Before we get to today's story, a quick recap on all the things we covered this week. On Monday we spoke about overpaid CEOs, next we saw what happens at Davos. On Wednesday we talked about fixing Corporate Social Responsibility, then we discussed windfall taxes and finally we built the case against Big Tobacco
And with that out of the way, let's get to today's story shall we?
The Story
“Hello sir/madam, we’re pleased to inform you that you have been selected to be part of a special holiday package. We’re holding an event at Hotel ABC this Sunday at 4:30 pm for select invitees to explain this offer.”
“Hold on, where are you calling from?”
“I’m calling from Club Mahindra, sir/madam”
“Okay, but what is this offer?”
“Sir/Madam, if you just pay ₹3.50 lakhs now, you’ll get free* holidays with us for the next 25 years. Please come to our event and the team will explain everything in detail to you. You also stand a chance to win a new microwave oven in our lucky draw.”
You’ve just read a typical sales pitch from a Mahindra Holidays representative. And what they’re selling is something called a timeshare — a model they have tried very hard to perfect in India over the past couple of decades. Now if you’ve never attended one of these events, you might be scratching your head wondering what on earth is a timeshare. See, companies like Mahindra Holidays build out a bunch of resorts all across India and the world. And they don’t follow the typical hotel model of taking ad-hoc bookings from vacationers. Instead, they offer a subscription model. In this case, people pay an upfront membership fee for a particular period, and in return, they can choose to holiday for 7N/8D at any of the member resorts every year without paying anything extra for accommodation.
But why would people pay so much money upfront?
Well, think of it this way. If you’re someone who takes that bare minimum 7N holiday each year, a decent hotel room is going to set you back at least ₹5,000 a night when you holiday with family. And if you do this every year for the next 25 years, you’ll shell out nearly ₹9 lakhs, even more perhaps. But that’s not the actual cost. You also have to remember that hotel rates increase every few years to keep pace with inflation. So over a period of 25 years, you could be shelling out quite a large sum of money. And that’s why Club Mahindra’s promise can be enticing — future holidays at today’s prices!
That “savings” and “immunity against inflation” sales pitch is how timeshare companies like Mahindra Holidays try to convince people to loosen their purse strings for a membership. And glitzy presentations with fabulous photos of their resorts help sell their cause.
It’s quite a brilliant model if you think about it.
Because, unlike a typical hotel, Mahindra Holidays isn’t affected as much by the vagaries of the economy. When the pandemic struck, the hotel industry was hit quite badly. Business conferences were cancelled, vacation plans were ruined, and no one knew when anything would ever restart. And in a sea of red, Mahindra Holidays stood out. They actually turned an operating profit during April-June 2020 — the worst period for the industry.
And the reason once again is simple.
That upfront membership fee. See, the company accounts for this fee over the 25-year membership period. That means, only ₹4 of every ₹100 received finds its way into the Profit and Loss Statement. The rest of the cash sits on its Balance Sheet. And it can use a part of that money to actually build out additional rooms and fund new hotels. It doesn’t need to tap the banks for more money and it can essentially remain debt-free. This is quite unlike its peers who had to borrow money heavily to survive the pandemic.
So even though Mahindra Holidays saw a drop in membership count in FY21, it was able to show an operating profit and use the cash on its books to add 465 new rooms that year. In fact, that was the highest room addition by the group ever.
And wait…the upfront membership fee is not its only stable source of income.
What if a prospective customer doesn’t want to pay upfront? Well, there’s always the 4-year EMI route. And while the first year is interest-free, Mahindra Holidays charges interest at 15% for the 2–4 year period. Nearly 20% of its 2.67 lakh members have opted for the EMI mode of payment.
Then, there’s also something else. While the sales pitches usually promise an inflation-free holiday, the fine print states that there’s an annual subscription fee starting at ₹17,000 that you’re expected to pay in addition to the upfront fee we quoted earlier. And this portion is frequently adjusted for inflation. You can imagine that this fee will only inch upwards then.
And no, there’s no way members can escape this. They have to pay up whether they holiday at the resort or not.
But wait. We haven’t even talked about other variable sources of income?
Money that comes in from F&B charges and other leisure activities — snooker table, riding an ATV at the resort and those kinds of things. And according to Mahindra Holidays, 80% of its members pay up for these too.
It all seems too good to be true, right?
Well, yeah, none of this is really new. The model has in fact been around for a while. And it's ability to generate massive wealth for shareholders is still in question. Take, for instance, Club Mahindra's share price. The company's stock hasn't moved much in the past 5 years and growth has been lacklustre.
As of March 2022, the company just has a little over 2.67 lakh members even after being in business for over 2 decades. That’s not a large number by any stretch of the imagination. And it’s quite hard to imagine this growth rate will skyrocket now. Especially since a lot of people have had pretty bad experiences with Timeshare. Just look up the number of complaints from people who haven’t been able to book rooms due to unavailability during holiday seasons. It's insane.
So clearly investors haven’t quite been gung-ho about the stock.
To change things around, Mahindra Holidays seems hellbent on using all that free cash on its books. In the words of its CEO, “You can’t grow your member base unless you add resorts.” And that’s what they have been doing. In FY20, for every room it had in inventory, it had nearly 70 members. But it has already brought down this member-to-room ratio to 58 this year. And they’re still ramping up their room additions to improve customer experience.
But for Mahindra Holiday’s timeshare to really work out, they’ll need to attract the segment where their future growth can come from — gen-z or the young millennials. That’s a tough proposition indeed because they’re a generation that prefers flexibility and new experiences above all else. And that’s one thing timeshares don’t really provide. With only 29% of new member sales to millennials in FY22, Mahindra Holidays will be hoping that its new 3-year member plan (instead of 25 years), can prove to be the silver bullet that drives its future growth.
But will it work? We will have to wait and see.
Until then…
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