Over the last decade, the timeshare development industry has experienced unprecedented consolidation. The obvious result of this trend is fewer developers in the industry, and in particular, fewer new developers. This article will highlight some of the reasons for the industry consolidation, some commentary on why smaller developers may not be entering the industry as eagerly as they once did, and offer a hopeful view of the future.
The trend to consolidation has paralleled the entry and expansion into timeshare development by several major hotel brands. The hotel industry itself, as recently as 2015, would be characterized as “fragmented”. For example, in 2015, before its acquisition of Starwood, Marriott was the world’s biggest hotel company but had only 5 percent of global room sales, according to Euromonitor data. Large hotel players have realized the need to be present in as many markets as possible. They are realizing that size matters in negotiations with on-line travel agents, such as Expedia and Priceline. It is only natural that these companies view timeshare as part of their business expansion strategy. The benefits in a competitive environment of a large capital base—especially in the context of the emerging chase for the millennial customer—is enormous.
For the last few years, wehave often heard from conference presenters thatthe millennial customer, with their preference for short-term over long-term purchase commitments, is drawn to flexible-type ownership wherein they can utilize their timeshare interests as currency as opposed to feeling like a member of a private club. Not surprisingly, private country clubs are facing declining membership as well. Where does this leave the entrepreneurial, closely-held timeshare developer that represented a large part of the industry in years past? Why is it that independent developers do not seem to be entering the industry to replace those that started in the industry 20 or 30 years ago and are retiring or selling to an upstream buyer at the end of their careers? We understand that there are market forces in play and like in any industry, if one can generate an appropriate return for the amount of risk involved, then that industry draws more and more players and competition—and only the strongest survive. The business has always been challenging and complex, especially in being able to correctly project the level of risk for a developer. Those same old challenges and more are faced by new developers. Based on our firm’s client base and conversations with numerous timeshare serial entrepreneurs, the following is by no means an exhaustive list of the challenges that are present now and were not before, or are many times magnified compared to years past. These are just a few of the top areas to consider.
- Locations. The most desirable development locations are A+ locations with at least 40 weeks per year of good weather, a ready supply of potential employees, affordable housing for employees, and in popular vacation destinations. Locations meeting this description have often become cluttered with competitive timeshare offerings. It is more difficult than ever for a new development to stand out in these areas.
- Uploads and reloads. Many developers that we interviewed intimated that more than 50% of their sales are related to sales of new products to existing customers. Developers new to the industry with no existing customers are obviously going to face huge challenges compared to those already in the industry.
- Unlike other types of real estate development, a percentage of the profit in timeshare is in the arbitrage between the interest cost and interest charged on purchase money notes. Less and less net profit is generated from actual development and sales activities. This requires a long-term view rather than a “build it and sell it out” view of the business.
- Sales and marketing. This is a critical and complicated part of the business and the one that new players are likely the least adept at developing properly and may not want to risk the upfront investment.
- Tax policy. Installment reporting, immediate expensing of selling expenses, and other tax accounting conventions available to sellers of brick and mortar timeshare interests are not available to sellers of non-real estate vacation accommodation experiences, requiring expensive, more elaborate business structures to meet the demands of the evolving millennial customer.
We could go on and on with this discussion about the challenges, and there certainly are many. An economist would say that as long as the potential profit is more than the perceived risk, developers would be motivated to enter the business. But how can we help make our industry more attractive to others? How can we help mitigate the risk to a point where it is attractive? How can we grow the breadth and depth of the industry? Perhaps a parallel can be drawn with the beer business. Sure, InBev, SABMiller, Heineken, and Carlsberg produce 45% of world beer production, but craft beers in the United States grew by 5% in 2015 to approximately 13% of domestic beer sales. Harkening back to the beginning of this article, Priceline, Expedia and similar companies are making a push to grow their own businesses by signing up more independent hotels and apartments to offset the decreasing profitability of the competitive relationships with the large brands. Likewise, Airbnb and companies similar to it have significantly changed that industry’s landscape and more importantly, the way customers buy the product.
While these industries are certainly very different from timeshare, it is instructive that the nimble, creative, niche-oriented entrepreneur with a good idea can compete against the global giants. We can and should continue to provide a forum for these new players to learn and strive for a heathier industry in all areas—from finance to sales and marketing to development of a heathier and transparent resale market. A modification of the current regulatory environment, which many believe is an impediment to industry expansion, is also in our best interest. There is an old saying in business that “money goes where it is treated best”. While we cannot mitigate the business risks for any potential new players in our marketplace, we can and should continue to do our best to develop that marketplace and make it as efficient as possible.