were actually working on such a program which would grant additional perks to those who owned a certain volume or who had referred substantial new business to DVC.

That exec has been gone from the company for nearly 2 years now and these plans have not been mentioned again. But the encounter does shed some light on the thinking of certain members and Disney's potential desire to address such requests. When the DVC exec gave only the bare bones information described above, he was openly applauded by many in the audience.

It's tough to evaluate any such programs in the abstract because we can only theorize what form they would take. Most people seem to envision themselves as being losers under such a plan. In reality, many would benefit from added perks & benefits.

Disney needs to keep the "Disney Vacation Club" business viable...and that means continuing to sell points. In their eyes, every individual who chooses to purchase resale is a lost customer for their direct sales department.

No doubt many resale buyers will spend $$$ on park tickets, food, souvenirs and much more. But Disney wants to have its cake and eat it too--they want the park ticket, food and souvenir money AND the $140-160 per point to join DVC.

If they reach a point where new point sales are no longer viable, they will get out of the timeshare business. And if that happens, you can bet you will see some not-so-favorable changes in perks and benefits afforded to the stagnant population of DVC owners.

I'm not suggesting that buyers should knowingly pay more than resale just to feed the Disney machine. I'm not suggesting that buyers should be faulted for buying resale. But if you really want to see the big picture and understand Disney's motivations, realize that they will do everything possible to keep direct point sales at acceptable levels. Merely pocketing the dollars from ticket and t-shirt sales isn't sufficient.

 

[bisney]

Disney needs to keep the "Disney Vacation Club" business viable...and that means continuing to sell points. In their eyes, every individual who chooses to purchase resale is a lost customer for their direct sales department.

...

But if you really want to see the big picture and understand Disney's motivations, realize that they will do everything possible to keep direct point sales at acceptable levels. Merely pocketing the dollars from ticket and t-shirt sales isn't sufficient.

Assuming the figures I've seen elsewhere in the forum are correct, the overwhelming majority of points re-acquired by Disney recently are for foreclosures (62K points vs 2K points for ROFR?). That would be the biggest moneymaker for DVC operations... reacquire the points for little more than legal fees and office expenses and resale them for $130-160 per point as opposed to paying $40-90 per point through the ROFR process.

DVC operations are virtually a rounding error on Disney's consolidated financials. Unfortunately Disney's financial statements lump DVC in with all park/resort activity but I've read on the Orlando Sentinel that DVC's peak operating profit was $190M. Assuming it's dipped since then, at best DVC would represent 2% of Disney's consolidated operating profit.

I would only hazard a guess that Disney's motivation with DVC is to build brand loyalty with future generations, ensure a 95%+ occupancy rate, pay for capital costs while covering future maintenance costs and most importantly to keep customers coming back to Disney on a annual basis. In my opinion, DVC itself is a method of generating regular income... the direct point sales are just gravy.

 

[tjkraz]

Assuming the figures I've seen elsewhere in the forum are correct, the overwhelming majority of points re-acquired by Disney recently are for foreclosures (62K points vs 2K points for ROFR?). That would be the biggest moneymaker for DVC operations... reacquire the points for little more than legal fees and office expenses and resale them for $130-160 per point as opposed to paying $40-90 per point through the ROFR process.

That relative trickle of points isn't enough to support sales operations. DVC still averages 125K - 175K in sales per month, and that doesn't even include Aulani.

Still, building new doesn't cost a whole lot more than foreclosures. New construction is about $20-25 per point.

DVC operations are virtually a rounding error on Disney's consolidated financials. Unfortunately Disney's financial statements lump DVC in with all park/resort activity but I've read on the Orlando Sentinel that DVC's peak operating profit was $190M. Assuming it's dipped since then, at best DVC would represent 2% of Disney's consolidated operating profit.

By that logic, profits generated by turkey legs, Dole whips and churros are even less significant. Yet Disney continues to monitor and adjust the prices of those products.

Wall Street expects growth from TWDC. When profits decline in one business unit, they must be made up elsewhere.

As new DVC VP, Ken Potrock's performance will be judged based upon results. Iger, Staggs, Holz and the shareholders expect growth...not stagnation or decline.

I would only hazard a guess that Disney's motivation with DVC is to build brand loyalty with future generations, ensure a 95%+ occupancy rate, pay for capital costs while covering future maintenance costs and most importantly to keep customers coming back to Disney on a annual basis. In my opinion, DVC itself is a method of generating regular income... the direct point sales are just gravy.

If Disney were using DVC as a virtual "gateway drug", we would never see the type of cost increases they have demonstrated in recent years. Disney would be building larger, more moderately-priced resorts and slashing prices. They would be content with locking-in those park admission tickets and souvenir purchases for the next 5 decades.

But that isn't happening. Instead prices have risen dramatically and the resorts they are building are smaller & more exclusive. And they have also taken steps like the March '11 resale restrictions designed to bolster direct sales.

Consider a resort like Aulani. Without a theme park, ancillary revenues are much more limited than other resorts. Non-Disney restaurants are plentiful in the vicinity and most recreation options available to guests are run by outside vendors (tours, excursions, etc.) Yet Aulani is the newest and second largest of all DVC resorts.

Disney didn't invest $800 million into Aulani under the assumption that they would eventually make that back via t-shirt sales and dinners at Makahiki buffet.

 

[bisney]

@ Tim

With construction projects, most of the sales are done during the pre-construction phase with the rest made within the first year or two of opening. I’m assuming that Disney sold the bulk of their points for their DVC resorts within the same window… obviously they still sell points (and make a great margin) directly for existing resorts but the majority of their profit had to have been made in the first few years as there is only so much inventory available.

Comparing Dole floats, t-shirts and buffets to DVC points is ridiculous. Unlike DVC points, these are high volume, high turnover products. From experience, the markup on such products is substantial… the most expensive part of the $5 popcorn you buy is often the container which might be $0.15 per unit.

As most of the costs for large infrastructure type facilities such as Disney theme parks are fixed in nature, every time a DVC member goes to the park with their family, that’s hundreds of dollars of incremental profit to Disney. Every time a DVC member pays $150 (or more) for a buffet meal, that’s at minimum $125 profit to Disney. A t-shirt sold for $30 might cost $5 to manufacture. And that’s just for one day. Extrapolate that over 29-47 years of trips and you see the impact of park attendance revenue, merchandise and concessions and the overall allure of DVC to Disney and it’s shareholders.

DVC builds brand loyalty and bolsters other streams of revenue. Our kids will likely have the Disney channel at home. Our daughter may want Disney princess themed birthday parties instead of going to Chucky Cheese. Our son may choose Lightning Mcqueen bedsheets instead of Thomas the Tank Engine because of his trips to Disney. And so on and so on.

And did Disney pay for an $800 million hotel with buffets and t-shirts? Like all of their DVC projects Disney recovered and made a hefty profit on all construction costs from the initial sale of points (with little cash flow exposure), they will recover all future capital and operating costs (with a cushion for contingencies and profit) through MFs and the millions of buffet meals and t-shirts sold over the next 47 years that you’re downplaying is at minimum 75% profit.

I agree that the Grand Floridian is smaller and more exclusive but you contradict yourself by saying new resorts are smaller when Aulani is the 2nd largest resort. My guess with Aulani is Disney recognized a desire to increase west coast DVC sales as the bulk of DVC resorts are located in Florida as well as providing an exotic locale to entice prospective DVC buyers around the world. Yes it’s non-theme park related but it made DVC a LOT more attractive for us knowing that we could take a break from the theme parks to stay in Hawaii which is on our bucket list.

 

[tjkraz]

With construction projects, most of the sales are done during the pre-construction phase with the rest made within the first year or two of opening.

That statement is not factually correct. In recent years DVC resorts have taken anywhere from (approx) 3 years to "sell out" in the case of Bay Lake Tower to 6+ for Animal Kingdom Villas to 8+ years for Saratoga Springs, and "most" of the sales do not occur pre-opening.

As for margins, on consumer products and meals obviously they are very high. But they are similarly high on DVC facilities. You can speculate on margins for as many items as you wish but I can give you actual figures for DVC.

Bay Lake Tower was a $140 million project. Design, labor, materials, furnishings. With 5.6 million points, we know that it cost DVC $25 per point to acquire that asset. Points were then sold for up to $165 each--a very substantial mark-up itself.

Meanwhile, prices at BLT were increased from $130 per point to $165 over a span of 15 months. Aulani went from $120 - 145 in just 13 months. And Grand Californian experienced a single increase of 27%, going from $130-165.

Those increases, coupled with the 2011 policy changes which attempt to coerce buyers to choose a direct purchase over resale strongly suggest that DVC is very interested in protecting this revenue stream.

If DVC was solely a vehicle for selling marked-up buffet meals and t-shirts, the pricing model and sales approach would be much different. That $190 million in profits may only be a fraction of the bottom line for Parks & Resorts, but it's a piece they continue to protect.

 

[bisney]

Construction projects typically require a certain percentage of pre-sales to secure lending, building permits, etc. Perhaps Disney is different but that is how most construction projects work in the private sector. The point is the bulk of DVC's profit is recognized in the early stages of the resort's useful life with future profits capped by the points available to the resort's point limit.

Nothing you've said changes my opinion based on real world experiences in financial consulting that the overall business model for DVC is to profit in the short term on construction sales and to generate long-term revenue for the other divisions of Disney through annual trips, park admissions, merchandise, concessions, media and other streams of revenue. Obviously DVC is profitable so it doesn't qualify as a typical loss leader but it's a profitable means of securing additional long term revenue. Because at the end of the day, it all gets consolidated into the bottom line.

Have a nice weekend and I'll see you in other threads.

 

[DougEMG]

Nothing you've said changes my opinion based on real world experiences in financial consulting that the overall business model for DVC is to profit in the short term on construction sales and to generate long-term revenue for the other divisions of Disney through annual trips, park admissions, merchandise, concessions, media and other streams of revenue.

This kind of makes sense to me. Kind of matches up with your purchase costs are only going to be a small amount of what you spend vacationing each year at WDW.

For our family with DVC we end up going for more days per year, spending more time on site and not visiting Universal or Sea World, and overall spending more money at Disney than prior to owning DVC.

 

[tjkraz]

Nothing you've said changes my opinion based on real world experiences in financial consulting that the overall business model for DVC is to profit in the short term on construction sales and to generate long-term revenue for the other divisions of Disney through annual trips, park admissions, merchandise, concessions, media and other streams of revenue. Obviously DVC is profitable so it doesn't qualify as a typical loss leader but it's a profitable means of securing additional long term revenue. Because at the end of the day, it all gets consolidated into the bottom line.

I wholeheartedly agree with these comments.

But I still take issue with the prior dismissal of DVC income as little more than "a rounding error." DVC may represent only a small portion of the total Parks & Resorts income for a year, but that's a segment which includes full or part ownership in 11 theme parks, water parks, nearly 40 hotels, hundreds of restaurants, hundreds of retail outlets, four cruise ships, Adventures by Disney, and many other business units.

Certainly Disney will earn a lot more in park admission, food and souvenirs over the life of the DVC contracts. No question.

But DVC isn't anything close to a loss leader. Through their pricing models and policy decisions, it's quite clear Disney intends to reap as much profit as possible from the DVC sales division while also benefitting from decades of ancillary purchases from each owner.

 

[bisney]

But I still take issue with the prior dismissal of DVC income as little more than "a rounding error."

Perhaps it's a difference in interpretation... materiality (depending on the industry as well as a massive list of other factors) can range from 1-5% of a company's net income. I never meant to dismiss DVC's operations, it was just an observation that in technical financial terms DVC's operations in Disney's consolidated statements are small enough so that DVC wouldn't change the way the users of the financial statments regard the company. So my apologies if you took issue with that comment, it's just the way I've been trained to interpret numbers.

I agree that Disney wants to have it's cake and to eat it too in that it profits from construction sales and future revenue streams. I suspect that the profit on ancillary purchases > profit on construction which is why I think DVC's appeal to Disney (not DVC) management is in it's ancillary profit (thus similar to a loss leader in concept however not like a loss leader in that DVC is massively profitable). However, this is just my idle speculation and it would take a team of trained monkeys much smarter than I with much better information available to actually prove that point.

Anyways, appreciate the conversation!

 

[tjkraz]

Perhaps it's a difference in interpretation... materiality (depending on the industry as well as a massive list of other factors) can range from 1-5% of a company's net income.

In FY 2012, the Parks & Resorts division (which includes DVC) had a total profit of $1.9 billion.

You previously cited a figure of $190 million in annual profits from DVC sales or 10% of all P&R profits.

 

[bisney]

In FY 2012, the Parks & Resorts division (which includes DVC) had a total profit of $1.9 billion.

You previously cited a figure of $190 million in annual profits from DVC sales or 10% of all P&R profits.

Consolidated income before taxes for Disney in 2012 was $9,260M
Orlando Sentinel said at it's peak DVC's operating profit was $190M.

Materiality is usually based on consolidated income rather than by business segment. Also, taxes are usually ignored as taxes can fluctuate year over year due to types of transactions, extraordinary items, jurisdictions, etc. The point I made earlier was that DVC represents at best 2% of Disney's overall operations. While DVC's operations are much larger than many hotel chains, it represents just 2% of the juggernaut that is Disney.

 

[tjkraz]

(duplicate)

 

[tjkraz]

Consolidated income before taxes for Disney in 2012 was $9,260M
Orlando Sentinel said at it's peak DVC's operating profit was $190M.

The $9,260 M figure is for The Walt Disney Company as a whole: Broadcast networks, cable networks, film studio, consumer products, interactive, Parks & Resorts, etc.

Using your measure, frankly I'm not sure how many components of the Parks & Resorts division are "material." DVC profits are as much as 10% of P&R (Disney no longer offers any breakdown of P&R income streams.)

The remaining 90% is spread among admission to the 11 parks, the hotel stays, merchandise sales, food and beverage sales, Disney Cruise Line fares, AbD trips and more. Individually, how many of those components are more relevant than DVC?

DVC income is going to be small in comparison to film studio profits (particularly when you have The Avengers and a Pixar flick or two), ESPN, consumer products and other more far-reaching enterprises.

But as 10% of all profits generated by Disney's world-wide theme park empire, Disney Vacation Club is more than just "gravy."

 

[bisney]

Using your measure, frankly I'm not sure how many components of the Parks & Resorts division are "material."

If by "my measure" you mean a basic financial definition that is accepted and used by investors, accounting firms, financial analysts, media, etc worldwide, then sure... materiality is just a buzz word that I made up.

Your functional DVC knowledge is second to none but if you can't accept a simple calculation using public information or when you dispute a basic term as commonly used as "materiality" then this conversation about DVC finances is going no where.

So have a lovely weekend, a Coke and a smile and best of luck with your website.

 

[chalee94]

If by "my measure" you mean a basic financial definition that is accepted and used by investors, accounting firms, financial analysts, media, etc worldwide, then sure... materiality is just a buzz word that I made up.

i think you're just talking at cross-purposes. as a CPA, yes, i get what "materiality" means but when the disney corp big dogs are evaluating the heads of the parks division and DVC, i don't think "materiality" in the sense you are using it matters at all. Iger won't say "you missed your targets but that's really just "immaterial", so we're giving you bonuses anyway..."

but sure, it's true that most investors don't care whether DVC sales are up or down slightly when deciding whether to invest in DIS stock and if auditors find a misstatement on the DVC side, they might not force disney to restate their filings with the SEC...but i don't think that is the "material" point of the conversation...

 

[tjkraz]

If by "my measure" you mean a basic financial definition that is accepted and used by investors, accounting firms, financial analysts, media, etc worldwide, then sure... materiality is just a buzz word that I made up.

Your functional DVC knowledge is second to none but if you can't accept a simple calculation using public information or when you dispute a basic term as commonly used as "materiality" then this conversation about DVC finances is going no where.

I'm familiar with the concept, albeit not as extensively as you apparently are. In the case of a diverse media empire like TWDC, I would think it more appropriately applied to each operating segment individually.

Nevertheless, I'm not entirely certain how this discussion segued from commentary on DVC's pricing and policies to the textbook definition of materiality.

The entire Parks & Resorts division only generates 19-20% of all Disney profits. Absent DVC, that number falls to 17-18%. Given the wide assortment of destinations and offerings bundled in that total, I would question whether any of them individually would be regarded as "material."

 

[bighoo93]

I'm familiar with the concept, albeit not as extensively as you apparently are. In the case of a diverse media empire like TWDC, I would think it more appropriately applied to each operating segment individually.

Nevertheless, I'm not entirely certain how this discussion segued from commentary on DVC's pricing and policies to the textbook definition of materiality.

The entire Parks & Resorts division only generates 19-20% of all Disney profits. Absent DVC, that number falls to 17-18%. Given the wide assortment of destinations and offerings bundled in that total, I would question whether any of them individually would be regarded as "material."

Just wanted to say that even if it has gone a bit OT, I have found both of your contributions to this discussion interesting. Typically, if anyone dares suggest that DVD cares about or does anything whatsoever besides maximize their revenue from direct sales of DVC points, a vocal majority gets a collective case of the vapors. The other extreme, that DVD gives away points as a loss leader in order to pump other WDWC sales, would be equally implausible, and frankly not supported by the recent across-the-board price increases. But even if the definition of "materiality" isn't a topic that excites many, I am just pleased to see other voices acknowledging that there are more sophisticated lines of corporate strategy and tactics at work in WDWC besides DVD maximizing revenue from direct sales.

 

[ELMC]

Disney realized it had a big problem post 9/11 when the entire travel industry took an enormous hit. Since that time they have been running endless promotions (the latest "free dining" promotions are nowhere near as good as they have been in the past. By switching the focus to DVC they essentially guarantee bookings by forcing people to use their points each year. That is simply mitigating risk and trying to guarantee other revenue streams from tickets, meals, souvenirs, etc. It just so happens that they are trying to make a profit on DVC at the same time. Clearly the outlined business plan is more sophisticated than this, but I think it's possible that Disney execs had more than one goal that they were trying to accomplish with DVC.

 

[bighoo93]

Disney realized it had a big problem post 9/11 when the entire travel industry took an enormous hit. Since that time they have been running endless promotions (the latest "free dining" promotions are nowhere near as good as they have been in the past. By switching the focus to DVC they essentially guarantee bookings by forcing people to use their points each year. That is simply mitigating risk and trying to guarantee other revenue streams from tickets, meals, souvenirs, etc. It just so happens that they are trying to make a profit on DVC at the same time. Clearly the outlined business plan is more sophisticated than this, but I think it's possible that Disney execs had more than one goal that they were trying to accomplish with DVC.

Not just possible, it is a near certainty. This also explains a lower incentive to "do something" about resales and renting than many people expect.

Excellent post.