The Resort Trades - January 5, 2009Change. These days, it is difficult to have a discussion about the vacation ownership industry without using the word “change”. Most everyone agrees that the industry is likely to experience significant change in the coming year. However, agreement on the magnitude and implications of the change is difficult to assess. Investors and lenders are requiring companies to incorporate the effect of these changes into their prospective business plans. So what types of changes are companies expecting? The following key points should be considered when revising your 2009 business plan:
Focus on Profitable Sales, Not Volume
During the hay-days, vacation ownership companies often sacrificed profitability on unit sales, knowing that interest rate spreads on customer mortgages would more than offset any losses. Now that interest rates have significantly increased and the spread on mortgages has declined, companies will need to focus more than ever on unit sales profitability. Below are some points to consider ensuring this objective:
Challenge Your Sales Mix – It is critical to fully analyze the profitability of all marketing channels and sales centers. The metric for evaluating these programs will need to shift from number of tours generated to unit profitability. With this shift, it may beneficial to evaluate all tour programs and to focus on those that produce the highest quality results. While these channels may produce lower volumes, the results will improve overall cash flow.
Control Giveaways – Companies can control sales costs by managing first day incentives (FDIs) and tour gifts. Companies should establish formalized policies that provide guidelines on FDIs and gifts. These policies should be closely monitored. In addition, shrinkage can be reduced with the proper set of controls.
Commission Structure – A profitability focus should also be implemented with tour generators and sales representatives. This initiative can be achieved by realigning commission and bonus structures to reward quality and profitability. It is critical that sales objectives are clearly communicated to all channels and that the net results of such initiatives are emphasized.
Customer Quality
The timely collection of customer mortgage payments and homeowner association dues is a critical part of the operations of a successful vacation ownership company. The quality of a customer base can have a significant impact on overall operating results. To ensure this result, it is likely that banks will raise the minimum FICO score that will be accepted on future collateral. Points to consider are:
Credit Score - Very few vacation ownership companies evaluate customer credit scores as part of their underwriting process. Most companies will obtain a customer credit score after the sale, only as required by a hypothecation or securitization. However, it is not uncommon for default rates to exceed 50% for customers in lower FICO bands. A customer’s credit rating should be used to determine the required deposit and the interest rate charged on the financing.
Know your Defaults – Most vacation ownership companies have developed static pool reports that detail defaults by FICO band. However, companies should consider expanding the static pool reports to aggregate default information on other criteria such as marketing channel, sales center, sales representative, first day incentive, and tour gift. This information will prove to be critical in analyzing the effectiveness of sales and marketing programs.
Administrative Needs
Many companies have reduced back office personnel in hopes of conserving cash. While at the same time, many lenders have increased external reporting requirements. In balancing these conflicting priorities, companies should consider implementing the following initiatives:
Simplify –Sales and marketing programs, such as first day incentives and sales commission programs should be simplified. Complex programs are difficult to monitor. By reducing the variables involved in these programs, fewer staff are needed to administer and oversee the details.
Automate – An added benefit of simplified sales and marketing programs is the ease in capturing such information in an automated format. Automation will further accommodate reduced staffing and improve the accuracy and efficiency of financial reporting.
The vacation ownership industry is among numerous consumer related industries that are undergoing dramatic change. While change is a difficult and often unwelcomed concept to grasp, those companies that acknowledge and accept this challenge will be best positioned for long-term success.
Many of our suggestions are a significant departure from the traditional vacation ownership business model. However, difficult times call for difficult decisions and philosophical and cultural changes are among them. The success of these dramatic changes will be most effective if communicated and embraced among the entire organization
