CANNON MOUNTAIN: Financial analysis and recommendations for improvement

David Byrne
Deepika Chauhan
Marian Gentile
Evan Konwiser
Kristyn McLeod
Justin White

June 1, 2007

First-Year Project
Group 19
Tuck School of Business at Dartmouth

TABLE OF CONTENTS EXECUTIVE SUMMARY CHAPTER

I: INTRODUCTION

EXECUTIVE SUMMARY The goals for this project were to analyze Cannon Mountain’s profitability; compare Cannon Mountain to similar ski areas; and make initial recommendations for improvement. After an extensive financial analysis, interviews with Cannon Mountain employees, and interviews with managers from comparable ski areas, we came to three primary conclusions: 1. To increase profitability, Cannon Mountain must improve its revenue management and focus on increasing the number of skier visits and revenues per skier visit. 2. To sustain its profitability, Cannon Mountain must invest in snowmaking infrastructure and lodge, trail, and parking lot capacity. 3. To accomplish the above goals, the State of New Hampshire should considering creating a separate authority to improve management and oversight of Cannon Mountain.

CANNON TODAY: HOW IT COMPARES 2006 REVENUES: CANNON VS. COMPARABLES After analyzing Cannon’s financial statements, accounting records, and skier visit data, we found that Cannon has been profitable in three out of the last five years, but in the years it incurred losses, the losses were substantial. Because Cannon is a state-run ski area, it does incur expenses and give up potential revenues that other mountains do not. These expenses include shared labor expenses with Franconia Notch State Park, lost revenues from free and reduced tickets for seniors, residents, legislators, and state employees, and expenses and lost revenues due to the radio tower. While these adjustments do give a more accurate look at Cannon’s profits, they also show that in the years that Cannon lost money, the losses were still considerable. To determine the cause of the ski area’s losses, we looked at Cannon’s revenues and expenses and compared them to similarly sized ski areas in the northeast. We found that while costs have remained steady at Cannon Mountain, revenues had decreased slightly and were far below the average of comparable mountains. In fact, revenues at similarly sized ski areas averaged three times those of Cannon. For example, Sunapee’s revenues averaged $9M and Gunstock’s revenues were $7.5M. We investigated whether the cause of Cannon Mountain’s revenue discrepancy was from fewer skier visits or less revenue per skier. We found that Cannon suffers from both. Above, we show that Cannon’s utilization, a measure of skier visits, has decreased since 2002. In addition, Cannon’s average revenue per skier visit is $16.48 compared to $21.60 for similarly sized mountains in the northeast. Below, we discuss recommendations for improving both skier visits and revenues per skier visit. From a cost perspective, we found that Cannon excels at operational efficiency, but is investing far less money than its competitors in the areas that boost revenue, including marketing and snowmaking. Cannon has been able to keep its costs constant by operating with fewer employees that comparably sized mountains and deferring investments and maintenance. Our interviews with staff echoed the need to focus on marketing to increase skier visits. Employees told us that concentrating on marketing would help articulate a strategic vision for the mountain and the staff.

RECOMMENDATIONS From this quantitative analysis and from our qualitative conversations with general managers at comparable areas, we came up with recommendations in three key areas: focus on revenue management; invest for sustainability; and consider creating a separate state authority to manage and run Cannon Mountain. Focus on Revenue Management: Cannon needs to focus on bringing more skiers to the mountain and improving its revenue per skier. If Cannon were to bring its average revenue per skier up to the competitive average, it would make an additional $600,000 in revenues each year. If Cannon were to increase its skier visits to the competitive average, Cannon would bring in nearly $1.5M in revenues each year. How can it accomplish these revenue goals? · Create an integrated pricing plan that looks annually at every price point on the mountain. From average daily lift ticket prices, to season passes, to lesson and rental packages, Cannon needs to compare itself to competitors and create pricing scenarios that allow it to increase its average revenue per skier. It shouldn’t be allowing skiers to avoid full prices or buying season passes as it does with the Buddy Pass. · Focus on marketing. Cannon needs to know who its skiers are, where they live, why they choose Cannon, why some skiers don’t choose Cannon, and how Cannon can most effectively talk to and reach those skiers. We specifically recommend: o Reinstating an annual market research program o Hiring a full-time, year round marketing manager for Cannon o Reallocating current marketing dollars to focus on the web and reduce reliance on an advertising agency. Invest in Infrastructure Once Cannon begins increasing its skier visits, the mountain will need to start planning for how to sustain that growth. In the short term, that means performing regular maintenance and investing in snowmaking. The medium term, or the next three-five years, investments will be needed to reduce the bottlenecks created by increasing skier visits at the lodge and at crowded trail intersections. In the long term, Cannon will need to look at it parking lot capacity and consider future expansion. Create an independent authority We spoke with two mountains that are government-owned and have stable profits: Gunstock Mountain, which is owned by Belknap County in New Hampshire and Whiteface Mountain, which is owned by the State of New York. Both are managed by independent commissions that have the authority to hire and fire the general manager, solicit bond issues, and make autonomous pricing decisions. We believe that a commission or authority would provide the oversight and autonomy necessary to manage Cannon Mountain like a business.

CONCLUSION In conclusion, we believe Cannon Mountain needs to increase profitability by focusing on increasing the number of skier visits and revenues per skier; sustain its profitability by investing in infrastructure and capacity; and create a separate authority to improve management and oversight of the mountain.

I. INTRODUCTION Cannon Mountain is New Hampshire’s only state-owned, state-run ski area. In 1998, the State of New Hampshire leased its other state-owned ski area, Sunapee, to a private company. During the 2006-2007 legislative session, a bill to consider leasing Cannon Mountain was introduced by legislators who were concerned that the ski area had incurred significant losses in recent years. The bill failed and the Commissioner of the Department of Resources and Economic Development, the state agency tasked with managing Cannon Mountain, promised to create a detailed business plan for the future operation of the ski area. This project provides the data, analysis, and recommendations necessary to prepare a business plan and formulate a strategic vision for Cannon’s success. The primary goals for this project were to analyze Cannon Mountain’s operating profitability; compare Cannon Mountain to similar ski areas; and make initial recommendations for improvement. Using both financial analysis and interviews with Cannon Mountain and comparable ski areas, we came to three primary conclusions: 4. To increase profitability, Cannon Mountain must improve its revenue management and focus on increasing the number skier visits and revenues per skier visit. 5. To increase its profitability, Cannon Mountain must invest capital in snowmaking infrastructure and lodge, trail, and parking lot capacity. 6. To accomplish the above goals, the State of New Hampshire should reorganize Cannon Mountain into a separate authority to improve management and oversight of the mountain. This paper begins with an analysis of ski area industry, then presents a quantitative and qualitative analysis of Cannon Mountain today, follows with a qualitative comparative analysis, and concludes with a set of recommendations. B. Analysis of Northeast Ski Industry Prior to performing a detailed analysis of Cannon and its relevant comparables, we wanted to evaluate the ski area industry overall. Using Porter’s Five Forces we analyzed the overall attractiveness of the northeast ski industry by ranking the strengths of its relevant forces. Industry rivalry (medium / high) The northeastern United States skiing industry has a lot of players and is quite diverse. Ski areas range from large ski mountains such as Killington and Loon to smaller mountains such as the Dartmouth Skiway. No single northeastern mountain controls market share because proximity to the target markets is one of the key traffic drivers. Each mountain has different strategies, goals, costs, and management styles, therefore industry coordination is difficult. American Skiing Company used to own six northeastern resorts, but recently sold most of them. There is some coordination however, as seen amongst mountains with different operators, which often share season pass programs and promotional agreements. Even with this coordination, the market is considerably fragmented. Given the large number of ski mountains and wide geographic diversity, there is medium to high industry rivalry. Differentiation is possible because skiing is a service industry. For example, ski mountains differentiate themselves on the basis of snow quality, variety of trails, as well as the level of service. Still, skiing is an expensive sport and customers are price sensitive. As such, mountains develop innovative pricing packages to attract different customer segments. The skiing industry has high fixed costs such as marketing, mountain operations, and G&A overhead. The high fixed-cost nature of the industry coupled with mountains’ ability to differentiate also suggests that medium to high rivalry exists. Threat of entry (low) The northeast ski industry faces two main barriers to entry. First, there is the need to find a suitable mountain to commercialize. The northeast is saturated with development, especially those locations close to the metropolitan areas. As such, the likelihood of even finding an available piece of land is extremely low, if not impossible. Second, the initial investment required to build a ski resort is prohibitively large. Given the low margins that current ski areas experience, it would be fiscally imprudent to sink millions of dollars into a new ski area. It is more likely that an existing mountain would expand into a new size bracket. While many mountains continue to expand lift capacity and terrain, the volatility of weather remains a big liability. Few ski areas are willing to significantly change the market in which they operate due to the large influx of capital it would require. As a result, the threat of new entry into the ski industry at large is very low. Supplier power (low / medium) Every ski mountain must have access to water and power to operate. Snowfall and temperature in the northeast are highly variable and as such, ski areas must make snow constantly, consuming large amounts of water and power. Therefore, access to inexpensive water and power is very important. Ski areas generally develop their own water supplies for snowmaking. Water access is often a limiting resource, therefore resorts must build expensive reservoirs for snowmaking. Despite the huge cost of reservoir maintenance, there is no one water supplier, which limits supplier power. Electricity does have a supplier, but rates are generally standardized across regions for entire suppliers. As such, suppliers are legally prohibited from exerting power on ski areas. Again, supplier power is low. As a service business, labor is the most important piece of delivering quality customer service. Given the relatively low-skilled, seasonal nature of ski area employees, labor does not have significant power. Although most ski areas are in rural areas with a limited supply of labor, ski areas generally do not have a hard time filling their winter rosters. However, unionized and municipal employees have high salaries and benefits. This is a risk factor because labor can represent up to 25% of costs causing medium supplier power. Finally, any capital equipment (e.g. lifts, groomers) that are used to run the mountain are purchased off-season. While these expenditures are a significant portion of costs over time, these suppliers exert low power over the ski areas. The resulting overall supplier power is low to medium, brought up by labor dynamics. Buyer power (high) In the ski industry, buyers are the skiers and snowboarders that visit the mountain. Switching costs for buyers are almost non-existent (for non-season ticket holders) as they can switch resorts daily if they do not like service or conditions at a particular mountain. Also, there are many ski mountains in the northeast, which allow a buyer to switch mountains without traveling long distances. Because buyers exert a lot of power, ski areas respond by adding features that buyers desire such as terrain parks, day care service, and man-made snow. Threat of substitutes (low) There are no identifiable substitutes to skiing / snowboarding. Winter sports such as cross-country skiing and ice-hockey do not provide the same experience as skiing and thus do not pose a serious threat to the ski industry. Environmental factors (very high) Ski mountain profits in the northeast are very dependant on weather conditions. For snowmaking, temperatures must be below a certain level. In years with warmer winters, ski industry profits are lower. The pattern of temperature and snowfall is the primary determining factor of the size of profits (or losses) for ski areas. The importance of weather patterns – an uncontrollable revenue driver – is a unique facet of the industry that exerts extremely high power. Overall attractiveness Based on the examination of the five forces, the ski industry is not a very attractive industry. This is supported by numerical data and interviews of ski area managers (Chapters II and III) which indicate that only the most efficient ski areas are able to consistently earn a profit. Based on this discussion, we approach the analysis of Cannon with the underlying assumption that a ski area needs to excel in its operations to be successful. However, we are optimistic that Cannon has the potential to be one of these profitable mountains.

II. CANNON TODAY We conducted a quantitative analysis of Cannon’s financial statements, accounting records, and skier visit data. In addition, to get a better qualitative understanding of Cannon today, we conducted interviews with Cannon Mountain and State of New Hampshire employees who have significant responsibilities for the ski area’s operations. A list of specific interviews can be found in Appendix 12. B. Overview of Cannon’s Profitability Our findings indicate that over the last five years, Cannon has operated on average at a loss. Based on state accounting records, during the five ski seasons ending fiscal 2006, Cannon’s winter operations were profitable in three years, unprofitable in two, and generated a cumulative loss of roughly $532,000 . Because earnings in positive years were modest, and losses in bad years – such as 2005-2006 – were severe, Cannon generated a cumulative deficit despite the fact that it was profitable in more than half of the seasons analyzed. Given current management and operations, we believe that Cannon is likely to experience significant losses in years with unfavorable weather. As shown in Appendices 1a and 1b, Cannon’s profits have underperformed comparable areas (defined below). In fact, its profit margin has been worse than comparable mountains in every year from fiscal 2002 through fiscal 2006. Although in good years, Cannon’s pre-tax margin was only a few percentage points lower than the comparables, in bad years Cannon’s margins were over 10 percentage points worse. Some of this difference can be attributed to Cannon’s inability to develop a real estate base, a major revenue source for many of the comparable mountains. While we are confident that Cannon, in its current state, cannot be consistently operated profitably, we believe that the state accounting records used in our calculations above create an overly pessimistic picture of the mountain’s financial situation. The fact that Cannon is state owned means that the mountain incurs some costs and foregoes some revenues that privately held mountains would not. Specifically, Cannon shares its personnel with other areas in Franconia Notch State Park while incurring the full payroll cost of those employees; it maintains the radio tower atop Cannon mountain despite the fact that large cellular service providers make use of it; and it gives away free and discounted tickets to legislators, seniors, and state employees due to pressure imposed by the state. In order to create a fair picture of Cannon’s overall profitability, we attempted to net out these effects. Our illustrative calculations are shown in Appendix 2a, and suggest that Cannon’s profits would be about $50,000 higher each year – on average – with appropriate adjustments to the financial statements. The net result is that Cannon is still unprofitable and lags behind comparable ski areas in terms of profit margin, but it is more profitable than originally believed. As a point of clarification, our adjusted figures should be viewed as approximations rather than precise values. Cannon did not have specific records of labor-hours devoted to the rest of Franconia Notch State Park, and it is impossible to precisely estimate the conversion rate on free tickets. Our assumptions for any unknown parameters were based on discussions with various Cannon personnel, and are detailed in the footnotes to Appendices 2a and 2b. In the rest of this section, we discuss Cannon’s revenues and costs in more detail, and provide insight into why Cannon’s financial picture is so strikingly different from comparable ski areas. C. Data Sources and Definitions We define “comparable” mountains as ski areas in the Northeast with Vertical Transport Feet (“VTF”) values between 4.500 and 9.999 million. VTF is the sum across all lifts of each lift’s vertical rise multiplied by its hourly uphill capacity. Cannon has 8.223 million VTF . In Chapter III, Section A, we explain why “VTF” is an appropriate comparison metric. Throughout this section, we will refer to the following major data sources: · “State System”: Financial records of Cannon’s winter and summer operations from the 1999-2000 season through the 2005-2006 season. These accounting records are maintained by the DRED on behalf of the state of New Hampshire, and were provided by Gail Lehouiller, Finance Manager. · “QuickBooks”: Cannon financial records maintained at Cannon. In aggregate, these records contain roughly the same information as the State System, though the data is broken out in a different way. Data was provided by Gail Lehouiller. · “Skier Visit Data”: Records of daily skier visits to Cannon, dating back to the 2001-2002 season. Data provided by Lorri Souza, Accounting Technician. · “Free Ticket Data”: Records of free and discounted tickets given to legislators, seniors, and state park employees. This data, which was provided by Lorri Souza, goes back to the 2001-2002 season. · “NSAA Data”: Aggregated ski industry data provided by RRC Associates’ “Economic Analysis of United States Ski Areas”. These annually-published books are available in Feldberg library and go back over ten years. D. Analysis of Cannon’s Revenues Key findings Our analyses show that Cannon’s revenues are dramatically lower than those of comparable northeastern ski areas. In fact, between fiscal 2004 and fiscal 2006, Cannon’s revenues ranged between 26.9% and 29.9% that of comparable mountains . Revenues have been weak for two primary reasons: 1) not enough skiers are coming to the mountain; and 2) when skiers come to the mountain, they do not pay enough for their tickets and related services. We believe low skier visits are the result of cost-cutting initiatives, a lack of focus on marketing, bare-boned operations, and deteriorating facilities. Also, we believe that Cannon’s ticket pricing structure – which is approved by the New Hampshire legislature – is responsible for below average revenue per ticketed skier. Below, we elaborate upon these assertions and discuss Cannon’s overall revenue breakout in more detail. Total revenues In fiscal 2006, Cannon earned total winter-related revenues of $2.9 million, a mere fraction of the $10.8 million earned by comparable ski areas . It generated the vast majority of its revenues – approximately two thirds – from ticket sales. Though comparable mountains only earned about one third of their revenue through ticket sales, this does not mean that Cannon outperforms other mountains in this area. Rather, it indicates that Cannon generates much less revenue than its competitors from ancillary operations. Even adjusting for real estate and lodging-related revenues, it is clear that Cannon generates a much larger percentage of its revenues from ticket sales than the competition. To compare Cannon’s revenue breakout with those of comparable mountains, we reclassified revenue line items from the State System from fiscal 2000 through fiscal 2006 so that they matched up with revenue line items contained in NSAA Data. In general, we found that it was fairly easy to map Cannon’s accounting records to the appropriate NSAA revenue item. Skier visits Though Cannon derives the majority of its revenues from tickets, it does not have enough ticketed skiers to make efficient use of its assets. After talking with Cannon personnel about skier visits, speaking with managers from comparable mountains, and analyzing utilization statistics provided by the NSAA, we learned that Cannon skier visits each year lag considerably behind the peer group. Cannon skier visit data indicated that roughly 57,000 tickets were sold at Cannon in the 2005-2006 season, excluding season passes. In addition, Mountain Manager Billy Roy estimated that roughly 1,000 season passes were sold at Cannon in recent years. Compare this to Sunapee in 2006-2007, which sold approximately 144,000 tickets and 2,500 season passes. These figures are summarized below: Tickets Season Passes Cannon 2005-2006 57,000 1,000 Sunapee 2006-2007 144,000 2,500 Cannon as a % of Sunapee 40% 40% We see that Cannon has approximately 40% of the skier volume of Sunapee even though the two mountains are comparably sized and neither has a real estate base. Given that ski areas are subject to considerable operating leverage (due to high fixed costs), it is remarkable that Cannon has done as well as it has in terms of profitability with such low volume. We also compared Cannon’s utilization with other comparable areas. “Utilization” is defined as average skier visits at a mountain each day, divided by that mountain’s comfortable capacity. The utilization over an entire season would be calculated as: [S (daily skier visits)] / [(comfortable capacity) x (length of ski season)] In simple terms, this metric describes how much skier traffic a mountain gets on average, relative to the number of people that the mountain can accommodate. We feel confident that this is an appropriate metric for comparison, as managers from other comparable mountains verified that it is commonly used in the industry. In order to calculate Cannon’s utilization, we needed data on capacity, ski season length, and skier visits. When we visited Cannon mountain early in the spring, we were told that Cannon’s capacity is roughly 3,650 skiers per day, and skier visit data gave us the length of each ski season dating back to 2001-2002. We had to make some assumptions in order to estimate total skier visits each season because the skier visit data had some discrepancies compared to other data sources. On many days, total skier visits were estimated to be much lower than the number of cars in Cannon’s parking lots. For example, records indicated 1,355 cars on March 25, 2006, but only 586 skiers. Assuming that each car should bring with it at least one skier, we decided to make a simple adjustment; we estimated daily skier visits as the higher of “car count” or “total attendance”. Initially, we were concerned that our methodology might be arbitrary, but when we visited Cannon at one point during the spring, we were told that there were 118,000 skier visits in the preceding year (fiscal 2006) . This closely matched our estimate of 115,921 skier visits in fiscal 2006 , and gave us confidence that our methodology was reasonable, and our utilization calculations were sound. Utilization calculations are shown in Appendix 4b, and graphed in Appendix 4a. Our major finding is that Cannon’s utilization is much lower than the comparables, and the discrepancy is increasing with time. In fiscal 2002, Cannon’s utilization was in line with the rest of the northeast . However, over the past five years, Cannon’s utilization has steadily decreased, while comparable mountains have seen steady increases. This is a worrisome trend, and if it were to continue, Cannon’s financial situation could deteriorate further. Because the skiing industry is dominated by fixed costs, it hurts Cannon tremendously to not fully utilize its fixed assets. Cannon’s utilization figures would be even lower if the mountain had greater lodge capacity. Ski areas need to balance capacity between lodges, parking lots, lifts, and trails. Cannon’s lodges have much lower capacity than do its lifts, trails, and parking lots. In fact, after the lodges, the next bottleneck is the parking lot, which can accommodate 4,500 cars (which would equate to considerably more than 4,500 skiers). For illustrative purposes, changing Cannon’s daily capacity from 3,650 to 4,500 skiers would reduce the utilization in fiscal 2006 from 26.9% to 21.8%. Cannon could comfortably handle a much larger average number of skiers each day if it expanded its lodge facilities. Revenue per skier visit Initially, we suspected that Cannon was not earning as much revenue from ticket sales as its comparables. A qualitative data point supporting our hypothesis came from a March 11, 2007 report written by “secret skiers” who were evaluating the mountain. The report included the following passage: “We met some Cannon regulars during lunch. We thought they were employees as they were both wearing a lot of Cannon logo apparel. They both primarily ski at Cannon. They don’t buy a season’s pass, but somehow purchase points that can be used during the year. I did not understand exactly how the program worked, but they had it mastered.” Thus, Cannon has customers who ski the mountain frequently but do not purchase season passes. This was very surprising to us, especially considering that Cannon’s season passes are relatively inexpensive ($445 for a NH adult in 2006-2007). The “purchase points” referred to in the above passage are known at Cannon as Buddy Passes. Buddy Passes are cards that can be used to purchase day passes at Cannon. Buddy Passes are sold in 20, 40, and 60 point increments, and can be redeemed at a rate of one point per midweek ticket, and two points per weekend ticket. In other words, a 40 point Buddy Pass could be redeemed for 40 midweek tickets, 20 weekend tickets, or any combination thereof. In addition, multiple people can use the same Buddy Pass (passes can be redeemed at a rate of 8 points per day). Thus, it would be possible for a family to ski for an entire season with a single Buddy Pass. Also, Buddy Pass points carry over until Christmas of the following year. We conducted an analysis to understand the incentives that Cannon’s ticket pricing model creates for its customers. Results are summarized in Appendix 5. What we find is not very surprising; Buddy Passes are a great deal for customers, and a revenue destroyer for Cannon. If a 60-point Buddy Pass were used to purchase only midweek tickets, the average cost per ticket would be at a 62.3% discount to the listed price. If two people shared a 40-point Buddy Pass to ski 10 weekend days each in a season, they would save 32.9% off of the listed ticket price. Next, we ran another analysis, also contained in Appendix 5, to show whether or not skiers would be better off purchasing a season pass or a Buddy Pass. What we found was that, assuming a potential season pass customer is planning on skiing five weekend and ten midweek days over the course of an entire upcoming season, they are better off buying a Buddy Pass (whether they are NH residents or not), and the benefit increases if they can share a large pass with others. The discount runs as high as 46.8%. While 15 visits may not sound like a lot, last year, one of our group members purchased a Killington pass and it turned out to be cost-effective after fewer than 10 visits. Our conclusion is that Cannon is leaving revenue on the table by allowing its customers to “game” the system; its pricing structure ensures that only the most die-hard skiers have the incentive to buy a season pass. The fact that Cannon only sold 1,000 season passes last year further supports our conclusion. Though we did not compare Cannon’s ticket pricing structure with comparable mountains, it is clear that the Buddy Pass is costing Cannon ticket revenue. The mountain needs to revisit its ticket pricing strategy, which, as mentioned above, is currently approved by the NH legislature. While the above analysis shows that the Buddy Pass is costing Cannon money, and that Cannon’s ticket pricing strategy should probably be revised, it does not show how Cannon’s revenues per skier compare to comparable mountains. We approached this relative-revenue-per-skier question by analyzing NSAA Data. Results are summarized in Appendix 6. We found that Cannon has only earned between 72% and 76% as much ticket revenue per skier visit as its peers over the past three years ($16.48 for Cannon v. $21.60 for comparables in 2005-2006), and hypothesize that this shortfall is primarily due to Cannon’s ticket pricing strategy, as discussed above. In addition, Cannon earns much less total (ticket and ancillary) revenue per skier visit than comparable mountains. As discussed above, this results from the fact that Cannon derives a very small percentage of its revenue from ancillary services. Key takeaways Cannon’s revenues lag far behind those of comparable mountains because Cannon has inadequate skier traffic, adverse ticket pricing strategies, and an insufficient focus on ancillary services. E. Analysis of Cannon’s Expenses Overview Our key finding is that Cannon’s cost structure is not bloated, and if anything, Cannon should be spending more in certain areas. Cannon Mountain’s winter operation costs are below average for mountains of comparable size located in the Northeast. We reclassified expense items from the State System from fiscal 2002 through fiscal 2006 to match them up with expense items monitored by the National Ski Areas Association in their annual Economic Analysis of United States Ski Areas for fiscal years 2002 – 2006 (“NSAA Data”). Because the NSAA did not split out expenses for comparably-sized mountains in the northeast, we compared Cannon to comparably-sized mountains (4,500-9,999 VTF) across all geographic regions, and also compared Cannon to the entire northeast segment. Our general findings are that Cannon’s “fixed” costs are in line with peers in actual dollar amounts and that its “variable” costs are roughly a third that of comparable mountains. However, as a percentage of operating expenses, some of Cannon’s fixed cost line items are as much as 400% higher. We attribute this to Cannon’s below-average revenues; if fixed costs cannot be reduced, then as the revenue base shrinks, fixed costs will necessarily become a larger percentage of total expenditures. Perhaps our most striking finding is that Cannon has cut costs to a point that revenue drivers are being squeezed. Currently, some fixed costs are being managed as quasi-fixed (i.e. – partially variable). For example, marketing expense – which should be a fixed expense – is less than one third the absolute level of comparable mountains . In addition, though snowmaking expenditures are in line with comparables, Cannon’s equipment is less efficient, suggesting that the mountain should probably be spending more than its peers on snowmaking. As Cannon continues to squeeze these revenue-drivers, pressure on its bottom line will increase. In our recommendations section below, we suggest that priority should be given to snowmaking and marketing; these activities drive skier-visits to the mountain, which will help to grow the top line. The following is a detailed analysis of the main cost drivers at Cannon and in the ski industry as a whole. Variable Costs We define variable costs as all costs that vary with the number of skiers on Cannon Mountain . In the ski industry, the majority of costs are fixed, therefore the main driver of variable costs at Cannon and for the industry as a whole is part-time, seasonal labor. This labor can be partially managed based on ski conditions and traffic. For example, only lifts that service skiable terrain are manned and surplus labor is dismissed when weather conditions change. There is however, a base operating level that requires minimal labor, so this cost is not purely variable. It should be noted that the ski industry is a service industry; therefore variable labor represents a significant portion of expenses, industry-wide, to the tune of 24.5% of total revenue . Cannon’s variable labor costs (over the five year period between 2002 and 2006) as a percentage of total revenue were 26.4%, and 25.6%, as a percentage of expenses- marginally lower than comparably sized mountains in the Northeast, which averaged 26.9% . Given Cannon’s low revenues, low labor costs as a percentage of that revenue, as well as the quasi-fixed nature of direct labor, both management and labor at Cannon are clearly very efficient operators. Fixed Costs The majority of costs in the ski industry are fixed – costs that must be incurred regardless of overall skier traffic, such as core lift operations, grooming, snowmaking, property operations, general and administrative (G&A), and marketing costs. These fixed costs can be grouped into two distinct segments: operational costs and revenue drivers. The operational costs are the expenses associated with maintaining proper facilities and running the business, such as property operations and G&A. Other costs, such as marketing and snowmaking, are expenses incurred to grow the top line of the business. Our findings indicate that the dollars spent on revenue drivers at Cannon are significantly lower than they should be, a likely reason for Cannon’s cumulative losses. We describe the major fixed costs below. Lift Operations Lift operations include the labor needed to operate Cannon’s seven lifts and tramway, as well as electricity and fuel costs. Cannon’s lift operations expenses amounted to 9.1% of total operating expenses, on average, between FY02 and FY06. Comparably-sized mountains nationwide spent 8.4% . However, the actual dollar amounts spent on these activities by Cannon and its comparables were $296K and $593K , respectively, indicating that Cannon is extremely efficient at running its lifts. One explanation for this cost savings is that Cannon staffs the lifts with a minimum amount of personnel. Cannon does not station ticket checkers at its lifts. Over the long term, this lack of oversight could lead to theft of services if skiers perceive Cannon to have lax supervision and begin skiing without tickets. Grooming Cannon’s grooming costs include the leases on the grooming equipment, labor used to operate the groomers, and the fuel usage of the groomers. Cannon spends significantly more on grooming than comparably sized mountains, with average costs between FY02 and FY06 of $238K as compared to $142K for the comparables . The steepness of Cannon’s terrain necessitates expensive grooming equipment. It should be noted that Cannon directly expenses its leases, rather than capitalizing them or purchasing equipment and depreciating it as an asset. Additionally, Cannon occasionally uses skilled mechanics to operate its groomers because of the equipment’s value and because the terrain is difficult to groom. The high pay-grade labor could contribute to Cannon’s anomalous grooming costs as well. Snowmaking At Cannon, Snowmaking costs include direct labor, electricity, equipment repair and parts. Cannon uses water from Echo Lake and therefore does not bear the cost of purchasing water from a municipality, which, our qualitative analysis reveals, is a large portion of snowmaking costs at comparable mountains. Even with this cost savings, Cannon spent $337K on average, while comparably-sized mountains and all mountains in the Northeast spent $307K and $695K, respectively . Given that northeastern ski areas receive notoriously less snow than their western counterparts, the true amount spent by comparable areas falls somewhere between $307K and $695K. Thus, Cannon is likely spending less on snowmaking than its competitors, even with its older snowmaking system. It is not likely that Cannon can dramatically reduce snowmaking labor by upgrading to new equipment because current snowmaking technology prevents complete automation on steep terrain, such as that found on the majority of Cannon’s trails. For these reasons, we believe Cannon should be spending as much as, or even more than, its competitors in the Northeast. Discussions with ski industry professionals indicate that snowmaking is considered a marketing exercise. It generates buzz amongst skiers in urban areas and draws skiers to the mountain. The revenue-generating potential of snowmaking cannot be understated; when used in tandem with an effective marketing strategy, snowmaking can be a powerful draw for day trippers from Concord and Boston. Because snowmaking is a top-line priority, we conclude this cost should be treated as fixed, and, even in years with relatively good snowfall, Cannon should utilize its snowmaking budget. Although many season pass holders will ski at their local mountains regardless of conditions, day pass skiers will likely visit the mountain with the best perceived conditions, therefore snowmaking and marketing activities must be coordinated for maximum effect. Property Operations Property operations include all costs associated with maintenance and upkeep of buildings and equipment. At Cannon, this represents 13.9% of operating expenses and includes such diverse expenditures as trash removal, propane and contracted repair services. Cannon’s property operation costs are slightly higher than those of comparably sized mountains nationwide, at $450K and $414K , respectively; however, the NSAA reports that mountains in the northeast have higher than average costs for property operation as a percentage of revenue. When compared to 4,500-9,999 VTF areas in the northeast, Cannon’s expenditure of $450K looks very lean compared to the comparable average of $699K , suggesting that Cannon’s property operations are efficiently controlled. Our analysis grouped lift maintenance and snow removal costs into property operations because it was not possible to split these out of the budget lines, while the NSAA split these specific line items out separately. Our methodology also inflated the electricity costs associated with property operations because we only split lift operations, grooming, ski patrol, snowmaking, and other operations out of the total electric and fuel spend, while the NSAA splits these costs amongst all departments. Further refinement would show that Cannon’s expenditures on property operations are far below the comps. Additionally, we believe Cannon’s property operation costs are lower than our calculations indicate because of labor sharing with Franconia Notch State Park (“FNSP”) and Cannon’s energy and maintenance expenditures relating to the radio tower operations at the top of Cannon Mountain. While we do not have precise dollar amounts for these costs, Cannon’s staff estimates that full-time employees could spend as much as 30% of their time working elsewhere and as little as 5%. If the low end of the estimate is true, then the cost of sharing labor and resources are cancelled by FNSP’s reciprocation of labor. However, if the actual time spent elsewhere is higher than 5%, then Cannon Mountain is bearing the cost of maintaining other state parks and facilities. Our conversations with Cannon’s Finance Manager, Gail Lehouiller, revealed that Cannon had just begun to monitor employees’ time more closely to get an accurate picture of these costs for future budgeting. Cannon is responsible for the electricity that powers the radio tower atop Cannon Mountain, although several businesses make use of the tower. Though the radio tower costs have not been monitored monthly in aggregate, we can estimate from past billing to WMUR for $450/month that the cost is higher than $10,000/year for all constituencies (such as Verizon, State Emergency Services, WMUR), meaning the tower costs alone could account for 4.5% of the actual money spent on property operations. A May 25, 2007 article in The Dartmouth revealed that the Church of Christ at Dartmouth College earns $76,600 each year by renting out space in its steeple to firms including Cingular Wireless and Verizon Wireless . Given that Verizon makes use of Cannon’s radio tower, it is clear that Cannon is missing a significant revenue opportunity. General & Administrative G&A costs include all items related to overhead, such as full-time salaries and benefits, non-marketing postage, telephony, etc. Cannon’s actual G&A spend is very much in-line with that of comparably-sized mountains in the northeast, at $712K and 691K, respectively . This suggests that G&A is, truly, a fixed cost. Marketing Cannon’s marketing budget includes promotion and advertising spend, but not salaries. The bulk of this budget is spent on radio-advertising, placed through a third-party advertising agency. In actual amounts, Cannon spends less than half that of comparably-sized mountains nationwide, $213K and $522K respectively, yet its revenues are roughly a third that of comparables. We believe that a base-level investment is necessary to generate significant awareness of the advertising and promotions that draw skiers to the mountain. We present a detailed analysis of the marketing department in Chapter IV – Recommendations. F. Staff Interviews: Qualitative Assessment of Cannon During the course of the project, we interviewed a number of Cannon Mountain and New Hampshire State employees to garner information and recommendations on how to improve the mountain . We found the employees to be knowledgeable, hard working, helpful and invested in Cannon Mountain’s success. Interviews included the directors of snowsports, rental department, base area, ski patrol, retail, snowmaking, and equipment maintenance. Communication A recurring theme throughout our discussions with employees at Cannon was a lack of communication between departments. Some of the staff felt that the organizational structure impeded communication, thereby reducing efficiency and cross-selling opportunities. The two areas which could benefit most from increased communication are the snowmaking and grooming departments and the ski lessons and rental departments. Unlike other mountains, Cannon’s snowmaking and grooming are two separate departments with different managers. The snowmakers need to tell the groomers which trails need to be groomed after snow has been made and the groomers need to tell the snowmakers where on the trails the snow coverage is thin. However, due to Cannon’s organizational structure, there is no formal means of communicating this information between the two departments. The staff believes that if the two departments were combined under common leadership and/or there were more formal methods of reporting trail status (e.g. a report at the end of the day), both departments would become more efficient. Similarly, the rentals and ski lesson departments at Cannon are two distinct entities. Currently at Cannon, people that are renting skis are not always asked if they would like a lesson as they are at most mountains. The staff believes that they would sell more lessons if the rental salesperson offered a lesson to the customer as he or she rented skis. The location of the two departments exacerbates the problem as the rentals are in a different building than the ski school. One recommendation from the staff was to locate the child rentals (customers that are most likely to purchase ski lessons) in the same building as the ski school to increase cross-sell between rentals and lessons. Marketing / direction of mountain When asked how Cannon Mountain could increase its profitability, most staff members mentioned marketing as a key driver. The staff seems unsure of what target audience and message Cannon is using from year-to-year. Some of the staff wondered whether Cannon Mountain should be targeting families or “hard-core” skiers. Cannon staff said again and again that Cannon was a truly unique ski area and that attribute should be reflected in the marketing message and materials. Employees who didn’t think that Cannon should be targeting families said that the mountain does not currently have the terrain or the facilities to cater to this demographic in a competitive way. The typical Cannon skier, according to the staff, is a New Hampshire native with intermediate to advanced skiing skills. The staff feels that if Cannon wants to target families, the mountain needs to modernize its lodges and build a terrain park to appeal to families with children who snowboard. Some staff members also were concerned about marketing channels. While some wondered whether Cannon should advertise more locally, other said they thought that Cannon spends too much on radio advertising and not enough on other channels. As an example, some staff mentioned that last year was Cannon’s first year of using search based internet advertising. In our recommendations section, we outline the need for a strategic vision for Cannon and a plan to articulate that vision to its employees. Currently, staff is unsure whether they should focus on customer service or focus on efficiency – doing their jobs as quickly and as cost effectively as possible. Every person with whom we spoke reiterated this point: no one was sure what the strategy of the mountain is and what can be done to enact that strategy. Cannon is one of the few government-owned ski areas in the northeast. As such, the base and surrounding areas are less commercial than other mountains. Furthermore, Cannon is set in a beautiful, undeveloped state park as opposed to other mountains which are surrounded by condominium developments and hotels. The staff feels that this non-developed, non-commercial aspect of Cannon should be a selling point. The surrounding state park could be a point of differentiation for Cannon and as such, the marketing literature should emphasize location. Capital Improvements Employees also spoke at length about old equipment and the need to make capital improvements to perform deferred maintenance. Due to budgetary constraints, Cannon has several departments which have deferred their maintenance capital improvements and the mountain will need to perform capital improvements in these areas to remain functional. These areas include snowmaking, where some of the equipment is dated, inefficient and prone to breakdowns. Cannon has to make snow even when the weather is above optimal temperatures in order to maintain trail coverage. Investing in more efficient snowmaking could reduce labor and energy costs, and improve snow coverage. The grooming department could also benefit from capital investment because it uses some older equipment that is often unreliable. Furthermore, some of the department’s dated equipment cannot traverse Cannon’s challenging terrain. Due to the steepness of the mountain, the grooming department needs new equipment to groom the trails properly. Most employees said that the lodge needs to be updated and expanded in order to attract new skiers. Several staff members commented on the fact that there were often very long lines for concessions and no room for skiers to sit down. When a skier is unable to buy a meal in the lodge, this represents lost revenue for Cannon as well as a disgruntled customer who may not return. Furthermore, the employees felt that the lodge locations were very confusing to some customers, especially first time skiers. Many of the staff felt that if the rentals, lessons and main lodge were all in one building, it would be less intimidating to new visitors. Customer Service Cannon staff believes that customer service needs to improve to increase skier visits. To accomplish this, management should outline how customer service fits into its strategic vision and incorporate specific goals for customer service into a plan to articulate that vision to employees. As previously stated, Cannon’s employees would like more direction about what kind of skier the mountain is targeting and how they should prioritize customer service in their daily activities. The staff felt the cost cutting measures implemented over the past few years have forced employees to focus on working more efficiently, thereby de-emphasizing customer service. The employees believe that if management emphasizes customer service, more new skiers will want to return to Cannon, thereby increasing overall skier visits. Some specific examples included customer service for tour groups and more customer service for novice skiers. Morale Morale among the staff members that we interviewed was low. The cuts in staffing have forced the remaining employees to work harder and have damaged staff morale. Most of the employees work very hard and fear that they will have to work even harder if there are more cuts to payroll. Also, they see that skier visits are declining and the employees are afraid that the State might close or lease the mountain. Even though morale is low, most of the workers take great pride in Cannon and want to see the mountain succeed. They are willing to work long, hard hours in order to make Cannon a successful ski mountain if they feel management is also engaged in its success.

III. COMPARABLE DISCUSSION A. Introduction In addition to comparing Cannon’s financials to other mountains using the NSAA annual data report, the team also reached out to mountain managers at a variety of northeast mountains to solicit opinions on mountain management and relevant themes to Cannon. We chose to contact mountains with one or more aspects that are similar to Cannon, or which had a market-leading position and therefore could offer some best practices. Throughout April and May, we conducted interviews with mountain managers from five ski areas: Jay Gamble at Mount Sunapee (Sunapee, NH), Doug Holler at the Dartmouth Skiway (Lyme, NH), Jay Rand at Whiteface Mountain (Lake Placid, NY), Rick Kelley at Loon Mountain (Lincoln, NH) and Greg Goddard at Gunstock Mountain (Gilford, NH). Throughout this report, input from these interviews will be referred to by the mountain name only. A record of these interviews can be found in Appendix 12. We took several factors into consideration while looking at other mountains’ similarities to Cannon, These included size, region, location, presence of a real estate base, and ownership structure. Pertinent data for these mountains can be found in the following exhibit. Ski Area Location VTF per hour Revenue Skier visits per year Comfortable carrying capacity Number of year round FTEs Number of year round marketing FTEs Cannon Franconia, NH 8,223 $3M 116,000 3,650 15 0.5 Dartmouth Skiway Lyme, NH 2,700 N/A 30,000 1,600 2 0 Whiteface Lake Placid, NY 16,000 N/A N/A N/A 30 3 Loon Lincoln, NH 11,865 $15M 343,000 6,100 93 4 Sunapee Sunapee, NH 9,682 $10M 240,000 5,200 28 3 Gunstock Gilford, NH 6,386 $7M 170,000 3,560 32 3 Size Given the scale advantages of large ski areas, one must compare Cannon to similarly sized mountains. As mentioned in Chapter II, the metric that the industry uses to compare mountain sizes is Vertical Transport Feet per hour, or VTF. Sunapee and Gunstock are both within the same range as Cannon in the NSAA report; Sunapee is slightly larger and Gunstock is slightly smaller. The Skiway is significantly smaller, with Loon and Whiteface being significantly larger. Loon is the market leader in New Hampshire. Region Given the large variations in ski mountain size, weather patterns, and customers, we chose only to compare Cannon to northeast mountains. This is consistent with industry norms, as northeastern mountains are rarely compared to those in the Midwest, Rocky Mountains, or Pacific regions. Location Given that geographical snow patterns and proximity to metro areas are big determinants of the success of a ski area, we also wanted to match Cannon’s location with those of comparable mountains. Loon is the closest comparable in this respect. It is approximately 15 miles from Cannon and thus experiences the same snowfall and is roughly the same distance from Boston. Sunapee and Gunstock are also close to Boston (Sunapee a little more so, Gunstock a little less so) and receive similar amounts of snow. Real estate base Many ski areas garner significant revenues from lodging and property management. Since Cannon is on state land and does not have a real estate base, it is important to compare it to mountains that do not have a real estate base. Of the mountains in our comparison, only Loon has a real estate base, and even they do not record operating revenue for this real estate. A local real estate base can increase profitability by attracting multi-day and vacation skiers, as they have accommodations near (or on) the mountain. Loon enjoys an advantage over Cannon in this respect. Other comparable mountains have lodging bases that are roughly equivalent to Cannon’s, which has a small number of lodging facilities in the vicinity. Ownership structure We considered Cannon’s unique ownership structure when conducting interviews. Dartmouth Skiway, Whiteface, and Gunstock are institution, state, and county owned, respectively. As such, they all face similar obstacles and benefits to Cannon and were chosen to represent how ownership structure impacts mountain management and capital use. B. Best practices and insights Overall themes In general, mountain managers pointed to two things that they must maintain to optimally run their mountain. First and foremost is the ski product, which includes the snow quality and the lift service. Customer service is second. This includes all points of contact between the skier and the mountain. Regardless of marketing strategy, lodge size, or the mountain’s proximity to the highway, a ski area must meet and exceed customer expectations of the product because skiing is a service industry. Daily management Speaking with managers, we learned that each one manages his cash flow daily. Sunapee has detailed spreadsheets that record the sales and costs incurred each day. The GM looks at these reports at the conclusion of every ski day in order to evaluate how the mountain performed and where changes can be made for the following day. Loon expects the head of each profit center to similarly examine his or her own profit and loss statement (P&L) for each day and be responsible for improvements. Decisions to manage costs are also made daily. These costs mostly pertain to the number of FTEs (Full Time Equivalent employees) required to run the mountain. While variable labor is only a small portion of costs, it can add up to considerable savings over the course of the year. The savings amount to $375K for Loon and about $900K for Gunstock over the course of the season. Most of the benefit of daily management comes from revenue maximization. Sunapee is able to design marketing programs and boost sales on specific days by targeting particular audiences. For example, Sunapee made the decision to stay open an extra week in April and marketed heavily to attract skiers. Including the cost of keeping the mountain open and additional marketing expenditure, the mountain netted a sizable profit for that week. Finally, it is noteworthy that all mountains manage their year-round business as one operation. No mountain distinguishes their summer from winter operations. Loon, Gunstock, and Whiteface all have summer operations that include operating a lift, campground, climbing wall, and banquet events. The Skiway and Sunapee only hold events. In all cases, the manager is responsible for the entire year. While they do think of summer operations as a separate profit center, they do not think of it as two separate businesses. Profitability Mountain managers have different opinions of whether a ski area in the northeast can be profitable on a consistent basis. Sunapee was in dire straits when a private lessee took over its operations from the state. Since then, the mountain has posted profits every year, ranging from barely breakeven to sizable profits. The Skiway has broken even for only a handful of years in recent history. Whiteface has earned a profit the last few years, but has not consistently done so throughout its history. Gunstock also has been in and out of the black over the last five years. Only Loon, as the market leader, is able to report consistent profitability. Loon has incurred only two losses in its last 40 years of operations, showing a unique ability to be profitable despite weather variations. Loon’s management is confident that a ski area can turn a profit consistently. All General Managers feel that a ski area can turn a profit over a multi-year period, but year to year variations due to weather make the consistency of profits more difficult to achieve. Marketing With the exception of the Skiway, all ski areas to whom we spoke had sizable investments in marketing staff. Each mountain, regardless of size, has approximately three FTEs, working year round on marketing programs. Sunapee has a director of marketing, a director of sales and special events, and a director of direct marketing, website, and materials. These positions’ salaries are $75K, $35K, and $40K respectively. Whiteface also has three FTEs in similar roles in addition to a corporate marketing department at its parent commission that provides additional resources and support. Loon has four FTEs dedicated to marketing and Gunstock, a smaller mountain than Cannon and municipally-owned, has three FTEs plus two seasonal additions. Marketing spend at the comparable mountains varies as a percentage of revenue and by the type of spend. All mountains report that radio, the traditional stalwart of ski area advertising, has been becoming a smaller percentage of the advertising budget. Marketing spend on radio ranged from 10-40%. Direct marketing, website, and e-mail spend has been increasing and is seen universally as the trend for the future. Additionally, most mountains have ways to gather information about their customers. The marketing departments conduct surveys at the mountain and on the web. They also collect information like skiers’ zip codes and e-mail addresses which helps them contact and target skiers. Mountains then use this information to cater their marketing programs to their demographics, including targeting particular segments of skiers over e-mail. Part of this includes the website itself. The website is the most important marketing device to communicate information about the mountain to potential skiers. All mountains interviewed recognized this and invested in it heavily. Some ski areas also use innovative marketing and promotions in order to maximize the number of skier visits. Gunstock has used night skiing to differentiate itself in this regard. Its night skiing program is wildly successful and it enables Gunstock to appeal to more skiers during the day as well as attract incremental skiers at night. Gunstock had 30K night skiers last year alone, signifying its importance as a revenue generator. Gunstock also introduced a morning ski pass. This allowed skiers to ski until lunchtime for a reduced price. This was also extremely successful and had a high yield since no promotional prices were offered on the pass. Loon and Sunapee also engage in innovative marketing programs, such as mid-week discounts, resident discounts, and school promotions. They are all developed and managed by the marketing team and they allow the mountains to draw in more skiers, especially during the lower traffic periods. Snowmaking Without fail, mountain managers listed snowmaking as one of the most important parts of their operation. Snowmaking is used both to form the base of their product and as a marketing tool to bring skiers to the mountain. According to Sunapee, snowmaking is a fixed expense. It is part of the core product and while it is budgeted carefully, management will willingly go over budget to make more snow in a bad natural snow year. Whiteface, Loon, and Gunstock all reported new trends in snowmaking. They all use state of the art snowmaking equipment that is capable of covering the mountain in a much shorter period of time, but only in colder temperatures. As a result, mountains no longer try to make snow at the warmer end of the temperature range because snowmaking is far less efficient. Instead, they make snow only when the temperature drops, but are able to effectively cover the trails in a shorter period of time. The result of this is oftentimes a later opening date (no longer targeting Thanksgiving), but a much more efficient snowmaking system and a better ski product. The General Managers have the ultimate discretion in go / no-go decisions for snowmaking at all times. Gunstock and Loon both report that snowmaking technology has advanced significantly, especially in the last five years. Gunstock also mentioned that a new snowmaking plant to increase capacity could cost millions of dollars (up to $10M). Each new fan gun costs $25K to $30K each, with 62 guns having been bought to cover one trail at Gunstock last year. Loon mentioned that the money invested in snowmaking has been rapidly returned to the mountain in the form of reduced energy bills. Overall, mountain managers are unanimous in recommending that Cannon update its snowmaking capabilities. However, given a lack of knowledge about the specifics of Cannon’s snowmaking today, managers were unable to provide concrete suggestions. They agree that the fundamental ski product is essential to the skier experience and skiers will not continue to come to the mountain without adequate snowmaking given the uncertainty of natural snowfall. All mountain managers plan on man-made snow to be the primary source of snow for skiers through the holiday season. Additionally, Sunapee reports making snow mid-week in the middle of the season purely to be able to market to the Boston-area skiers that Sunapee has fresh snow despite a lack of natural snowfall. Ownership structure and investment Each mountain deals with ownership oversight and investments differently. In general, there are two types of investment in ski areas. The first is maintenance capital expenditures. This is capital required for heavy maintenance and upkeep of the facilities but does not expand the capacity of the mountain. The second is expansionary capital expenditures, which expand the capacity of the mountain, whether it is parking, lifts, trails, or lodge-related. How managers obtain capital for these dual purposes depends on the ownership structure of the mountain. There are also varying amounts of oversight and discretion that is allowed by the mountain manager depending on the ownership structure. Since these aspects vary considerably by mountain, we will discuss each separately. Sunapee Sunapee is owned by the state of New Hampshire, but privately operated by Tim and Diane Mueller since 1999. They are the owners of Okemo Mountain Resort (Ludlow, VT) and the operators of both Okemo and Sunapee. At Sunapee, the Muellers employ a General Manager who has complete discretion to hire all subordinates and operate the mountain as he sees fit. During its first year of operations as a private entity, the manager set up five initiatives to improve the operation: · Capital investment: Built a high-speed lift and upgrade capacity. · Maintenance program: Major facility maintenance to bring all facilities into best condition possible. · Policy, procedures, and attitudes: Changed the attitude of the workforce by improving morale and providing a strategic direction. Ensured all employees were on board with the changes that demanded placing a premium on customer service. · Marketing message: Changed Sunapee’s marketing to make it the premier family mountain for the Boston-area and got it ranked as the #2 mountain for grooming in the eastern United States. · Accounting procedures: Developed an extensive set of Excel-based accounting spreadsheets that would allow the manager and all division heads to have a far more clear view of the financial situation for better control of operations. Due to these initiatives, Sunapee increased revenue by 40% with $4M in capital improvements (both maintenance and expansionary) during the first year of private operations. Over the first four years of private operations, Sunapee’s revenues nearly quadrupled and have since flattened. Sunapee was widely regarded to have been in the same condition in 1999 as Cannon is today: outdated infrastructure, demoralized staff, but good fundamentals of terrain and location. What allowed Sunapee to turn around was the change in ownership structure that put in the current manager and the resulting investment that fueled the growth. Still today, the owners give the manager significant latitude to operate the mountain. The manager submits an annual budget for approval, but is free to spend beyond or below the budget as he makes operating decisions on a daily basis. Only for significant expenditures does he need the approval of the owner. The owners provide maintenance capital as needed, which includes about $300K in expenditures during the summer each year just to prepare the mountain for the season. Expansion capital is requested of the owners via a detailed business plain which includes an expected ROI (return on investment) and payback timeframe. The typical payback timeframe is three to five years, with over five years deemed unacceptable. The owners select which pieces of the plan they would like to fund and provide that money as requested. The cost of capital for those funds is incurred by the mountain and appears on the operating P&L. Sunapee is a unique situation because they were operated as Cannon is by the State of New Hampshire until the leasing proposal was approved. Loon Loon is a privately owned and operated mountain. In January 2007, the owner and operator, Booth Creek, a privately held ski resort company based in Truckee, CA, closed a sale-leaseback deal whereby Loon was sold to CNL Income Properties, Inc. but leased back the operating rights. As such, Booth Creek continues to operate the mountain, but no longer owns the land. Similar to Sunapee, the General Manager is hired by the operator and has full discretion in mountain operations. The manager applies for capital from the operator and receives it based on the completion of a detailed business plan. In this particular case, Loon was the beneficiary of cash obtained during a sale lease-back and thus its current expansion (including two new lifts and a new trail area) is being completely funded by this deal. As such, Loon does not incur a cost of capital for its expansion. Whiteface Whiteface is owned and operated by the State of New York. It is administered by the Olympic Regional Development Authority (ORDA) which was established in 1982 to manage the facilities used for the 1980 Olympic Winter Games in Lake Placid, NY. It operates and maintains all facilities, including Whiteface and Gore Mountains and the Olympic Sports Complex. The Authority has a mandate to keep these facilities up to world-class competition standards. It has upgraded the bobsled and luge tracks, ski jump, and ice skating facilities over the last 20 years. ORDA has a CEO and full time, year-round staff dedicated to its mission. ORDA is supervised by a ten-member board of directors (BoD). The BoD meets four times per year and is made up of local business leaders and interested parties that are appointed by the Governor. ORDA is funded by the state legislature and receives funds annually from the state budget. Even though Whiteface generally turns a profit, ORDA loses money overall each year. The manager of Whiteface puts together a proposal for capital funding annually and submits it to ORDA. The Authority allocates its state funding to its various facilities, which includes funds for Whiteface. For example, ORDA funded a recent $10M expansion that included a new gondola and lodge expansion. Some of funds came directly from the state and some came from a bond issuance. Whiteface also has a line of credit for maintenance capital. Much of the justification for ORDA comes from the economic benefit to the local area. As such, the town of North Elba, NY (in which the village of Lake Placid is located) provides substantial tax revenue to ORDA (approximately $700K per year). The state feels strongly that the mountain should remain in state control. The state only allows state-owned facilities to be leased in ten-year agreements, dis-incenting a potential lessee (as mountain operators prefer much longer leases). The General Manager has complete discretion to run Whiteface. He can sign off on expenditures up to a certain level, and then can get approval from the ORDA CEO for any outlays above that amount. ORDA also provides administrative support. Whiteface has its own bookkeeper, but a central office handles the finances for the mountain. ORDA also has a corporate marketing department that assists in Lake Placid-regional advertising and assists in Whiteface’s marketing plans. The Authority also provides legal support and additional administrative support to Whiteface. While getting funds from the state might be a slower process than in a private arrangement, it is extremely effective and allows Whiteface to be run as a private business on a day to day basis. Gunstock Gunstock’s structure is the most comparable to Cannon’s. It has been a county owned and operated mountain since its inception. In 1959, Belknap County, NH decided they did not have the expertise to run a ski mountain. As such, Chapter 399 of the Laws of 1959 created the Gunstock Area Commission. This commission is an independent group that oversees the mountain. It is composed of five commissioners, each serving five year terms with no term limits. The commissioners are appointed by state representatives from the municipalities of Belknap County. The group is apolitical and serves as the BoD for the mountain. Given this independent management structure, the mountain has its own fiscal year, benefits for employees and policies, and can keep its surplus to reinvest in the mountain. It has no budgetary constraints related to its county ownership and hires a mountain manager that has complete discretion to run the day to day operations of the mountain. The manager is seen as an “agent” of the mission and reports to the BoD on a monthly basis, keeping them apprised of the financial status and any other areas of concern for the mountain. The Gunstock Area Commission currently has no authority to borrow money on its own. This is due to the Commission being unable to repay a $10M bond that it issued in 1985. In 1990, the mountain defaulted on the bond and the county took on the balance of the bond which was eventually paid by the taxpayers. As such, the Commission must now ask for general obligation bonds from the county for any capital improvements. In order to do this, the manager presents a detailed business plan to the commission. The commission gets feedback from a variety of sources and then eventually presents the bond proposal to the county. If approved by the county voters, a bond is issued. Additionally, the county must approve maintenance capital and cash flow loans. Gunstock funds these expenditures by drawing on a line of credit from a local bank, backed by the county. This process has worked very well. Gunstock has had the capital it needed to maintain equipment and facilities and has not defaulted on any payments. The county voters have consistently supported Gunstock and in 2003, they approved a 15-year bond for an expansion. Gunstock must account for the cost of capital on its operating profit and loss statements. Skiway The Skiway is owned by The Trustees of Dartmouth College, a non-profit educational institution in Hanover, NH. It is located wholly on land owned by the College and all facilities are owned by the College. The land was developed by the College to be the Skiway in the late 1950s. The mountain is meant to provide a benefit to the College community and the residents of the Upper Valley. It is the home of the Dartmouth Ski Team, and several local school ski programs. The Director reports into the Dean of the College office. The Director prepares a budget each year which is reviewed and approved by the Dean’s office. The Director has unofficial discretion to spend differently within that budget, but must request additional funds if he wants to spend significantly more. The Dean’s fiscal officer oversees the financials of the mountain and provides fiscal support. Since the mountain was created as a public service, the College’s expectation is that the mountain will lose about $35K per year. The Director budgets to breakeven and sets that as his goal. In order to obtain capital, the Director of the Skiway must submit a proposal to the Dean’s office. It is reviewed by the College on an annual basis and a certain amount of that proposal is approved. For example, the Director submitted a proposal for a new lift that badly needed replacing. He included the various amounts of funding that would allow him to replace different parts of the lift. In the end, the College only agreed to fund the parts of the lift that were most in need of replacement. The College does generally provide basic maintenance capital on a yearly basis. The Director is allowed to reinvest any surplus that he gains through operations. It is also noteworthy that some of the Skiway’s expansion capital has come in the form of alumni donations. The College underwent a capital campaign to raise money from alumni for a new base lodge. A lead gift by the McLane family established the fund, and the new McLane Family Lodge opened in 2000. The Skiway did not incur any of the cost of the construction of the new lodge. The Skiway does, however, incur the cost of capital for its other capital improvements. It is able to borrow at a negotiated College rate, but must account for that cost in its operating P&L. Finally, all employees of the Skiway are employees of Dartmouth College and as such are required to be paid a “living wage” and receive College benefits. As such, labor costs for the Skiway are substantially higher than they would be under a different ownership scheme. However, the Skiway needs to keep almost no administrative staff as all administrative support is provided by the College.

IV. RECOMMENDATIONS After a comparative financial analysis of Cannon Mountain’s revenues, costs, and profits, as well as a qualitative look at how Cannon’s competitors are structured, we have three recommendations for improving the profitability of Cannon’s winter operations: · Improve revenue management · Invest capital in the mountain to ensure revenue sustainability · Reorganize Cannon Mountain’s management structure Below, we address each of these recommendations, beginning with an explanation of how the recommended area is currently managed at Cannon Mountain, a comparison from a peer mountain if available, and concluding with a specific recommendation for implementation at Cannon. The recommendation is followed by a timeframe of short-term (immediate to two years), medium-term (two to five years), or long-term (more than five years), and a financial note detailing our best cost estimate. Following these recommendations, we present a series of scenarios that outline some of the changes. Appendix 13 presents an outline of recommendations and their associated timeframes and costs. B. Improve Revenue Management This is the most critical of our five recommendations. As we have repeated throughout this study, Cannon Mountain needs to triple its revenues to stay competitive with comparable mountains. Cannon Mountain can increase its revenues in two ways: · Increase skier visits · Increase revenues per skier visits. Below, we will show that if Cannon Mountain were to improve its utilization and raise its ticket prices to the northeastern average in the short term, Cannon’s revenues could increase from between $2.9M and $4.9M. Increasing skier visits Cannon needs to increase its skier visits to bring in more revenue. Currently, Cannon only utilizes 24.6% of its recently improved lift capacity, compared to the northeast average of 37.9%. If Cannon could bring its utilization up to the northeast average, Cannon would make $1.4M in additional revenue per year. How can Cannon bring more people to the mountain? Cannon needs a new strategic marketing plan that answers the following questions: · Who is a ‘Cannon’ skier? · Who are Cannon’s customers? · Why do they ski at Cannon? · How can the skiers be broken up into separate markets? · What is the revenue potential of each market? · Which market of skiers should Cannon target? · How do these target markets make decisions about where they ski? · What is Cannon’s message to those skiers and where and how does it deliver it? While Cannon Mountain’s marketing expenditures as a percent of revenue are comparable to peer mountains, we recommend that this strategic marketing plan guide the restructuring and the reallocation of the way those dollars are allocated among different media. Market research For the past three years, Cannon Mountain has done little to no market research on its customers. All of the comparable mountains with whom we spoke perform some kind of market research on a regular basis. Research ranges from on-mountain customer surveys to more sophisticated online and email-based questionnaires. We recommend that Cannon reincorporates a formal consumer-based market research program into its annual marketing budget. This market research must address whether Cannon should market itself as a skier’s mountain, a family mountain, or whether there is room for a combination of the two without confusing skiers. Should Cannon emphasize its lack of lift lines or its new family area? Can it do both? How can Cannon plan its improvements so that it can emphasize something new to skiers each year? A detailed market research plan is attached in Appendix 14.

RECOMMENDATION: Reinstitute a market research program
TIME FRAME: Short-term
FINANCIAL NOTE: Comprehensive market research programs range from $20,000 to $50,000, if contractual labor is used. We believe a fulltime marketing professional can complete the needed research at an appropriate level of detail in a short period of time. If funds are not available for either contractual or salaried labor, we would recommend working with MBA or graduate marketing students. Restructure Cannon’s marketing department If Cannon is going to increase its skier visits through marketing, it must have a full-time, on-site marketing director to develop and implement a strategic marketing plan. As we discussed in the preceding comparables section, most of the benefit of daily management comes from revenue maximization, and the mountain can maximize its revenue by using targeted marketing. During the winter ski season, the director of marketing needs to have the flexibility to make daily adjustments to the marketing strategy. Today, Cannon shares its marketing director with New Hampshire State Parks. Under this current arrangement, the marketing director can only be on-site a few days a week. In addition to an off-site marketing director, Cannon has one full-time group sales person, two seasonal season pass sales people, and two people doing guest services. In Concord, the marketing director shares a staff of two people with Cannon, both of whom work part-time on Cannon-related marketing. Every comparable mountain with whom we spoke employed a full-time, on-site marketing director. Further, every comparable mountain, with the exception of the Skiway, had at least three full-time, year-round people dedicated specifically to marketing, not including guest services. The typical marketing department structure was a director of marketing, a marketing manager with responsibility for special events and group sales, and a marketing assistant with responsibility for graphics, the website, and/or media relations. Some of the larger mountains added additional seasonal staff to help with events and other public relations. Additionally, Cannon spends more of its marketing budget on an advertising agency than the comparable mountains. Sunapee spends around 10% of its marketing budget on an advertising agency, mostly for help with branding, and did not use an agency for the first seven years of operation. Loon spends about 5% of its marketing budget on agencies, and currently only uses agencies on a project basis. Gunstock spends between $20K and $30K a year on ad agencies. While Cannon’s reliance on an advertising agency is necessary without a full-time marketing director, we believe Cannon needs to source the majority of the services provided by the agency in-house. The cost savings realized by doing this would help to fund this full-time position.

RECOMMENDATION: Restructure Cannon Mountain’s marketing department · Hire a full-time marketing director · Add additional full-time resources · Reduce reliance on the advertising agency
TIME FRAME: Short-term
FINANCIAL NOTE: Reducing reliance on the advertising agency could give Cannon an additional $15K to $25K to use toward a full-time marketing director’s salary. It is unclear whether the marketing departments of Cannon Mountain and New Hampshire State Parks could be restructured to give Cannon three full-time year-round marketing employees. If not, an additional $30K to $80K in total compensation may be necessary to give Cannon a competitive marketing department. In the reallocation section below, we recommend another way to fund one of the graphics/web positions. Reallocate marketing dollars Compared to the other mountains surveyed, Cannon over-spends on radio advertising and under-spends on internet advertising. Radio spend at comparable mountains ranged from 10% to 40% of total marketing budget. In addition, these mountains reported that investing in their website and direct marketing through e-mail is becoming an increasingly large part of their marketing plans. This kind of direct marketing requires daily fine-tuning of the message and the target audience. As we have stated above, this kind of marketing necessitates a full-time marketing director and other available staff who survey the weekly and daily revenue needs of the mountain and Cannon’s competitive position in terms of snowmaking, grooming, events, pricing, so that the marketing staff can respond accordingly. In addition, further investments in Cannon’s website will allow it to serve as a tool for inexpensive market research. Most of the mountains surveyed use their website to collect email addresses and communicate with those skiers on a regular basis. Cannon should not merely reallocate its marketing dollars according to how other mountains spend their marketing budgets. Rather, Cannon should formulate how to reallocate its marketing budget after thorough market research. Market research may reveal that Cannon skiers use different media than other skiers or reveal entirely new ways of thinking about marketing Cannon. For example, Governor Lynch suggested that Cannon consider using the state liquor stores and rest areas to sell ski tickets and advertise Cannon Mountain.

RECOMMENDATION: Reallocate marketing spending, consider web strategy
TIME FRAME: Short-term
FINANCIAL NOTE: While an additional investment in the total advertising budget will be explored in our scenarios section, a reallocation of funds does not have to include new monies. If market research backs it up, we would recommend reducing Cannon Mountain’s radio spending by 10-20% and putting the money into a web-strategy staff position. Increase revenue per skier visit In addition to increasing the number of people skiing at Cannon, the mountain also needs to increase its revenue per skier visits. Currently, Cannon’s revenues per skier visit are $16.18, compared to the northeast average of $21.60. If Cannon brings its revenue per visit up to the northeast average, it would bring in an additional $600, 000 in revenues per year. To do it, Cannon needs a new integrated pricing plan for each of its profit centers, including ticket sales, lessons, rentals, retail, nursery, and concessions. This pricing plan needs to be completed in conjunction with the market research described above to ensure that Cannon is targeting the right skiers with appropriate pricing. Though Cannon does give each of its profit centers discretion over submitting a budget each year, we recommend that the general manager and director of marketing work together throughout the year to integrate pricing recommendations and make adjustments as revenue situations dictate. We recommend that Cannon evaluates the following pricing decisions as it creates a new integrated pricing plan: · Daily Lift Tickets: Cannon increased the price of its lift tickets for the 2007-2008 season. This increase will help to bring Cannon closer to the Northeast average, but the mountain should continue to monitor its competitors closely. · Season Passes: Cannon should do a comparative analysis between the price of its season pass and how its competitors price their season passes. If Cannon’s daily ticket prices are not the root cause of the low revenue per skier visit, then multi-day or season passes may be. Specifically, Cannon should consider only offering resident rates during the week. · Buddy Pass: Anecdotally, the team heard that some skiers can now buy a Buddy Pass instead of a season pass. Cannon should investigate whether its season pass revenues are dropping as a result of the Buddy Pass, and whether its competitors offer similar pricing.

RECOMMENDATION: Create an integrated pricing plan for every profit center
TIME FRAME: Short-term
FINANCIAL NOTE: No additional funds needed. C. Invest capital Cannon has to grow its skier visits and extract more revenue during each one of those visits. But to ensure that Cannon can continue to grow its revenues year after year, critical infrastructure improvements will be necessary within the first few years of increased skier visits. We believe Cannon needs to consider investments in three general areas: · Regular maintenance · Snowmaking · Potential bottlenecks: lodge, trail hotspots, parking lots Regular Maintenance While Cannon’s ability to keep its costs low has allowed it to earn a profit in three of the last five years, its aggressive cost-cutting has forced the mountain to defer necessary maintenance on snowmaking equipment, vehicles, and lodges. Sunapee spends $300K each summer on maintenance alone.

RECOMMENDATION: Ensure that funds for regular maintenance are available
TIME FRAME: Short-term
FINANCIAL NOTE: $300,000 to $500,000 Snowmaking Although Cannon has snowmaking coverage on 158 of its 165 skiable acres, Cannon’s snow gun arsenal, including many older snow guns, limits their snowmaking crews from covering terrain as quickly as the competition. In addition to being less-labor intensive, new snow guns also save costs by being more energy efficient. An improved snowmaking system is a marketing as well as functional tool and could be used to justify ticket price increases. While a more detailed return on investment analysis is necessary before investing, we recommend that such a study be undertaken immediately and that Cannon Mountain begin to plan to invest substantially ($1M) in its snowmaking system within the next three years.

RECOMMENDATION: Perform a return on investment analysis on modernizing Cannon’s snowmaking system.
TIME FRAME: Short-term
FINANCIAL NOTE: No additional funds needed.

RECOMMENDATION: Invest in new snow guns, a computerized operating system
TIME FRAME: Medium-term
FINANCIAL NOTE: Most likely in the $0.5M to $2M range. A complete return on investment analysis is needed. Potential bottlenecks: lodge, trail hotspots, parking lots While Cannon’s skier capacity is approximately 3,650 skiers per day, its lodge capacity is well below that number. In interviews, employees put the capacity of the main base lodge at only 500 and all lodges at a capacity of under 1,000 skiers. If skier visits increase, the lodge could become a bottleneck, and as with improved snowmaking, a new lodge or expansion could be a significant marketing tool as well. Currently, there are a couple areas on Cannon’s trail network that enforce Cannon’s reputation as an icy mountain. These are usually overcrowded trail intersections that were not developed to support the number of skiers now being serviced by new lifts. As Cannon’s skier visits grow, some trail maintenance will be necessary to maintain a positive skier experience. A few days a year, Cannon’s parking lots fill up. While this is not a short-term problem, as Cannon continues to add skier visits, it may be necessary to increase the capacity of the parking lots. In the medium-term, we believe that Cannon could further increase its revenues by expanding its lodge facilities. If lodges were no longer the bottleneck (and the parking lots – able to hold 4,500 cars – became the limitation on capacity), then a new lodge would increase Cannon’s capacity from 3,650 to at least 4,500. This would increase revenues by another $1.1 million, as shown in Appendix 7, bringing Cannon’s total revenues up to over $6 million. Though $6 million is more than twice the current level of revenue being generated by Cannon, comparable mountains earned average revenues of roughly $10.8 million in the 2005-2006 ski season. We believe that it would be possible for Cannon to approach this figure over time if it were able to strengthen its reputation (leading to premium pricing), and revitalize its facilities, among other things. Though we discuss specific recommendations in more detail at the end of the paper, we believe that it is possible for Cannon to achieve revenues in line with comparable mountains over a longer time horizon.

RECOMMENDATION: Expand base lodge capacity
TIME FRAME: Medium-term
FINANCIAL NOTE: $1M range

RECOMMENDATION: Make trail bottleneck improvements
TIME FRAME: Medium-term
FINANCIAL NOTE: ($0.5M to $1M)

RECOMMENDATION: Add additional parking capacity
TIME FRAME: Long-term
FINANCIAL NOTE: Unclear

As a final note, we heard in employee interviews ideas about expanding Cannon to the old Mittersill slopes. We would recommend that Cannon not undertake any additional expansion of its lift or trail capacity until it can improve its utilization of its current lifts and trails. D. Reorganize Cannon Mountain Establish an independent authority We feel strongly that Cannon needs an independent authority that can run the mountain as a business. Given the volatility in natural snowfall and the resulting uncertainty in the ski area industry, Cannon’s best shot at consistent profitability is having a management team that can make decisions with long term sustainable profits in mind. It was this same decision that Belknap County made regarding Gunstock in 1959 and the State of New York made regarding Whiteface and Gore in 1982. Following in the footsteps of Belknap County and New York, New Hampshire should create an independent commission or authority to administer Cannon. We postulate that an ideal commission would have the following characteristics: · Five members, residents of New Hampshire, with relevant experience · Members would be appointed by the Governor and approved by Executive Council · Members would serve five-year terms with one term expiring each year to ensure consistency. There would be no term limits. · Commission would have the authority to hire the general manager · Commission would meet monthly with key Cannon personnel · Commission would have fiduciary responsibility for Cannon Mountain · All requests for capital (both working and growth) would be made through the commission and all investment would come from public bonds administered by the commission or special state grants awarded by the Legislature at the commission’s request. In such an environment, the Legislature would no longer have direct control over Cannon. All government oversight would go through the Governor and Executive Council as appointers of the commission, or through the Legislature for any state funding. This arrangement would give Cannon the independence from the state to make decisions that would benefit the mountain long-term. Additionally, there would be a separate body in charge of generating capital (bond issuances) for the mountain to ensure that it does not interfere with state funding of any other sort. This commission would also be responsible for the administration of Cannon Mountain’s summer operation. The Olympic Regional Development Authority in New York, and the Gunstock Area Commission in Belknap County, is responsible for both winter and summer operations of their facilities. The legislation for such a change already exists on the books. A bill mimicking the New Hampshire Chapter Law 399 of 1959 and its subsequent amendments that created the Gunstock Area Commission could be easily transferred to the new Franconia Notch Commission. Additionally, similar legislation went before the state in 1992 as part of discussions about the future of Sunapee and Cannon. At that time, the state decided to lease Sunapee and retain control of Cannon – essentially giving complete control over one mountain to hold onto the other. At this time, 15 years later, it is even clearer that tight control of the mountain by the legislature is in nobody’s interest. The evidence in this report overwhelmingly supports a change in organization that would not only allow quick implementation of our suggestions, but puts a management structure in place that would allow responsible and profitable management of the mountain into the future. Moving Cannon Mountain to an independent authority would affect the ski area’s relationship with Franconia Notch State Park (FNSP). Though we believe the two entities will continue to share some resources, we recommend that these resources be accounted for in a systematic way. These recommendations follow in the next section.

RECOMMENDATION: Create a Cannon Mountain Commission
TIME FRAME: Medium-term
FINANCIAL NOTE: No additional funds needed Changes to the General Manager position Since the state is currently searching for a new general manager for Cannon, we feel it is the utmost importance that the responsibilities and compensation of this role be changed immediately to most benefit Cannon. The most obvious issue with this role is compensation. In speaking with mountain managers at other mountains, it became clear that this role is severely underpaid. Rick Kelley at Loon and Greg Goddard at Gunstock both reported the salary to be “laughable”. Goddard gets paid nearly double the salary range for a mountain that is smaller in physical size (albeit more than two times larger in revenue) than Cannon. Kelley told the team that all his direct reports and most of his mid-level managers below them get paid more than the salary range. While we realize the intent of the compensation is not to cheapen the role, other mountain managers could not even come up with an idea of what capable and qualified person in New England would be willing to take on such a role at that salary. As such, we recommend raising the compensation to more competitive levels, which would be in the $100K per year range. Secondly, we want to be clear on the roles and responsibilities that would be in the sole discretion of the mountain manager. This works best when the manager reports to the independent commission, but can be applied even in today’s structure. The responsibilities of the manager should include: · Budgeting · Pricing · Hiring and firing of all mountain employees · Supervising the leaders of all divisions, including HR, operations, and marketing (yet not being the direct leader of any of those areas) · Making decisions on expenditures under $20K · Approaching the Commission (or the Commissioner of DRED) with a detailed business plan outlining capital requirements It is important for the mountain manager to have autonomy in running the mountain and have the staff and at his disposal. This will help Cannon maximize revenue and keep costs low. The establishment of a commission and the appointment of an empowered General Manager is the most effective way at providing the right kind of supervision to achieve the stated goals.

RECOMMENDATION: Increase the salary of the general manager position
TIME FRAME: Short-term
FINANCIAL NOTE: $50,000 per year Accounting policies Cannon needs to improve its bookkeeping along two dimensions. First, it needs to structure its divisions as individual profit centers. Second, it needs to better allocate costs to the appropriate profit centers, including those not part of Cannon’s winter operations or even Franconia Notch State Park at all. As seen at comparable mountains, each division manager (e.g. rentals, lessons, concessions) should have responsibility for his or her own P&L. In order to do this, records must be kept on a more frequent and detailed basis in order for each profit center manager to understand how his individual business is doing and how it can be improved. Additionally, costs must be allocated to these profit centers in a straightforward, yet accurate manner. This includes costs for electricity, depreciation of facilities, inventory and labor. Regardless of whether Cannon becomes managed by an independent authority, Cannon must initiate cost accounting procedures that allow it to account for labor and supplies that go to other operations within Franconia Notch State Park and within the general state park system.

RECOMMENDATION: Refine accounting practices to better define profit centers and allocate costs
TIME FRAME: Short-term
FINANCIAL NOTE: No additional funds needed Human resources Our final recommendations involve the morale of the staff at Cannon. We feel strongly that a new manager needs to align the employees with the direction and strategy of Cannon. Managers at other mountains have made it clear that internal communication with their employees and motivation is integral to their success, as customer service is extremely important to create a positive experience for skiers. Today, Cannon has a reputation for poor customer service. Whether or not this is justified is irrelevant. The new manager must change this impression by reinvesting in his employees to improve morale, and subsequently customer service. As part of this initiative, Cannon should consider formal incentives that would help employees meet specific goals. These can be operational, financial, or qualitative in nature (e.g. lift stoppage, profit points, or customer satisfaction surveys). The point of such a program is to formally align the employees with goals of Cannon by tying some sort of compensation or additional benefit to an explicit and measurable goal. Organizational strategies have helped other mountains, such as Sunapee and Loon, become extremely successful. The same sort of initiative would be extremely beneficial to Cannon, especially at this time of uncertainty given the lack of a General Manager and leasing proposals that are being discussed in the media.

RECOMMENDATION: Create customer service initiative to boost morale; Consider incentives.
TIME FRAME: Short-term
FINANCIAL NOTE: No additional funds needed for a morale program; Potential increase in salaries or a bonus to employees who meet certain criteria.

Scenario analyses Based on all of the above analyses, we firmly believe that Cannon’s primary problem is low revenues rather than high costs (though this does not mean that costs should be ignored). We also believe that if Cannon were to take a few lost-cost actions in the short-term, such as investing in marketing and maintenance, it could increase its revenues significantly. Earlier, when discussing our proposals to increase revenues, we showed that if Cannon ticket prices and utilization were similar to that of its comparables, its revenues would increase by over $2 million dollars.

Below, we run through a few scenarios to reinforce these points.

Scenario #1 What happens if Cannon raises per-skier ticket revenues to match comparable mountains? As shown in Appendix 15, revenues would increase by roughly $600,000. These proceeds could be used to: · Increase snowmaking spend by over 150% (or) · Increase the marketing budget by at least 200% (or) · Replace worn vehicles and take care of other deferred maintenance accounts.

Scenario #2 What happens if Cannon spends its marketing money more effectively and increases utilization to match comparable mountains? If Cannon did this and did not rationalize ticket prices, it would increase its revenues by roughly $1.2 million (the $1.4 million figure in Appendix 16 is the impact of higher utilization conditional upon higher ticket prices). These proceeds could be used to: · Invest in more efficient snowmaking equipment (and) · Increase the marketing budget (and) · Hire more full-time employees (and) · Replace worn vehicles and take care of other deferred maintenance accounts.

Scenario #3 As mentioned before, Cannon will have to invest in marketing and maintenance before it can match comparables in utilization and revenue per skier visit figures. We tried to quantitatively assess the impact of these investments by projecting out Cannon’s potential revenues and expenses for next few years.

Our analyses show that Cannon can become much more efficient at revenue maximization with very little investment. Proforma statements in Appendix 16 illustrate that even if Cannon cannot increase its utilization and revenue per skier visit figures to the level of its comparables, it can still earn a profit. We made the following assumptions in projecting out the Cannon financials. · 2008: Fix pricing system to increase revenue per skier visit, invest in marketing · 2009: Invest in maintenance. Investment in marketing and investment pays off and increases utilization. · 2010: Increase investment in maintenance. Mountain utilization increases to 33% (still below the comparables) Takeaway – Scenario analyses Cannon can begin its turnaround with minimal investment by making revenue adjustments. Over the longer-term, Cannon will be able to benefit from increased investment which we expect will earn a positive return to the operation.