Financial engineering of DVC . . . how does it really work?

[Mickey of the Villages]

Let's say Disney builds a new DVC resort. In total the resort has 100 points (just an illustration). I think that Disney builds new DVC resorts and pays for the construction of the resort out of the points they sell to DVC members. In this example, let's say 70 points. But I believe that Disney keeps a portion of the points at the resort for its own resale as direct reservations into the resorts, let's say 30 points. In this way Disney defrays the cost of construction and a significant portion of the resort maintenance but retains the ability to create a profit stream from direct reservations into the resorts (i.e., from non-DVC guests) out of it's 30 points. This is just my guess; is this how it really works? If this is how it works, any insight into why this is done instead of just building more hotels (instead of DVC)?

 

[crvetter]

Well I assume the amount they make from selling points is significantly more than the construction costs; in fact it needs to be high enough to support advertisement, member perks, sales staff, kiosk staff, legal, etc. The portion that Disney has committed to keeping is at minimum 2% of the resort.

As for why they build DVC instead of a cash hotel is likely driven by 1) money in hand now allows them to invest at a higher return than the return of the cash hotel, 2) Members pay for upkeep of the resort, 3) just as DVC is an inflation hedge for the members it's a depression hedge for Disney because the rooms are filled or at the very least operation costs are covered.

The financial reason DVC makes money selling points and the owner saves money is because the rate of return a Corporation expects to receive on their investment is generally much higher than the average consumer.

For instance there is ~6,000,000 points at Riviera to be sold. Lets assume 170 average selling price that means roughly $1,000,000,000 in revenue, that is a pretty large chunk of change much greater than the construction cost of Riviera (a billion would build a high end skyscraper in a highly dense metropolitan area as a point of reference). I do wonder what the staffing and overhead costs of DVC in general is (I assume guides are paid mostly if not exclusively on commission).

 

[chalee94]

As stated, Disney keeps 2 percent of the points, primarily for maintenance issues.

The numbers I have heard are that Disney's construction costs are around 20% of sales revenues. That's a pretty sweet margin.

As stated, DVC owners pay to maintain the resort. DVC collects 15% of those maintenance costs as an annual management fee.

It's not critical to DVD but it doesn't hurt that occupancy is less variable than hotels. If I don't use my points, I rent them to someone else. If I were to let my points expire, Disney can grab unbooked villas at 60 days out to sell for cash.

Disney wins all the way around. If I am committed to annual trips to WDW, I can win also. (But I admit the margin for the consumer is smaller at current prices.)

 

[BillPA]

let's see, a 2br at Riveria for a full year is 23,328 points. Selling at $188 is $4,385,664. That's more than $3,000 sq. ft.

 

[stewart715]

Disney doesn't just profit from DVC on contract sales. DVC is also somewhat a loyalty program. DVC members are more likely to visit often and spend money. The average DVC member surely outspends the average cash reservation or occasional guest on a yearly basis (on food, merchandise, etc. - not including park tickets).

 

[Mickey of the Villages]

let's see, a 2br at Riveria for a full year is 23,328 points. Selling at $188 is $4,385,664. That's more than $3,000 sq. ft.

I like the fact that you did the math. Although I'm not a general contractor I agree with your point that it doesn't cost $3,000 a square foot to build a 2br villa. However, I think we also have to consider the common areas like the lobby, parking lot, pool area, grounds, and so on that are also part of the total construction but not included in the room itself. I'm not sure where that math leads you but my guess is that it costs $500 to $700 a sg. ft. to build and furnish each room. My guess is that there could easily be $1,000 to $2,000 in "common area" charges per 2br. But these are really just guesses.

 

[disneynutz]

Bottom line is if they weren't making a ton of money, they would stop building new DVC resorts.

Bill

 

[chalee94]

Disney doesn't just profit from DVC on contract sales. DVC is also somewhat a loyalty program. DVC members are more likely to visit often and spend money. The average DVC member surely outspends the average cash reservation or occasional guest on a yearly basis (on food, merchandise, etc. - not including park tickets).

I doubt it is true that DVC outspends non-DVC on food given that some do consider the kitchens in the villas to be more than a decoration. And with multiple trips, souvenirs are less likely for every trip.

It's important to understand business segments here, though. DVC is not judged by the parent company as a segment by getting customers in the parks and restaurants, but rather by the direct sales of contracts and management fees.

But it is true that DVC reduces risk for Disney overall (compared to building new hotels) by having the customers pay for the construction costs of the new resort and providing revenue streams that are not as impaired during a recessionary economy.

 

[marshmallow]

Many good points have been made and I will rehash some here as well as adding my own:

1. Disney makes astronomically way more than the cost of construction on sales. Sales profits are huge in this industry.
2. Once sold the owner's maintenance fees provide a consistent income to run the resort and maintain it. Disney's pockets are enhanced again.
3. It is reliable income. Not given to the whims of the tourism industry. I have worked 30 years in the vacation ownership industry. In the difficult recession years we survived on the management fees from our associations.
4. If the common areas of the hotel/resort are in the club then the association pays for the upkeep.
4. Disney can resell the points. Either the lease years are up, refusal right or owner delinquency bring inventory back on which they have already received funds.
5. They do an incredible job maintaining the value. The resale is unbelievable compared to other timeshare resorts.
6. If people own at Disney they will be more likely to vacation there more often than they would have.