Forest owns a big chain of holiday hotels and parks and is considering investing in an accompanying amusement park at one of its locations. Trials of this service have happened at several places and shown many possible benefits: they are family friendly, available throughout the whole year, and have the possibility to attract new customers. Our client has done survey-based research within their chain and they think they have chosen the right holiday location to venture with adding an amusement park. At the moment, this holiday park mainly has business guests, however, the company thinks it could also be appealing to families.
Forest does however worry about the capital that is needed to create such an amusement park, and therefore wants to be sure they are investing in the right thing.
- This case might prove to be intricate as the candidate really needs to pay attention to the right subjects. They should pay attention to the profitability of the amusement park, and should not focus on competitive positioning. The amusement park needs to recover the investments made, and might even be in the position to charge a premium.
- The candidate should also make the right enquiries concerning the investment, its buyback period, and speculate about its vacancy.
- A good candidate will recognize many possible risks and benefits, allowing them to look at the case on a more detailed level.
Short Solution (Expand) (Collapse)
This is a straight-on calculation of the profitability of an add-on amusement park investment: Profit = Revenue – Costs. Often, interviewees will pay attention to the revenue, but we should focus on the minimum amount of money the holiday park needs to charge guests to break-even on the investment-costs during the period the costs are being paid back.
An example case structure would contain the subsequent points:
- Cost structure - Detect the costs – both fixed and variable – and the relevant payback time for the amusement park investments.
- Breakeven analysis - Following the predicted house rates and the payback period, detect the advised price per house for the holiday park (fixed and variable costs) to cover the costs throughout the investment period.
- Further risks and benefits – Qualitative evaluation of any other possible benefits or problems that the investment might cause.
- No competing amusement parks in the neighborhood
- No information available about competitors
- No possible short run competitive response
- There is no specific market-data available, nor is there a possibility for extra survey data
- The holiday parks usually gets business groups – this amusement park is expected to stimulate families to come there, too.
II. Analysis: How much per house should the holiday park charge to breakeven the costs?
- $6 million Investment
- 3 years to pay back
- 400 houses
- With amusement park, average 50% occupancy per year
- The investment made constitutes the fixed cost
- The variable cost is $40/night per house
The math concerns finding out the price the holiday park should charge per house during the three years to regain its investment. The participant should not concentrate on the variable cost, but rather on how the client can divide the fixed costs of the investment over those three years.
$6 million investment / 3 years = $2 million / year in incomes
400 houses x 50% occupancy x 350 days (not 365) a year = 70,000 houses annually.
(Often, participants have a hard time with this, trying to summate the costs and making it harder for themselves. Please let them try to figure it out on their own for a while before helping out.)
$2 million/year divided by 70,000 houses/year = 28.6, or around $30/night in fixed cost
The candidate needs to put this together with the variable costs of about $70/night in total for the period of three years. If they struggle to directly interpret this number, ask them for their opinion on the $70/night in total.
Key Elements to Analyze
A. Pricing Determination
- How can the breakeven point on the holiday park’s cost be interpreted?
- How do we feel about the holiday park’s pricing?
- The participant needs to see that $70 is a really low number, and even more if families might be going to the amusement park.
- The participant will therefore also need to compare this price to the real-life prices of holiday camps and their own experiences.
- Accordingly, the holiday park can credibly charge a much higher price than the low number that just covers its basic costs.
- The company has two possibilities: ask a fee for entry of the amusement park or include it in the holiday park price.
The add-on of an amusement park should be recommended. Despite there being several possible risks and things to consider (such as competitors), the economics are very appealing and the relatively very low price of $70/house to breakeven the costs is very appealing for a holiday park offering such amenities.
The participant should positively recommend the project, by making use of other possible ways which can lead to profits, and the low breakeven price as main arguments.
Bonus/Guide to an Excellent Case
- This case challenges a lot of participants’ expectations, with many of them significantly concentrating on competitive/market forces. An excellent participant will quickly start calculating by concentrating on the issues that really matter: returning the money spent on the investment.
- Furthermore, an outstanding participant should interpret the breakeven price of %70/house as very low. To see whether they have intelligent business judgment, as the candidate to interpret the numbers.
- Lastly, an outstanding interviewee needs to come up with many risks/benefits associated with this project.
Which possible benefits or revenue streams could this entail?
- Asking for an admission fee
- Food Sales within the park
- Promotional connections
- Merchandise / stuffed animal sales
- Expansion to other holiday parks or hotels in the neighborhood
What are the possible risks and problems that this strategy might pose?
- Management capability (does the company have any useful experience?)
- Risks concerning regulatory and insurance matters
- Health/judicial risks commonly associated with amusement parks
- Response by competitors
- Losing current business guests due to a more family friendly atmosphere