THE DETERMINANTS OF SKI RESORT SUCCESS A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Ezekiel Anouna May/2010 THE DETERMINANTS OF SKI RESORT SUCCESS Ezekiel Anouna May, 2010 Economics Abstract As the economy is in a decline, fewer people are willing to pay for luxuries such as vacations. Thus, the ski resort industry is suffering. This thesis reveals an opportunity m the growth of free skiing and a demand for more difficult terrain. In this paper, data is collected from nearly all Colorado ski resorts to form a regression model explaining resort success. Regression analysis is conducted to discover what aspects of a ski resort contribute to success. Primarily, skier visits from the 2008-2009 ski season are_useclas the dependant variable in the regression model to measure resort success. Additionally, hedonic pricing theory is applied to test lift ticket price as a dependant variable. The paper finds that resort size, and possibly terrain park features are related to resort success. The hedonic pricing regression finds that bowl skiing, and lack of crowds, increase consumer willingness to pay for expensive lift tickets. KEYWORDS: (ski resort, terrain park, hedonic pricing) ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature I would like to thank my thesis advisor, Esther Redmount, for her support and consistent efforts to make sure I was on track. I would like to thank my family for supporting me in so many ways throughout my college career. I could not have done any of this without any of you. TABLE OF CONTENTS ABSTRACT "> ACKNOWLEDGEMENTS iv 1 INTRODUCTION 1 2 LITERATURE REVIEW 7 2.1 Marketing 8 2.2 Product Quality 10 2.3 Pricing Strategy 14 3 METHODOLOGY 18 3.1 Data 18 3.2 Regression Model 19 3.3 Regression Method 36 4 REGRESSION RESULTS AND ANALYSIS 43 4.1 Regression 1 43 4.2 Regression 2: The Hedonic Pricing Model 60 4.3 Discussion 66 5 CONCLUSION 68 LIST OF TABLES 3.1 County Income 36 3.2 Variable Titles and Measurement Units 37 3.3 Raw Data 40 4.1 Equation 1 Regression Output 46 4.2 Equation 2 Regression Output 46 4.3 Equation 1 White Test Output 49 4.4 Equation 2 White Test Output 49 4.5 Equation 2 White Correction Output 50 4.6 Correlation Matrix 1 52 4.7 Correlation Matrix 2, Adjusted to Fix Multicollinearity 54 4.8 Equation 3 Regression Output 56 4.9 Equation 3 White Test Output 57 4.10 Equation 3 White Correction Output 58 4.11 Correlation Matrix 3 62 4.12 Hedonic Pricing Regression Output 64 4.13 Equation 4 White Test Output 66 LIST OF FIGURES 1.1 Skier Visits by Region (millions) 2 4.1 Equation 1 Histogram - Normality Test 47 4.2 Equation 2 Histogram - Normality Test 47 4.3 Residuals vs. VISITf Graph 1 48 4.4 Equation 3 Histogram - Normality Test 56 4.5 Residuals vs. VISIT Graph 2 57 4.6 Equation 4 Histogram - Normality Test 65 4.7 Residuals vs. PRICE Graph 65 CHAPTER 1 INTRODUCTION The skiing and snowboarding culture is a staple of the Colorado way of life according to not only a mass of Coloradoans, but also to many abroad. Colorado accounts for approximately 20 percent of ski and snowboard visits in the US every year . One ski visit, according to the industry, is defined as every one day that a skier or snowboarder uses a ski ticket or ski pass to ski or snowboard on a mountain. Therefore, one in five skiers or snowboarders chooses a Colorado ski area as his or her preferred destination every trip to a mountain. In fact, annual ski visits to Colorado account for approximately the same amount of ski visits to Vermont, Utah, and New York combined every year, as seen in FIGURE 1.1. 1 Colorado Ski Country USA, "Colorado Ski Country USA Facts and Stats"; available from http://media-coloradoski.com/CSCFacts/; internet; accessed 1 November 2009. 2 Ibid Figure 1.1 Skier Visits by Region (millions) ^em 11.85 A Colorado Vermont New York 33.15 ^Hi Utah HHk 4 * Rest of USA Colorado ski resorts have been responsible for attracting tourists to the state every winter for over a century. In 1914, Howelsen Hill Ski Area was established in Steamboat Springs, Colorado, and is currently the oldest Colorado ski resort in continuous use3. Since then, 26 additional Colorado ski resorts continue to gross large amounts of tourism SkiTown.com, "Howelsen Hill"; available from http://www.coloradoskicountry.com/overview.cfm/col8/HowelsenHill; internet; accessed 16 November 2009. revenue for the state4. With eight regional airports, including Aspen, Durango, Eagle, Grand Junction, Gunnison, Hayden (Steamboat), Montrose and Telluride, that offer more than 8.6 million passenger seats annually, over half of Colorado's ski areas are located within 35 miles of an airport5. Additionally, the industry employs over 30,000 people annually, more than any private sector employer in Colorado6. In fact, the Colorado ski industry contributes approximately $2.6 billion annually to Colorado's tourism industry7. Even with total skier visits down 5.5% in the US over the most recent 2008-09' ski season, Colorado still saw almost 12 million skier visits to its resorts' slopes8. Thus, ski resorts play an important role in not only Colorado's culture, but also its economy. The unfortunate truth is, though, that the current poor economy is having a negative effect on the ski resort industry as fewer vacationers per year are choosing expensive vacations such as those to ski resorts. In the light of a poor economy in North America, ski resort revenues are falling. In effect, it is necessary for ski resorts to develop effective strategies for adapting to this problem by maximizing the experience 4 SkiTown.com, "Colorado Ski Resort Guide"; available from http://www.coloradoskicountry.com/; internet; accessed 16 November 2009. 5 Colorado Ski Country USA, "Colorado Ski Country USA Facts and Stats"; available from http://media-coloradoski.com/CSCFacts/; internet; accessed 1 November 2009. 6 Ibid 7 Ibid 8 Ibid they deliver to potential customers, without dramatically increasing costs and prices. There is an additional environmental factor contributing to the decrease in resort revenue according to some research on climate change9. This mounting evidence regarding climate change should not be ignored. The question, therefore, is where is there room for improvement in order to combat such increasingly problematic conditions in the industry? In this paper, I identify an opportunity in the growth of extreme skiing and snowboarding. Freeskiing is a form of extreme skiing that is performed in terrain parks, areas of a mountain devoted to freestyle jumping, grind rails, and other freestyle features used for the purpose of performing tricks. Extreme skiing also can be performed on terrain that is either very steep, very dangerous, or both. This type of extreme skiing is sometimes known as big mountain skiing or backcountry skiing if the terrain is very hard to access. These styles of skiing and snowboarding have quickly become popular among the youth culture in snow sports. Additionally, the fact that all major ski and snowboard manufacturers now produce a multitude of equipment specifically for this kind of skiing and snowboarding demonstrates how rapidly its popularity has grown. While extreme-specific equipment was rare and very expensive before the millennium, a decade later, it is now some of the most popularly purchased equipment, produced in a varying range of quality and price. 9 Charles Shih, Sarah Nicholls, and Donald F. Holecek. 2009. Impact of Whether on Downhill Ski Lift Ticket Sales. Journal of Travel Research 47, no. 3 (02) : 359-372. Extreme skiing and snowboarding has clearly become a dominant, and permanent part of skiing and snowboarding. Ski resorts could take advantage of the continual growth in the presence of extreme skiing and snowboarding to develop focused strategies aimed at capitalizing on this growth. The research I conduct in this paper aims to provide statistically significant evidence that suggests such strategies could be effective by testing to discover weather the increased presence of more difficult terrain has an effect on resort success or not. I hypothesize that both the percentage of expert/extreme terrain, and the presence of terrain parks at a resort will be statistically significant and positively correlated with ski visits to ski resorts in Colorado. Ultimately, I argue that if the presence of extreme terrain and park features is related to ski resort success, than ski resorts in Colorado with more difficult skiing will see a greater amount of skier visits proportional to resort size, annually. I will perform regression analyses using ski visits, and lift ticket price as my dependant variables, explained by a number of different physical resort characteristics, which will be my independent variables in my models. The most important independent variables in my model will be the percentage of resort acreage deemed "expert terrain," and the number of available features in terrain parks, since these variables are critical to what I try to prove in my thesis. Other independent variables I would expect to be significantly correlated to skier visits are annual natural snowfall, annual manmade snowfall, annual resort advertising budget, number of ski and snowboard instructors employed, presence of real estate, transportation time to reach a resort, and ticket price. In this study, data is collected on ski resorts in Colorado either through resort websites, Colorado ski resort collaboration websites, such as ColoradoSki.com and Media-ColoradoSki.com, or by contacting private resort companies, such as Vail Resorts Inc., by phone, email, or in person.