Red Spruce Resort Case Study

Red Spruce Resort

Case Analysis

Andrew Loudenback

Strategic Management

Montana Tech of The University of Montana

February 15, 2017

Executive Summary

        Red Spruce Resort is a premium lake front resort that is dedicated to satisfying its guests. They operate 6 months out of the year attracting families during July and August, and Corporate guests during May, June, September and October. Red Spruce offers a full-service spa, inflatable waterpark, pool, beach volleyball court.

        Red Spruce is losing its market share due to competition heavily investing in room renovations, and improved onsite recreation activities, as well as operating year-round. The rooms at Red Spruce have not been renovated in 15 years, and the recommended industry average is every 7 years. A survey showed that 32% of guests believe that rooms needed to be upgraded.

        Red Spruce is faced with the decision to renovate existing rooms or to do nothing and find other ways to attract customers. The project will cost over $1 million, but will increase room rates, and occupancy rates.

Problem Statements

        Red Spruce Resort has a mission to provide guests with exceptional service and satisfaction. In recent years, they have lost market share due to the economy, and a strong push from competitors who have recently upgraded their facilities. It has been 15 years since Red Spruce has upgraded, and thus they are losing customers, and customer satisfaction. They must decide whether to pursue a $1 million renovation product to gain more market share, and get back to their mission.

• Red Spruce is not living up to their mission statement.

Red Spruce is dedicated to guest satisfaction, but 32% of their guests are not satisfied with the quality of their rooms. Red Spruce’s primary competitors have heavily invested in room renovations and improving onsite recreational activities. Thus, Red Spruce’s market share has decreased steadily, and competitors are responsible for 90% of the revenue earned in 2012.

• Red Spruce only operates 6-months out of the year.

In the Resort industry success is measured by market share, occupancy, and revenue per available room. Right now Red Spruce is the only resort amongst their competitors that is only open for part of the year. Between Red Spruce and their primary competitors, they earned $29 million in revenues, and 90% of the revenue was earned by just three resorts: Blue Heron, Dunridge, and Irvine house. The three properties offer 80,000, 137,000, and 48,000 rooms available annually. Red Spruce averaged only 11,657 available rooms from 2011-2013.

• Recreation Activities expenses are too high to continue to have recreational activities.

Recreational activities currently are generating $12 per room night sold, while food and beverage accounts for $165 per room night sold. Labor costs for recreational activities are almost as high as the money being earned per room for activities. To combat declining market-share Red Spruce invested in the inflatable water park to attract more families back to the resort. Activities are dependent on occupancy at the resort and right now Red Spruce is not attracting enough guests to support current activity strategies.

Recommendations

Red Spruce is losing its market share to competitors, and less guests are visiting each year. The analysis provides recommendations for the following problems.

• According to the analysis performed it is recommended that Red Spruce Resort proceed with the renovation project. 32% of guests agree that rooms need to be updated, and if they don’t proceed with the renovation project the occupancy rate will decline to 58.3%, and they will have 146 less rooms sold in the coming year. Proceeding with the project will lower facility management costs by almost $50,000 (See Appendix B).  Projecting Net Income for 2015 without renovation Red Spruce will earn $46,192.22 less than they did in 2013. Not completing the project will lead to increased costs for maintenance, reduce occupancy rates, and mean less rooms sold annually. The Payback period for this project is less than 1 year, and will produce a high ROI early, and for the life of the asset.
• Currently Red Spruce Resort is only operating 6 months out of the year, while competitors are operating year round. The data show that operating year round would be beneficial for Net Income. If they did not renovate but operated year round they would earn $809,829.73 more than they currently do even with the decrease in occupancy rate, and number of room nights sold and increased maintenance costs. The analysis shows if they proceed with the renovation and also operate on a 12-month basis the Net Income will increase from 2013 by $1,331,160. Pursuing the project and running year round will also cut the payback period in half using a six-month operation, and will double the ROI in year 1 and over the life of the asset (See Appendix C)
• Red Spruce has invested in leisure activities to attract families back to the resort. Red Spruce is only earning $12 per room on activities and are losing $1.20 per room on their recreation activities. With or without the renovation, the data shows that they will continue to lose money on these activities. Renovating Red Spruce will cut the loses by 40 cents, but they will continue to lose money (See Appendix D). Red Spruce currently generates $38.94 per room with food and beverage revenues. Larger group stays account for 45% of the resorts entire room revenue, so it is recommended that they cut the activities and focus on improving food and beverage services to increase revenues. Leisure guest typically come in an average size of three people, and Red Spruce has enough natural resources such as nature trails and waterfront facilities, and also has a separate lake for pets to swim in to accommodate the needs of their leisure guests.

Analysis

        Pursuing the Renovation Red Spruce will generate a Net Income of $1,159,225.24 improving Net Income from 2013 by $171,935.10 and will increase nights sold by 357 (Appendix A&B). If the project is not completed Net income will be $941,097.92, which is $46,192.22 less than 2013, and $218,127.32 less than if they do pursue the project. The initial investment is $1,090,626 and if pursued it would take 0.94 years to pay back that amount (Appendix B). In year 1 of the renovation operating on a 6-month basis the ROI would be $68,599.24 Over the life of the asset, the ROI would amount to $10,501,626.42. The data in Appendix B shows that renovating the resort will be beneficial and carries little risk, as the payback period only operating half the year is under 1 year. If they do not pursue the renovations they will lose $168, 663.40 in revenues, and costs will increase by $49,463.92 making the renovation projects value much higher both in the short and long term (Appendix B).