“One should never spoil a good theory by explaining it.”
- Peter McArthur -
As we have done in both Diminishing
Returns and Changing Rules,
I am basing this dissertation on the basic 7-day interval use period. This assumes that a fixed week owner has
determined to exchange, that a floating time owner had requested a week for purposes of affecting an exchange and
a point’s owner had used that currency to acquire a week for the purpose of exchange outside their club or group.
Every exchange firm in existence depends upon ‘supply’ to make their system work. On the surface one might believe
the primary source of this ‘supply’ comes from members of that exchange firm depositing or banking their week in
advance. By doing so, a week became available for a second party to occupy and their week became available for
a third party to occupy and so on and so on. Both of the major exchange firms (RCI and Interval) use this ‘supply’
side system; one of them does so exclusively. This ‘supply’ side, one-for-one, would work in theory, however the
process would be very slow and awkward.
From the very beginning, when a newly developed resort made an affiliation with an exchange firm, that resort
or developer had to provide weeks to the exchange firm to “seed” the system. This seeding method was designed to
insure that the ‘supply’ of available weeks always exceeded the ‘demand’ for a week. In theory, as long as the
overall ‘supply’ exceeded the ‘demand’, every request for an exchange could be fulfilled with space available.
This is one reason, as pointed out in Changing Rules: “Exchange firms suddenly
became more concerned with new product development that insured initial membership growth than the old methods
of assured satisfied exchanges for existing members.” This new product development also insured that the ‘supply’
of inventory from developer seeding was ongoing.
Let’s look at the supply numbers. As of 1/1/03 there were 5,425 resorts worldwide and only 1590 in the United
States. On the surface this means that if you were a US owner your odds are less than One in Four of obtaining
an exchange in any of the 1590 US resorts (1590 / 5425). Assuming that you wanted to visit somewhere other than
Florida or California (1099 / 5425) your odds are about One in Five.
This supply picture looks different if it is displayed as numbers of units rather than resorts and they are
adjusted for owner use. As of 1/1/03 there were 132,000 timeshare units in the USA and only about 57% of those
available units are ever in the exchange supply inventory at any given time. The graph depicted spreads those 75,240
units as indicated below.
The pink slice is the 7,125
units in California.
The yellow is the 9,704 units tied up with RCI point’s resorts.
The green is the 11,813 units used by International visitors
The red slice denoted the 20,863 units in Florida
The blue denotes the 25,735 available for traditional weeks owners
As of 2/2/03 about 87% of the US timeshares were traditional weeks and about 13% were points based. However,
20-25 development firms are making about 75%-80% of all current sales with the majority of those being major ‘brand’
companies. The majority of these firms are selling only points based plans. In 1997 only about 9.1% of sales by
developers were points based plans, by 2000 that number had grown to about 15.3% and as of 2002 it topped 43%.
This means that the supply of new non-points based product is declining while the supply of points based product
is increasing.
For purposes of illustration of the 6,732,000 current timeshare plans in the US, 5,856,840 are traditional
weeks and 875,760 are points based programs. If we assume that the sale of points based plans continue to accelerate
at the same pace over the next 5 years (2003-2007) the percentage of points based plans will have doubled and of
the almost 2 million plans added over 64% will be points based. What does this mean with respect to the exchange
issue?
At the end of that period we will have a total of 8,590,107 timeshare plans of which 6,525,758 will be traditional
based timeshare plans and 2,064,349 will be points based plans. Assuming that the percentage of exchangers remains
57% there will be 3,719,682 potential use periods available to the traditional owners and 4,896,361 available to
points owners.
While it is clear that the overall supply is growing at a rapid rate the growth, in and of itself that doesn’t
greatly impact the traditional weeks owners ability to make a quality exchange. As indicated above, the growth
is mostly in points based plans that are not currently available to the weeks owners while the total available
exchange inventory is available to points owners so long as they conform to the traditional 7-day use period. This
only addresses one side of the supply issue.
The advent of clubs and the entry into the industry by the major brands have presented another supply issue.
By their very nature, these groups encourage higher owner/member use within the brand or club system and this practice
actually reduces the supply available to the exchange firms. Let’s use my Scottsdale Camelback as an example. A
traditional weeks property, SCR’s utilization history was about 24% utilization by owners (occupy or rent) and
about 76% used for exchange. In recent history about 22% of the total SCR inventory has been acquired by clubs
for exclusive use by their members; consequently, the utilization by owners has more than doubled and the amount
of exchange inventory has been cut by almost one third. This utilization pattern has effectively removed 1300 weeks
from the exchange pool.
Another industry issue is also having an impact on the available exchange pool. Currently only 73% of all timeshare
sales are by developers and the overwhelming majority of these sales are of new inventory. Twenty three percent
of the other sales were resales by consumers or owner associations. Again let’s use SCR as an example. The SCR
resale program began in 1990 and its sales pattern has never changed. Typically those sales are made to what we
call Timeshare Smart buyers. Almost 90% of these buyers have been inbound exchange guest who enjoyed their visit
to our community and their stay at our resort and wanted to return. They found it more economical and beneficial
to insure availability by purchasing a unit off the resale listings rather than taking their chance on getting
back via the exchange method. Again, this affected a change in utilization from an exchange guest to use by owner
and a subsequent reduction in the exchange pool.
The other side of this story is the demand curve. This demand in the timeshare business is being perpetuated
in every sales presentation ever being made. Vacations for a lifetime, exchangeability, flexibility and affordability
are the center posts of our pitches. In a perfect world the supply and demand would be almost equal. From the developers'
viewpoint it is safer to have demand outpacing supply for this assures an ongoing market. One of the essential
factors in the determination about going ahead with a new project is a feasibility study. The feasibility addresses
the affordability of acquiring the real estate location, the availability of professionals in building design &
construction and the materials necessary to do so. It’s going to consider the availability of the infrastructure,
traffic flow and zoning. These and other such issues will address the ‘can it be done’ questions, however more
importantly the study will address the ‘should it be done’ issue. These questions primarily deal with profitability
and marketability. The key ingredient in profitability is timing and the key to timing is market. If the demand
is booming in the marketplace the completion of the project in short order is assured and this means the cost of
money is minimized. If the sales drag out because the demand for the product is limited, the cost of money becomes
a major factor and could eat up any potential profit for the developer. Consequently, few developers are willing
to break new ground.
A prime example of this supply/demand issue is the recently completed 109-unit Hyatt Vacation Ownership
Pinon Pointe project in Sedona. The demand has always been exceptional
in Sedona, however land cost, zoning and the political environment have not favored additional development. After
a long struggle Hyatt was able to prevail and this new facility is a jewel in their crown. I am sure that
many of the millions of traditional week owners would place Sedona and Pinon Pointe
on their wish list for an exchange. Hyatt Vacation Ownership, Inc., is affiliated with Interval International
thus exchanges are possible, however be assured that the demand by members of the Hyatt Vacation Club will
eat up any supply that becomes available at that property for years to come.
Final Thought
In 1996/1997 there were about 1213 timeshare resorts in the US and these facilities averaged about 53 units
for a total of about 64,300. Between 96/97 and 2003 about 390 new resorts were developed to bring the total to
about 1590 with the total units more than doubling to 132,000. The number of units in the new facilities averaged
well over 100 and many of the existing resorts continued to expand though new construction. This activity brought
the overall average resort size to 83 units. Clearly this rapid expansion of the supply was quickly absorbed by
the demand as the 20-25 major developers experienced an average 17% growth in sales. As previously indicated the
majority of these developers were bringing club and points programs to the market. In the previous 10 years (1987
to 1997) only about 164 new resorts had been added.
The bottom line! Out of the 1590 resorts as of 1/1/03 about 390 are five years old or less and another group
of about 164 are fifteen years old or less. This means that over 1,000 of the US resorts are over 15 years old.
Little doubt exists that the majority of these older and smaller resorts cannot compete with the 500+ newer and
larger facilities with respect to the quality of product and service. In the world of exchange where value has
become an intangible, it becomes clear that the majority of demand will be directed toward the newer resorts. Those
older resorts in prime destinations that have been maintained to the highest standards and who are able to provide
exceptional service will also have some demand. If 57% of the available inventory in those 1,000 resorts or 2,703,000
unit weeks are considered to be of lesser value, the odds of any traditional weeks resort owner obtaining a desirable
exchanges has been effectively reduced to a level which is obviously becoming a major concern to millions of such
owners.
Next week we will address why the service from the exchange firms has diminished and then attempt to draw some
conclusions on the whole mess matter.
Part 1: Diminishing
Returns Part 2: Changing Rules
Part 4: Circumstances
