Hey, some of my responses take time to write, but since you asked ...
WDW has never been cheap. However, it’s much more expensive than it once was.
Twenty-five years ago, a theme park view room during Christmas at the Grand Floridian went for $235/night (excluding tax), about $450/night today.
Twenty years ago, that room was up to $345/night, about $550/night today.
Ten years ago, that room was up to $430/night, about $540/night today.
Since Iger took charges, prices have taken off.
That room will cost $928/night for Christmas 2014.
Beyond the price increases, to understand what’s happening financially at WDW today, it’s necessary to recognize where the greatest margins are: the hotels. WDW’s hotels are money-making machines and are the key to WDW’s future financial success.
However, it’s also important to remember what feeds WDW’s hotels: the theme parks. Without the theme parks, WDW’s hotels are overpriced mid-to-entry-level rooms sitting on swampland. Guests don’t stay at WDW hotels because they want to vacation in Orlando, they stay because they want to vacation at WDW’s theme parks.
Anyone who’s compared WDW’s rates with offsite hotels recognizes how profitable they are. Using my favorite example, a 565 sq. ft. Family Suite at Art Of Animation often costs more than a 945 sq. ft. suite at the Waldorf Astoria (within walking distance of Art Of Animation).
If places like the Waldorf Astoria and Wyndham Bonnet Creek (located next to the Waldorf) can provide more for less, then WDW’s hotel prices have nothing to do with their quality or location on land that Walt paid $120/acre for; it has to do with having the “Disney” name as a prefix. It has to do with their direct association to the theme parks.
WDW’s future financial success is dependent on selling
complete hotel and theme park vacation packages that attract discerning consumers to its Deluxe Resorts and yet still are within reach of the general public. Guests
want to stay onsite but, in growing numbers, they just can’t find the value in it.
WDW’s greatest commercial problems fall into three categories.
First, a change in marketing strategy to focus on families with younger children rather than adults and adults with older children has driven away much of WDW’s high-end customer base. Those who easily can afford WDW’s Deluxe Resort prices are not visiting WDW in the same numbers they used to. WDW is losing this market to other alternatives because WDW no longer as competitive as it once was with an older market, a segment that tends to have more disposable income. This is not a WDW vs. Uni comparison; this is a WDW vs. every other vacation destination in the world comparison. In this market, WDW is competing less effectively than it once did.
Second, combined ticket and hotel prices have risen much more rapidly than those who dream of staying at WDW Deluxe and Moderate Resorts can afford. The lion’s share of WDW’s revenue is from middle-to-upper middle income families who want to experience what they view as “lifestyles of the rich and famous”. To them, a stay in the Grand Floridian represents the epitome of luxury. However, WDW price increases over the last 10-15 years have outpaced this segment’s income, forcing these guests to downgrade their stays to lower-margin Value Resort or even offsite. WDW slowly is pricing itself out of its core market.
Third, the continued expansion of Disney Vacation Club (DVC) has eroded the customer base at WDW’s high-margin resorts.
WDW’s early financial success was driven primarily by what happened at the theme parks. Just like Disneyland before it, the Magic Kingdom and EPCOT were high-risk/high-reward investments in the future that produced a positive cash flow for generations.
Yet the rest of Walt Disney Productions underperformed and Michael Eisner was brought onboard in 1984 to cure Disney’s woes in film and animation.
Early in the Eisner era, Sid Bass encouraged Eisner to expand WDW in order to take advantage of Disney’s land holdings. The strategy worked brilliantly. Theme and water parks were added. New Deluxe Resorts were brought online and operated at near capacity year-round. WDW began to offer moderate and value accommodations to appeal to a wider audience. WDW’s gross margins improved as guests flooded the onsite resorts in order to experience what was considered the complete WDW vacation.
The key to WDW’s success was:
- Build, build, build – Make WDW an electrifying vacation destination that everyone, including the adults and older children, wanted to visit.
- Price control - Maintain prices that closely tracked people’s ability to pay for them.
As long as WDW grew, customers across all economic and age groups were drawn into the glowing orb of an electrifying WDW. WDW never was inexpensive but it was within reach. As long as vacationers felt they could afford both tickets and WDW hotel stays, they bought both.
WDW’s period of greatest financial success followed the decades when the theme parks expanded and tickets closely followed Median Household Income. WDW knew their target audience and operated accordingly.
The opening of Value Resort beginning in 1994 helped mitigate the effect of rapid prices increases that started in that late 1990s. However, as WDW continued its price expansion into the 2000s, the lower-margin Value Resorts eroded margins as guests downgraded from WDW’s Deluxe and Moderate Resorts to Value Resorts.
Things truly headed south in the post-9/11 era when travel suffered. Parks & Resorts performed well in FY2001 (ending in September 2001) but Eisner was under an increasing strain because of a growing number of misfires outside of WDW.
It was at this time that corporate Disney hastened the trend started in the late 1990s and raised prices even faster.
It’s an understandable strategy. When external market forces adversely impact business and when the CEO is under pressure to produce strong results, companies often sail into a safe harbor to weather the storm. In WDW’s case, this meant higher prices, quality cuts, and stagnation. This strategy can work but only temporarily. Long-term, this approach leads to gradual decline.
It was at the same time that WDW embarked on another short-term strategy with long-term consequences: DVC.
Corporately, timeshares are great; they infuse a company with quick high-margin cash. However, they sacrifice long-term profits for the sake of short-term profits.
In WDW’s case, DVC stole guests away from Disney’s obscenely profitable Deluxe Resorts and provided these vacationers with decades of Deluxe Resort style rooms at significantly reduced rates.
In the 1990s, WDW operated only 2 DVC resorts with a combined total of about 900 units. Since then, the number of DVC units has more than tripled, taking business directly away from Deluxe and even Moderate Resorts, robbing the company of high-margin profits. Families who once might have stayed at Deluxe or Moderate Resorts plopped over big money once for the promise of much less expensive stays for years to come.
Infused with the quick cash from DVC sales, P&R financial performance rebounded in the late 2000s. It never remotely approached peak levels but gross margin did recover modestly after cratering at 13.1% in FY2005.
During the economic downturn that followed, WDW offered a series of incredible discounts in order to keep hotel occupancy rates up. It worked. WDW occupancy was 86% in 2006, 89% in 2007, 90% in 2008, and 87% in 2009.
However, it also whetted the public’s appetite for discounts. Once those steep discounts ended and the flood of DVC inventory began to take effect, occupancy plummeted at WDW’s higher-end hotels. Non-DVC members began to wise up to the value of renting DVC points. Deluxe Resorts had to complete directly with the growing number of DVC members who rented out their points.
Without a series of flashy new theme park expansions constantly repolishing the WDW orb, the luster of a
complete WDW vacation faded. WDW now attracts “The Easy To Please” crowd.
WDW has become a rite of passage for the current generation, a place for parents to bring their strollered youngsters before they grow out of WDW’s dumbed-down childish offerings. Rather than appeal to single adults or older parents in their peak earning years, WDW unwittingly is targeting those least able to splurge on high-end hotel stays.
Of course WDW hotel occupancies are down at Disney’s Deluxe Resorts. The crowd that WDW is catering to cannot afford them.
Of course margins are down even as the Magic Kingdom is bursting at the seams. Vacationers are staying offsite, bopping into MK for a day or two, and then heading off elsewhere to enjoy the other offerings in Orlando. WDW no longer is the only game in town and without the Magic Kingdom drawing people in, WDW’s other 3 parks would suffer terribly.
Add it all together and you have an organization that continues to make short-term blunders that will lead to long-term institutional problems.
As demonstrated by the New Fantasyland expansion targeted towards young children, the latest price increases, DVC expansions, nickel-and-dime quality cuts, disappointing Art of Animation Family Suite bookings, decision to proceed with MyMagic+, and delays in Pandora and Star Wars Land, Parks & Resorts is an organization that continues to make the same mistakes that had caused it to underperform in the first place.