Life In The Fast Lane
Vacation ownership continues to grow rapidly, but speed bumps including land and construction costs and a dearth of human resources could slow things down slightly.
By Derek Gale, Associate Editor -- HOTELS Magazine, 2/1/2006
By all accounts, times are good for timeshare, and for the most part, it looks as though they will stay that way. “Timeshare continues its spectacular growth,” says Howard Nusbaum, president and CEO of the American Resort Development Association (ARDA). “The growth is occurring across the U.S. and around the globe with developments by public and private companies.” Indeed, worldwide timeshare sales have been estimated at US$11 billion for 2004, with U.S. sales climbing 21.4% to US$7.87 billion, according to a study released by the ARDA’s International Foundation. On top of that, “The target market is growing and making more money,” says Rip Gellein, Starwood Vacation Ownership chairman and CEO. “The value proposition for the product has never been better,” adds David Gilbert, executive vice president, resort sales and marketing, Americas, Interval International. “With the unprecedented rise in the cost of second-home ownership, [owners] have been priced out of that product. With affordable access to primary vacation destinations, timeshare’s value proposition is enhanced relative to other products in the market.”
But even with such a rosy outlook, there are challenges ahead. “Our biggest challenge, as a company and as an industry, is finding the right development opportunities—finding the right destinations cost effectively,” says Ed Kinney, vice president, corporate affairs and brand awareness, Marriott Vacation Club International. His colleagues agree. “Real estate costs have escalated significantly,” Gilbert says. “So many people are competing for space in markets, they have driven up the cost of land or buildings to convert. There’s almost a scarcity of opportunities out there.”
Starwood’s Gellein also shares the concern: “Land costs and construction costs have been going through the roof,” he says. Still, despite the costs, there are some 111 projects with 15,360 units in the North American timeshare pipeline alone, according to Lodging Econometrics, 63% of which are new, ground-up construction. Thirty-nine of these projects, comprising 3,998 units, are forecast to open this year.
Other challenges of note for 2006 are continuing to try to drive down high sales and marketing costs and looking to attract and develop sales and executive talent. “We continually experiment and look for ways to reduce our sales and marketing expense,” Gellein says. “The Internet certainly is a powerful tool that this industry has not quite tapped.” Gilbert concurs: “[The Internet] is not really a widespread sales tool yet, but we’re starting to see that gain some traction.” He also notes the importance of human resources. “There’s not enough qualified executive talent in the marketplace,” he says.
 Preben Vestdam, CEO, Centant Leisure Real Estate Solutions |
Outside North America, there’s an entirely different set of issues as the industry prepares for increasing growth over the next several years. These include continuing to change the perception and build the image of timeshare in Europe, working closely with regulatory agencies and environments in emerging markets and building a pipeline of knowledgeable project directors who have the skills to successfully grow the shared ownership resort business, according to Preben Vestdam, president and CEO of Cendant Leisure Real Estate Solutions.
Dealing With Rising Costs
With land too expensive for many deals to make sense, adding on to existing developments and building more dense resorts is the trend. “[People are] building more product on the same amount of space,” Gilbert says. Another trend is small players or new entrants partnering with larger brands. “One thing we have been doing is to find joint-venture partners that have these development opportunities and partner with them to make it a win-win situation,” Marriott’s Kinney says. “We’re doing that in Hawaii and in Jupiter, Florida with Ritz-Carlton.” Partnering is good for both sides, Gilbert says, with new entrants often providing access to real estate and proven players providing the brand image and human resources. “We see a lot of joint ventures [ahead],” he says. “There will be a slight growth in consolidation, but more joint ventures are possible.”
 John Burlingame, Executive VP, Hyatt vacation Ownership |
Gilbert also expects to see more mixed-use development. “Lenders like to see ownership product as part of a resort mix because it brings financial stability to the project,” he says. “Developers like mixed-use because it brings marketing opportunities.” For example, vacation ownership teams can talk to transient hotel guests and leverage the amenity infrastructure, offering a round of golf or a spa treatment for touring. And there are operational efficiencies as well, especially relating to staffing, Gilbert says. Plus, “timeshare owners enjoy the mixed-use environment because they have all the amenities of a world-class hotel at their disposal,” Gellein says. John Burlingame, executive vice president, Hyatt Vacation Ownership, also sees mixed-use development as the future, “for all the hospitality companies in particular.” Because of the marketing, sales and operational efficiencies, “that’s No. 1 on my hit parade,” he says.
As for locations, Florida and Hawaii continue as two of the most desirable U.S. markets, but both present development challenges. “In Florida, it’s very difficult to find property that pencils out,” Gilbert says. And while he says the same is true for Hawaii, development there has been strong.
Starwood currently is under construction on its second resort on Maui and its first on Kauai, and Marriott’s Kinney says “several opportunities there will be announced [this] year.” How are they doing it? Land costs notwithstanding, “you do what you can to minimize [construction costs] or have things in your favor,” Kinney says. “We fortunately are in a position as a large company to leverage resources for maximum efficiency. Buying power and long-term relationships with suppliers can be a tremendous advantage.” Also, when lenders see a sound business plan, experienced people and a quality product in a good market, “there’s never been access to more capital than we see today,” Gilbert says.
The Sales And Marketing Gorilla
Despite its potential to lower sales costs, so far the Internet is being used primarily as a cost-effective tool to generate permission-based leads, according to Gilbert. “Developers are using it extensively as a product and program awareness tool—a way to let consumers surf and see resorts, units and benefits of ownership. It’s a great awareness tool, although not a widespread sales tool.” Because the vacation ownership industry is regulated by individual locales, only the largest companies have the financial resources to register to sell in all of these places via the Internet, Gilbert explains. Further, even for those that have the resources, like Hyatt, “the real question is whether or not it pays to be registered,” Burlingame says. So far, it has for Marriott. The company is out front on Internet sales, taking in US$5 million to US$6 million per month, according to Kinney. “That’s a huge part of our business,” he says. “You have an immediacy in the marketing messages that go out to customers. It’s very cost effective.”
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Other strategies to reign in sales and marketing costs include a narrower focus on marketing to existing owners, maintaining database relationships and working to reduce sales force turnover.
Companies are “selling more product to the existing owner base and using it as a marketing resource to generate referrals,” Gilbert says. Why? According to Interval International’s Future Timeshare Buyers: 2005 Market Profile prepared by Yesawich, Pepperdine, Brown & Russell, 93% of prospective timeshare buyers place the greatest degree of confidence in the recommendations of a friend or family member. Kinney says some 50% of Marriott timeshare owners currently participate in referral programs or buy additional product. So while “keeping [existing owners] satisfied and enthusiastic is a challenge,” it’s a must for business. So is maintaining relationships. With the growth of product offerings like trial ownerships and biennials, vacation ownership companies are having more success getting people to buy something, with the potential always there for upgrades. Finally, something as simple as training to get sales people moving up the learning curve can reduce employee churn at the bottom, saving money. “We spend a lot of time and effort on that,” Burlingame says.
The Importance Of Human Capital
That brings up another challenge amidst timeshare’s great growth: finding and maintaining sales talent, a resource in short supply. “Clearly our most valuable assets are our people,” Burlingame says. “We want to retain our most valuable employees, so we’re working on programs to incentivize them, including adjusting how we
compensate them going forward.” Marriott’s
Kinney agrees. “The human capital side of the business is one of the most critical—it makes or breaks your reputation, ability to sell and your relationship with the customer,” he says. Kinney can’t talk enough about Marriott’s huge investment of resources—both manpower and financial—into its talent resource management team. The system aims to develop talent and maximize the potential of associates through opportunities and evaluation. “It was necessary to have something like this,” he says. “The process has translated to higher
efficiencies, lower turnover, and, in the bigger case, higher volume.” Kinney quantifies that savings in efficiency and higher volume as “tens of millions of dollars.”
But what about finding talent in the marketplace and recruiting those people? “That’s difficult,” Burlingame says. “There are people who have been in the business and are proven, and people who never have been in the business. Of the people who have been in the business, some are good talent, some are so-so; some are a good fit for us, some are not a good fit for us. We must find those that would be a good fit to be successful on both sides.” He says Hyatt has had the most success finding people who have not been in the business, either with or without other sales experience, and training them. “But that takes more time and patience and costs money,” he notes. “And every lead they take and don’t close, or close less than the line, it’s potentially expensive.”
On top of that, there also is a shortage of executive talent in the industry, and no significant pipeline other than industry veterans. “There are not many colleges that provide a curriculum for this aspect of the industry,” Gilbert says. And “it’s difficult to get an executive in that doesn’t understand the industry—there’s not time to bring people up to speed. This is a negative cash flow business, so there’s not an opportunity to make many mistakes.”
The human capital challenge is one that exists globally, although in a bit of a different form. “We found outside North America that there is great interest and hunger in getting into or adding timeshare or fractionals to real estate developers’ or hospitality companies’ business models, but... it is difficult to hire the right teams and project directors who are born and bred in those parts of the world and understand the culture and markets,” Cendant’s Vestdam says. “It is difficult to get access to the right people because the industry is young in that part of the world. We must bring up a breed of people who can grow shared ownership resorts.”
Looking Toward A Global Future
While nearly 72% of all timeshare sales are now U.S. sales, increased interest from branded hotel groups in Europe and higher quality, more regulated products are stimulating fresh interest from consumers, according to new research from PricewaterhouseCoopers (PwC) UK. “Increased regulation, more experienced operators and a more informed public have all contributed to changing perceptions and fostering growth in the [European] timeshare sector,” says Liz Hall, hospitality and leisure research manager. The growth is mostly in higher quality, branded products and different forms of timeshare, such as fractional ownership.
“What we are experiencing outside of North America is the same as what we are experiencing in North America—the emergence of fractional, high-end products and also expansions into private residence clubs and destination clubs,” Vestdam says. Marriott Vacation Club International sees the same trend, predicting that the worldwide ratio of timeshare to fractional sales will move from 84:16 in 2004 to 74:26 in 2008.
The consequence of this, however, is that large-scale growth becomes less likely as the product moves upmarket and fewer people fall into the target category. And thus, the PwC research shows steady rather than rapid growth of timeshare in Europe over the next five years. And while Vestdam believes Dubai and the Middle East are markets poised for explosion, “it’s not something which will happen overnight,” he says. He doesn’t expect sales to take off in earnest for Dubai until 2008. And certain markets in Asia might even be a longer-term play. In the meantime, Vestdam stresses the importance of the regulation of such markets to maintain a positive image. “As markets develop around the world, it is important that the industry works closely with the local regulatory environment to put the right regulations in place to look after the marketplace,” he says.
Finding The Hot Markets
In Europe, the trend is to go east. The traditional markets of Spain, Portugal and Italy are still being developed, but “smaller and faster-growing are Greece, Cyprus, Turkey and the Balkans, in
particular Croatia and Bulgaria,” Vestdam says.
Moving even farther in that direction, “the Middle East is an opportunity we’ve looked at for a long time,” Marriott’s Kinney says. Vestdam says the explosion of leisure real estate in this part of the world is led by Dubai and the United Arab Emirates, but he also sees Oman and Qatar as destinations. “There are specific investments into very large tourism projects in those areas,” he says.
Vestdam also mentions the opportunity for the niche play of religious timeshare—specifically in the Muslim holy sites of Mecca and Medina. “If you look at the business model, it fits perfectly for the environment in Mecca—limited space, and people would like to see occupancy rates as high as possible. Timeshare is perfect for a religious project.”
As for the Far East, “China is in its infancy, but has the potential to be a huge market,” Gilbert says. Vestdam agrees, emphasizing the potential for rapid development in locations such as Hong Kong (considered that part of the world’s Orlando, with Disneyland and other theme parks) and Macau, which he calls “the Las Vegas of China.”
Andrew Zheng, vice president of Shenzhen Fountain Property Management, a leading Chinese real estate and hospitality company, says, “We believe the Chinese people will enjoy and respond positively to the timesharing concept. In fact, we expect the market capacity and industry size to grow rapidly as Chinese people accept this concept and realize the benefits. This is why we have chosen to enter the market at this time.” Adds Joe Hickman, Interval International’s executive director, Asia Pacific: “The future is very bright. You can almost say limitless potential when there is a population of 1.3 billion.”
Companies To Watch
In North America, Cendant’s spin-off hospitality business will look to leverage its new
Wyndham brand to drive growth in the timeshare sector while also looking to grow in the U.S. West and in western Canada with its Trendwest brand, according to hospitality Chairman Stephen Holmes.
Cendant’s Preben Vestdam says more European hotel brands will start to build a significant timeshare presence, from Spain’s Sol Meliá, which just began sales for its Sol Meliá Vacation Club, to Portugal’s Pestana, which is expanding into the fractional business and adding points-based products. Another is Holiday Club, out of Finland, which is looking to break into markets including Estonia and St. Petersburg, Vestdam says. In addition, Grecotel, the largest luxury hotel developer in Greece, has launched Galaxia Vacation Club, and Vestdam says that company will look to expand in the Eastern Mediterranean. In Turkey, Dedeman is launching a vacation club, and the largest real estate developer in Cyprus just did the same. Other hotel brands to watch are De Vere and Macdonald, according to PricewaterhouseCoopers UK.
In the Middle East, three large leisure real estate developers, Nakheel LLC, EMAAR Properties and Dubai Holding, are worth watching, Vestdam says, along with Kuwait-based IFA Hotels & Resorts. Finally, in China, look for “companies that would not typically be in hospitality” to get into timeshare, says Interval’s Joe Hickman.
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