91-The End of a Local Leader’s Trap

It is normal for a market to consolidate, where just a couple of competitors come to dominate an industry. This Blog describes how that happens and explains some of the fallout for the remaining industry competitors. It is not usually a pretty picture.

Posted 3/16/09

A Leader’s Trap occurs when an industry leader, usually the first or second company ranked by market share, holds prices high in the face of declining industry prices. The industry leader expects that its customers will remain loyal despite lower cost competition. This decision is virtually certain to fail. Eventually, the industry leader will reduce its prices, but only after losing market share to the lower cost competitor. The North Lake Tahoe ski world is seeing the end of a Leader’s Trap. The world is about to get more interesting for skiers around this area.

Several years ago, one of the largest North Tahoe ski areas, Northstar, developed a ski pass that allowed the pass-holder to ski any day of the week except for Saturday and a few blackout dates around popular holidays. Northstar is a relatively large, well-run resort. While its mountain is fine for families, it is sorely lacking in challenges for the advanced skier. They priced these passes at the equivalent of five or six days’ cost of a regular full day of skiing. As a result of this decision, Northstar gained in popularity. Skiers flocked to the good deal. They skied Northstar on most days and then bought single day tickets at the other ski areas for their Saturday skiing. These pass-holders have been a boon to Northstar (see the Symptom and Implication, “The industry leaders are losing share” on StrategyStreet.com). They bring their friends and family, they buy food and equipment at the village shops and they upgrade the reputation of the resort.

Northstar enjoyed these benefits for the last several years because its two large competitors, Squaw Valley and Alpine Meadows, refused to match their price offering. This was a classic Leader’s Trap. By most accounts, Alpine and Squaw offer a better mountain to skiers. But the prices they charge have caused many skiers to jump ship to Northstar, taking their purchases and buzz benefits with them.

But these days are quickly coming to an end. Squaw Valley has announced new season passes that are very competitive with those at Northstar, and a great deal less expensive than previous season passes. Squaw Valley will now offer a Bronze season pass, good for any day except Saturday and selected blackout dates for $369. Northstar’s equivalent offering is $329. More expensive than Northstar, yes, but a whole lot less costly than when Squaw Valley’s adult full-season pass cost of $1,449. Squaw Valley also upped the ante. It offers a Silver pass for $469. This pass, which does not have a Northstar equivalent, allows the pass-holder to ski seven days a week, except on selected blackout dates.

This new pricing scheme from Squaw Valley puts a great deal of pressure on all other ski areas in North Lake Tahoe. Alpine Meadows will have to fall in line. Other smaller ski areas, such as Sugar Bowl, Homewood, Incline and Mt. Rose will also have to reduce their prices and offer a season passes with similar benefits. Northstar already is the leader in this pricing approach. It will continue on as it is, though now its price advantage over Squaw has fallen to 11%, from something closer to 75%.

Skiers here may see some additional pricing innovations, such as multiple ski area season passes. Such season passes, at low costs, already exist in Colorado, where a skier can gain access to five separate ski areas, including leaders Vail and Beaver Creek, for a cost that hovers around $500. A season pass granting the pass-holder access to several of the smaller ski areas might be an effective answer to Squaw Valley’s latest initiative.

No matter what happens next, Squaw Valley is out of the Leader’s Trap. It will certainly gain market share next year. (See the Symptom and Implication, “The larger companies are squeezing out the smaller” on StrategyStreet.com.)

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Update 2022:

Season ski passes covering several different mountains have taken over much of the industry’s season pass market. These multi-mountain season passes come at higher prices but with benefits highly appealing to committed skiers.  Avid skiers paid a very low cost per day by using these season passes. See HERE for a picture of what this might look like.

In 2022, skiers may participate in multi-resort season tickets at very competitive prices. Two major season-ticket companies include Ikon and Epic which both offer access to worldwide ski areas for competitive prices. Here are Ikon’s prices for 2022/23: for $1179 a season pass holder has no blackout dates, 14 unlimited skiing and riding destinations and up to seven days at 35 other destinations. There are lower prices offered for young adults, children ages 5 to 12 and children four and under.  The Ikon Base Pass (Comparable to the silver pass discussed in the blog above.) offers a skier or rider 13 unlimited skiing and riding destinations and up to five days at 30 destinations for $869 with some blackout dates.  The implied annual growth rate of this type of season pass price is about 5% a year, above inflation for that period, but offering far more skiing options and variety. These skiing destinations include well-known ski areas across the US and Canada along with several in France, Italy, Switzerland, Austria, Australia, New Zealand Japan and Chile.

These multi-resort season passes have put enormous pressure on the smaller ski areas whose season passes must be significantly cheaper to compete.

Leader’s Trap Examples – StrategyStreet.com

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Update 5/26

The success of the two leading season pass companies has radically redefined the ski industry. All US ski areas now fall into one of three groups: the major sponsors of the two pass companies; their smaller partners; and the remaining independents. The success of each ski area depends on the industry’s Very Large and Large customers. The season pass companies dominate the US ski market because they have been most successful with these critical customer segments. The business models of these ski pass companies carries some risk but has proven to be robust so far. The independents who decide to go their own way have followed three Function/Price – based alternatives with limited success.

Epic and Ikon (mega passes), owned by Vail and Alterra respectively, now control over 50% of the US industry’s lift capacity. They make up a strong duopoly. This concentration gives them season pass pricing power, advanced purchase revenue and the ability to smooth weather risk. As they grew in importance, season pass prices fell sharply, which made unlimited skiing much cheaper for frequent skiers (Very Large and Large customer segments). At the same time, day ticket prices surged which hurt occasional skiers (Medium and Small customer segments). Season pass holders now outnumber day – ticket buyers.

The backbones of the ski industry are the Very Large and Large customer segments. These two segments represent 20% of the total skiers and 64% of the total ski days. No ski area can survive without their support. The Very Large customer segment makes up 10% of the skiers and 38% of total ski days.  These ski enthusiasts average more than 35 ski days a year. The Large customer segment comprises 20% of the skiers and 26% of the total ski days. This customer segment averages about 15 days a year skiing. The vast majority of these two customer segments will hold a season pass from one of the two mega pass companies. The mega pass companies attract these two customer segments for 26% of their area ski days. Their pass partners enjoy 20% of their ski days from these two customer segments. The smaller independents attract these two customer segments for only 10% of their ski days. [We believe that you must understand these two customer segments in detail. In fact, customer size should be your first segmentation. See HERE for an explanation.]

The mega pass sponsors are the big winners in this industry consolidation.  They control the pricing, receive all the pass revenues and enjoy the economies of scale. Their market shares and margins have increased dramatically. The mega pass companies attract smaller ski areas as partners in their season passes. This partner pricing gives most of the economic advantage to the sponsoring season pass companies. This is like a co-op pricing scheme which runs the risk that the smaller members eventually refuse to the larger members. These partners receive a fixed payment for each ski visit. Of course, this visit payment is well below what their posted day ticket would cost.  The partners may not change any pass pricing. The advantage for the partner is that it receives more visits as pass holders seek diversification in their skiing experiences.  One estimate suggests that these partners receive about 40% more visits as part of the partner program than they would receive as an independent. These additional visits provide the smaller ski area with the opportunity to generate ancillary revenues from food, lessons and rentals.  One potential downside is that the additional skiers could strain the infrastructure of the smaller ski area. The smaller independent ski areas scrape by on fewer visits and lower total revenues. They do control their own pricing and promotions. Both the partner areas and the independents must finance their own capital improvements from their margins.

Some smaller partners and independents are beginning to struggle with high costs and low margins. A few of the smaller partners have left the mega pass consortia. Then, they and the independents must choose a new route to sustainable profitability. These companies have adopted Function/Price – based alternative strategies, including: joining a regional pass coalition, such as the Indy Pass group, to offer multiple ski areas and attractively priced season passes; focusing on local positioning with emphasis on family-friendly and community oriented benefits and value pricing; adding real estate in the form of a name brand hotel or on-site condominiums to provide customers for the ski areas. So far, only a few independent ski areas have found that any of these alternatives lead to sustainable attractive profits as they compete with much larger competitors. These smaller ski areas face a tenuous future.

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