Staggs: Booking trends "hard to read"

[raidermatt]

Article is below. Interesting that the war has been used as a reason to explain Disney's park problems, but that trends have not changed since the war essentially ended. Maybe its too early, but if the war was that big a hindrance, one would think Disney would be eager to report improvements. Also of note, booking trends are running below last year, which was not exactly a boom time for the economy.



Disney CFO says theme park booking trends unclear
5/1/2003 4:38:36 PM

LOS ANGELES, May 1 (Reuters) - Travel and tour booking trends at Walt Disney Co.'s (DIS) theme parks are still hard to read, although for the company's June quarter they are running lower than a year ago, Chief Financial Officer Tom Staggs said on Thursday.

Staggs also declined to provide any update on the company's earnings per share guidance for the fiscal year.

"The booking trends at theme parks are still quite hard to read," Thomas Staggs said in an interview with reporters following the company's fiscal second quarter earnings results. "As we look forward ... in the near term it's difficult to read the signs."

Staggs said "we haven't seen a distinguishable pattern" in bookings since April 9, when the city of Baghdad fell to U.S.-led military forces and the war in Iraq began to wind down.

Disney reported a smaller net profit for the fiscal second quarter on Thursday, as war and the weak economy hurt theme park attendance and the costs of war coverage hit the bottom line at its ABC television network. Revenue and net profits, though, were in line with Wall Street estimates.

 

[Snow Brite]

They seem to be taking the "Oh poor us, we've fallen and we can't get up" approach.

As a former 10+ year hotel executive I do NOT understand why they close a hotel instead of lowering rates across the board. It seems they would benefit from a Las Vegas approach of rock bottom hotel/food costs in order to get folks to their parks. As long as they were breaking even on at least the hotel rooms then they could make a little profit with the food and lots with the park tickets.

Hotels all have figured at Cost Per Occupied Room (CPOR). This takes into account labor averages, supplies that have to be replenished (shampoo, soap), and cleaning supplies (both for the room and laundry). As long as a hotel makes $1 over this amount its all good. Of course with higher demand you can make much, much more than $1 profit per room. I have worked a few different 4 diamond hotels and have never been somewhere the CPOR was more than $50 per room.

Now, the lost revenue from a hotel room going empty can never be regained. It is completely perishable. You cannot store up unused room nights for a full capacity night to use again. Park tickets are the same. If not bought that day, they cannot be stored in the deep freeze for another day. This is why the hotel industry has copied the airlines technique of yeild management. This is a day by day, hour by hour analysis of supply and demand in an effort to get "heads in beds". This is why the price for you airplane seat or hotel room may vary from the person across the hall or aisle by hundreds of dollars. This technique, used wisely can create a full hotel or a semi-full hotel or an hotel with one room sold all with the same revenue. For instance you could sell every room in a 100 room hotel for $10 and sell out with a $1000 revenue, or sell 1 room for $1000 with a $1000 revenue. Obviously with CPOR the later is preferrable if you are a hotel manager. But if you are a resort manager with a park to fill the middle ground is a better option. The hotel is not a profitable but it is better for the overall good.

But not at Disney. They have a very archaic system with set seasons that most hotels threw out with the typewriter. If they were to rely less on codes and were more active with their yeild management they could fill up their hotels. And full hotels, would mean more park guests. On dates when there was plenty of availability, the rates would be lower, sometimes at $1 over CPOR. On dates with high demand the rates would be higher, with a large profit. As demand increased for a date, so would the rates. If demand was unexpectedly not there, rates would be lowered, drastically and quickly.

So, this turned into a rather long disertation, but it has been frustrating for me to watch them shoot themselves in the foot. It seems they are relying too much on each individual unit to be profitable instead of the overall unit as a whole. And to shut down a hotel when you are still charging at least $20 over your CPOR is just ridiculous. Hmmmm... think they would hire me to sort this all out for them? I'm sure we could work somthing out....
LOL!

 

[Peter Pirate]

I hate to be disagreeable...Well, not really, so here goes. Disney has a much different dynamic than say Las Vegas...You see they own all of the choice hotels whereas Vegas has numerous competetors. Disney's competition in the offsite WDW area can lower to rock bottom and fluctuate (it's all about budget) but if WDW lowers the Grand Floridian to 99.00 per night to fill rooms this will be rememberd forever & people will come to look at this as a 99.00 room. This has already happened with AKL. This was intended to be a strictly high price resort but with all of the things that have happened since its opening Disney was forced to make rate reductions and they are having a huge tme overcomingthis stigma. Once you stay at AKL for 169 two or three times you're not ready to fork out 299 the next trip...

Disney looks at the future as well as the now. They can add profits durng the tuff times by severly discounting or ride it out knowing they won't be facing an uphill battle when things are clicking and full rates will again be feasible. Universal will have this problem. Their hotels are discounting (as are the Parks) and it'll be very intersting to see how easy they'll fill full priced rooms (and Parks)...If the bad economy continues this move by could really hurt Disney. If it (the weak economy) ends relativey soon Disney will look pretty smart, IMO.

 

[amw5g]

To piggy back and expand upon PeterPirat'es post, I see the reason they don't further cut room prices as two fold:
1- it erodes the perceived premium of the brand. It's why Deisel jeans cost $hundreds and levis cost $29 and a house brand at a discount store costs $19. They're all made of pretty much the same material with little difference in manufacturing costs, but the BRAND carries a premium value. Drop the price and people begin to lose faith in what they are purchasing. Disney probably does not want their hotel rooms to be seen as commodity.
2- The owners of off-property accomodtations have a much larger diversifcation of properties so that they can hedge against reductions in rooms prices for a specific locale. If they see tourism slip a bit in Florida or Cali or at any other Disney-centric place, they can lower the room rates there but offset the reduction by increasing rates in Chicago or Dallas or London. Disney does not have the luxury of a vast portfolio upon which they can hedge specific market plays.

So, dilute your brand, and you are seen as losing your brand premium, which risks angering your loyal customers and turning off clientele who might have been attracted in the first place. Also watch as your competition in the market lower their prices that much further to re-attract those whom you might have won over. The competitiors can do this with less economic repercussions than can the Disney.

My thoughts on the matter...
-Andrew

 

[jsginmd]

I may be wrong, but I thought that the hotels were different business units from the parks and merchandise. And from reading some posts here and elsewhere, aren't all units being held accountable for profitability individually? Rather than focusing on the overall picture (i.e. lose some on hotels, gain more on merchandise), each unit is pushing to be profitable on its own.

That, and the brand dilution points.

I have no inside information into Disney's business/accounting structure, so I may be way off base. I'm sure there are other posters that have more facts than I.

 

[Bstanley]

I'll admit it - I don't have any retail or hotel industry background - but guys I just don't buy the arguments against discounting to fill rooms.

Ask 10 of your friends/co-workers/etc the question "Why don't you stay at [insert the name of your favorite 'deluxe' WDW resort here] when you go to Orlando?".

I have only received two answers to that question:

90% of the time -> costs too much.
10% of the time -> I want more space (ie multiple bedroom condo type lodgings wanted).

Disney set the pricing on their rooms back when everybody and their cousins were traveling to Orlando - WDW resorts were running at better than 90% occupancy and they didn't need to offer any more discounts than they do now to maintain that.

So the idea is that people choose to stay at the Polynesian because when they get home they can go tell their friends that they paid $299 for a room at WDW? These would be the same people I guess that drop $55K on their BMW or Lexus merely to impress the neighbors (must be Californians, sorry AV .

Nope, don't buy it - more probably they'll tell their friends about the convenience, theming, friendliness, room size, bed size, view of the fireworks over the Castle, etc - i.e. those attributes of the resort that convinced them to spend more on this location than on some other location. The great majority of people who buy BMWs or Lexus' aren't buying them simply because they are expensive - they buy them because they are wonderfully made vehicles which makes them expensive - are they worth it? Is a monorail resort worth it? Only your checkbook can answer that question.

As long as the discounts don't affect the attributes that the resort offers (lower the quality) the resort will be able to raise the prices as demand increases and people will still stay there - after all the supply is limited.

PS - the reason people don't want to fork out $299 to stay at the AKL isn't because they offered discounts - it's because it's rooms (most of them) are not as large as the rest of the deluxe's rooms and because you couldn't put it any farther away from the MK if you tried (and stay on property)! I love the joint - stayed there the last two trips - but it's NOT convenient.

 

[Snow Brite]

If the Grand Floridian cannot run at an ideal occupancy for the rates they are asking then their rates are too high.

Just because $99 is offerred at one point, does not mean that everyone staying there will be paying $99. $99 will only be offerred until the occupancy has bumped up enough to exceed the forecasted lower than desired occupancy, then as demand increases, so will the rate. At some point, when occupancy far exceeds forecasted levels, the rate would be above what they are now getting for their rooms. The last 25 rooms would sell for a premium. And the revenues for the hotel would probably even out to what they have now, but with more rooms full. It is merely a tool to increase occupancy without a lot of expense. Yes, some people would have gotten smokin' deals. The ones that planned ahead, made their reservations well in advance and maybe got a little lucky.

I only used Las Vegas as an example of a type of environment where the hotels are run in the manner I was describing. Ski resorts that run their own slopes, hotels owned and operated by large convention centers, basically anywhere the hotel is a place to sleep while the guests enjoy the destination around them are all run with the maximum number of guests in the hotel model. Thsi is not to say these are not nice hotels, look at some of the hotels in Las Vegas, merely that the real money is in something else: The casino floor, the rental of booth space for the convention or the lift tickets. This is in comparision to the hotels that are destinations, such as Atlantis in the Bahamas, The Banff Springs Hotel in Canada, etc where they are trying to get the highest rate per occupied room, because the hotel IS the destination.

The point I am trying to make is they are running their hotels the second way when they should be running them the first. Yes, they have some beautiful hotels. But how often to people go to WDW JUST to stay at the Grand Floridian? The hotel is merely a profitable vehicle to fill the parks.

And could someone remind me when Disney start caring about perceived value again? I seem to have missed that memo....

 

[raidermatt]

I'm not sure what the right answer is, but I think the key is whether Disney's booking troubles truly are temporary and are caused only by the negative outside environment.

If the troubles really are caused only by the outside environment, then I completely understand and agree with the idea of maintaining price. Sure, some extra discounting here and there, but since the business will come back when the outside improves, better to hold the line, within reason.

But, if the troubles are at least partly self-induced (and, SURPRISE, I think they are, at least partly), then its a completely different problem.

If Disney is offering less overall value, as perceived by the public, then they really have no choice but to either reduce their price, or increase the benefit side of the equation. To ignore this is simply a case of denial.

So, what you think Disney's best course of action would be is really dependent on what you think is causing their problems, and what weight you give each factor.

 

[DC7800]

Originally posted by Peter Pirate
If WDW lowers the Grand Floridian to 99.00 per night to fill rooms this will be rememberd forever & people will come to look at this as a 99.00 room. This has already happened with AKL. This was intended to be a strictly high price resort but with all of the things that have happened since its opening Disney was forced to make rate reductions and they are having a huge tme overcomingthis stigma. Once you stay at AKL for 169 two or three times you're not ready to fork out 299 the next trip...

I completely agree, but I'm really surprised (shocked, even) that Disney apparently sees it this way as well. Maintaining prices is indeed in the best long-term interest of the company - which is exactly why I find it so puzzling. Current Disney practices - company wide - place little or no emphasis on the long-term; all that matters is short-term (this fiscal year, or maybe the current quarter) profit. And filling all hotel rooms (even marginally profitable) is just one more way to boost profit right now. Almost makes me suspect something else must be at work here.

Actually, and I've said it before, Disney should always be able to fill (say, 90%) the value resorts even when the deluxe resorts or off-property locations are virtual ghost towns (and it's not that bad right now, anyway). The prices with discounting actually beat many off-property hotels, and whatver you think of the All-Star "decoration/theming", exactly who would choose the Days Inn over All-Star Music? Consider all the people who claim to stay off-site solely because Disney is "too expnsive". If only for convenience and the fact that it's Disney, those value rooms (including Pop Century) should have been full all along with I-Drive refugees. But they haven't been (note Pop Century again), and it's not really because of price.

Originally posted by Snow Brite
But how often to people go to WDW JUST to stay at the Grand Floridian? The hotel is merely a profitable vehicle to fill the parks.

People do indeed stay at the Grand Floridian, and some of the other deluxe resorts, for the experience. The parks would still be plenty full without it (remember when WDW resort hotels were just the Contemporary, Polynesian, and Golf Resort?) and if the parks are your primary emphasis, you might do just as well at a moderate or slightly more modest deluxe. Save the GF for when you can devote the time to appreciate the place. I have no idea how many people actually do visit a resort without a park visit, but there are some (including myself, once). People already visit the parks (and some resort) just to have dinner, so spending the night is hardly unreasonable.

Disney really does need to so something to fill these "lost" room nights. Perhaps something really revolutionary, such as new theme park investment to give people a reason to come down for a few nights. A very rough estimate I just figured shows about $90,000 lost daily for every 25% of the GF's rooms which go empty (based on regular season rack rates - and beware - there are reasons why I didn't major in mathematics!), but if you discount just $100 on average for every room, your loss is exactly the same. A $99 price would be almost a $300 discount. Assuming $90,000 per night, we're talking an incredible $30 million plus per year (can those numbers possibly be right?). You have to allow some for operating cost (CPOR), but gee, that's enough to build a new C-D ticket attraction...