CAPE BRETON CHALETS

For privacy, we're going to locate four chalets over there, away from the other 16 ... the heated swimming pool will be located right here ... the main administration building will be up there, on the way to the highway ... down there, just below those two white pine trees, will be the constructed sandy beach leading to the dock.

And so it went for the better part of an hour as David O'Brien, a successful 35 year old, Port Hawkesbury, Nova Scotia lawyer, enthusiastically guided friends on a tour of the site of his proposed Cape Breton Chalets. Although it was already December, 1988, O'Brien's dream and objective was to have a 20 unit, upscale, housekeeping cabin (chalet) complex occupy the site ready for business by June 30, 1989. Later that evening, at work in his basement office, Mr. O'Brien reflected on plans developed so far for Cape Breton Chalets and began to examine the marketplace and competitive data he had obtained recently. The data would help him get a good fix on both likely revenue and on the marketing activities necessary to turn potential business into satisfied customers. In turn, if his revenue projections and proposed marketing activities showed promise, they would form a significant component of the business plan for Cape Breton Chalets.

Cape Breton Chalets: The Concept and The Location

The proposed development would be located on Highway 19, on The Ceilidh (pronounced kay-lee, Gaelic for gathering) Trail, at Troy, Cape Breton. The site was about one kilometer north of The Canso Causeway, the sole link between mainland Nova Scotia (pop. 716,000) and the province's famous Cape Breton Island (pop. 167,000). The site was also just north of the Cape Breton communities of Port Hastings and Port Hawkesbury. These communities provided grocery and other shopping opportunities and had a small, but underutilized, modern airport. Nova Scotia's best trout and salmon fishing and big game hunting areas were about an hour away. Three popular downhill ski areas were between one and two hours away. A map of Cape Breton Island is shown in Exhibit 1.


This case was prepared by Professor Ian Spencer at St. Francis Xavier University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright © 1991, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.


Mr. O'Brien held an option to purchase 16 hectares (40 acres) of land with 1,000 meters of ocean frontage along the northern end of the Strait of Canso. All frontage was protected by a natural breakwater about 50 meters from shore. The breakwater, which ended a few hundred meters north of the property, provided easy access to the Strait of Canso, George's Bay, and the open ocean beyond. Highway 19 bisected the property such that eight hectares, sloped gently westward down to the water and eight hectares rose above the highway to the east. The land supported a good mix of mature hardwood and softwood and had a small stream along its northern boundary.

O'Brien had sketched a tentative site plan for Cape Breton Chalets (Exhibit 2), as well as a floor plan and exterior views of a typical chalet. He also proposed a sign for the entrance to the complex (Exhibit 3). As he envisioned it, the complex would contain ten guest buildings. Each building would contain two identical chalets separated by a concrete block fire wall, giving a total of twenty units. A separate main building would house the registration area, a small office, a lounge/meeting room, a storage area, a laundry room, washrooms and a large, exterior deck. The lounge/meeting room would accommodate groups of 50-60 or could be divided into two rooms each accommodating 25-30. Other proposed facilities were a swimming pool, a tennis court, a constructed sandy beach, a T-shaped floating dock, hiking/cross country ski trails, a children's play area and a large, open common area.

Cape Breton Chalets also would offer various in-house and contracted services. One proposed in-house service was equipment rentals (canoes, boats, windsurfers, gas barbeques, VCR's, Nintendos and cross country skis). Another was a program of family oriented activities and events such as hikes, volleyball, lawn darts, horseshoes, and water activities. A third was a program of organized day trips to working farms, local historic villages, lobster and clam processors, or wildlife sanctuaries. A fourth was a child minding service. Contracted services would include deep sea fishing and tour boat charters leaving from the on-site dock, and a fishing and hunting guide service. O'Brien had already identified and spoken to possible contractors and found them to be quite receptive.

Each chalet would be a fully furnished, seven by nine meter, semi-detached small home. It would have two bedrooms, a living room, a kitchen, a three piece bathroom, a small storage area, and a front deck three meters wide. The living room would have a brick fireplace and offer a view of the shoreline and ocean beyond. The kitchen would contain a double sink, a fridge/freezer, a stove, and a table and chairs for up to eight people. Each chalet would be air conditioned, and electrically heated, and would be accessible from either the front or the rear. For efficiency, each chalet could be "closed" or "opened" on very short notice.

O'Brien felt it was important to include the words "Cape Breton" in the name of the development. He reasoned that for many visitors--whether they visited The Cabot Trail, Fortress Louisbourg, The Alexander Graham Bell Museum, The Glace Bay Miners' Museum, or some other attractions--the primary destination was Cape Breton Island. He felt the proposed name would have a strong appeal to these vacationers.

According to the Department of Tourism and Culture, tourism in Cape Breton had generated total revenue of $161 million in 1987 an increase of $11 million over 1986. As well, room nights rented were up almost 13%. O'Brien wanted to be a part of this large and growing sector of the Cape Breton economy.

The word "chalet", meaning any low-roofed, wide-eaved small home, had been suggested to reinforce the rustic, upscale image of the development. O'Brien believed traditional descriptives such as "cabins", "cottages", "units" and "bungalows" tended to convey a downscale "worn linoleum, broken screen door" image.

O'Brien had created a tentative slogan, "Naturally Yours." If adopted, the slogan would be an integral part of all advertising, signage and correspondence. He wanted Cape Breton Chalets to be well-organized and well-groomed (lawns, shrubs, flowers, trails) but not imposing. He also wanted Cape Breton Chalets to be a safe, friendly family-oriented place with lots to do. In time he wanted Cape Breton Chalets to become a destination--a place worth coming to because it offered a wide range of services and amenities at competitive prices.

Financing and Managing The Venture

Mr. O'Brien's accountant, Hugh MacDonald, had tentatively estimated the investment necessary to open Cape Breton Chalets to be about $1.1 million. Using his knowledge of the hospitality industry and quotations from suppliers, Mr. MacDonald had identified the following capital items:

Land $ 55,000 Swimming pool $ 35,000
Improvements (grading, Tennis court 20,000
     roadways, landscaping, T-Shaped dock 20,000
     beach area) 63,000 Rental equipment 20,000
Chalet buildings 680,000 Trails development 5,000
Main registration bldg. 70,000 Signs + pre-opening
Furniture & fixtures 100,000      advertising1 15,000

 

The plan was to obtain financing from owner's equity, a commercial mortgage, and the Atlantic Canada Opportunities Agency (Enterprise Cape Breton), a regional development funding agency. Equity of $219,000, an amount equal to 20 percent of the capital cost of project, would be required to supplement long term debt (a mortgage of $251,000) and an ACOA/ECB grant of $623,000, an amount equal to 60% of the total investment excluding land. Under its Action Program, ACOA/ECB also would be able to buy down the interest rate on the mortgage by six percentage points from about 14 percent to about eight percent.

O'Brien was confident that personal savings and investments by family and a few close friends would generate the necessary equity of $219,000. A well written, well reasoned business plan demonstrating commercial viability would be required to obtain debt capital and government grants. O'Brien was aware of other projects in Cape Breton which had received assistance from ACOA/ECB similar to the assistance he was seeking. In fact, he had heard that one tourism operator had received substantial assistance on the basis of a few hand-written pages. He believed a favourable response from ACOA/ECB would be sufficient to obtain the needed bank financing.

1Signage, both on-site and off, had been estimated at $8,500, and pre-opening advertising (20,000 brochures, including artwork and photography, letterhead, telephone and travel) at $6,500.

2Cape Breton Chalets could claim only 40% of the total estimated depreciation of $50,000 because 60% of the initial investment would come from an ACOA/ECB grant. The $20,000 depreciation figure thus is really "net depreciation allowed".

Mr. MacDonald also had produced preliminary first year operating expense estimates, including depreciation, of $115,100:

 

Wages and benefits $53,000 Heat, lights, water $ 6,500
Office and postage 1,000 Doubtful accounts 200
Telephone 2,000 Vehicle operation & travel 2,500
Bank charges & interest 1,000 Professional fees 2,000
Insurance 5,000 Advertising 10,000
Dues, fees, licenses 200 Commissions (to Check Inns) 700
Supplies (chalets) 1,500 Property Tax 8,000
Repairs & maintenance 1,500 Depreciation2 20,000

 

The above estimates did not include mortgage payments, which were expected to be about $25,000 per year for principal and interest. In developing the above estimates, Mr. MacDonald reasoned that Cape Breton Chalets, with about six percent of Cape Breton's housekeeping units, would capture about six percent of the market. Thus, he calculated first year revenue to be about $112,000 (roughly 1600 cabin nights at an average of $70. per cabin per night). For wages and benefits he had allowed for a manager at about $25,000 per year and an average of two staff persons who would provide cleaning, maintenance, and recreational and minor administrative services for about $12,000 each per year. It was Mr. MacDonald's opinion that modest reductions in advertising and professional fees in years two and three would not offset increases in other operating expense items. Thus, he made a preliminary estimate of a 5% increase in operating expenses for each of years two and three.

Mr. O'Brien expected to devote most of his time to the Cape Breton Chalets project until it opened in late June. Once open, he planned to devote three long days each week to the venture. He saw his role as helping to implement advertising plans, selling the complex to prospective commercial and family users, and working with his manager to ensure smooth operations. The manager and staff would be responsible for the day-to-day running of Cape Breton Chalets. O'Brien did not expect to draw a salary or to take any dividends from the business for at least the first three years.

The Consumer Market

With assistance from The Department of Tourism and Culture, the toll booth supervisor at The Canso Causeway, and The Department of Lands and Forests, Mr. O'Brien had obtained various statistics. He hoped the information would help him quantify the volume, seasonality, and type of visitors entering Nova Scotia (Exhibit 4), and Cape Breton (Exhibit 5), and assess the potential of the shoulder season hunting and fishing markets (Exhibit 6).

Although he had not analyzed this information in depth, O'Brien believed Cape Breton Chalets probably should attempt to attract four distinct groups of vacationers: the extended holiday vacationer, the special holiday week/weekend vacationer, the weekend get-away vacationer and sports fishing and hunting vacationers. He saw the extended holiday vacationer as being essentially a July and August traveller with some potential in June and September. He thought this market would consist of families, couples travelling alone, and non-family parties. He also thought it would include travellers with well planned itineraries as well as those with largely ad hoc itineraries.

Holiday weeks and weekends that seemed to offer consumer market potential were New Year's Weekend, University Break Weeks (roughly the last two weeks in February and the first week in March), public school March Break Week, Easter Weekend, Victoria Day Weekend, Labour Day Weekend, Thanksgiving Weekend and Christmas Week. O'Brien felt these weeks and weekends should attract guests primarily from Nova Scotia but also some from New Brunswick, Prince Edward Island and possibly Newfoundland. O'Brien also believed that any weekend, in addition to those designated as holiday weekends, offered couples, families and non-family vacationers the chance to depart from their routines and indulge in their favourite outdoor or indoor activities.

The fourth segment of the consumer market was the sports fishing and hunting market. Sports fishers, who vacationed primarily from April to June but also from July to October, considered the rivers of Cape Breton to be among the best in the Province for trout and salmon. Hunters, who vacationed primarily in October and November, likewise considered the highlands and backwoods of Cape Breton to be excellent, particularly for big game. O'Brien hoped the data would confirm that there was adequate potential in these shoulder season markets.

In addition to the market data shown in Exhibits 4 to 6, O'Brien had obtained a copy of a tourist study conducted by marketing students at the University College of Cape Breton (UCCB). He had also interviewed the owner of a large, Cape Breton housekeeping complex, who corroborated the UCCB data. During the summer of 1985, the students had interviewed 967 visitors to Cape Breton at 18 sites around the island. They found these tourists came from mainland Nova Scotia (15%), the rest of Canada (45%), the U.S.A. (40%), and other countries (less than 1%). The primary lodging of these visitors while on Cape Breton included hotels and motels (33%), cabins and cottages (3%), tourist homes/bed and breakfasts (3%), campgrounds (39%), friends and relatives (18%), and other/not specified (4%).

The study isolated the three percent of visitors who tended to stay in cabins and cottages and determined that about 40 percent were from mainland Nova Scotia or New Brunswick, about 40 percent had children with them, and about 30 percent had family incomes above $50,000. In the accommodations where they spent the greatest part of their time in Cape Breton, these visitors averaged a five night stay.

Although he knew Mr. O'Brien's intentions, the owner of the large Cape Breton housekeeping complex revealed that about 20 percent of his visitors were from Nova Scotia, 40 percent had children with them, 40 percent had stayed there before, 50 percent intended to return and the average length of stay was four nights. In 1988, with little active marketing, this operator had averaged 60 percent occupancy for the 13 weeks mid-June to mid-September.

Commercial Customers

Commercial customers represented a secondary market for Cape Breton Chalets. Bus tour groups, organizations hosting meetings and small conferences in the Port Hawkesbury/Port Hastings area, and any other groups coming to the Strait of Canso for a specific event or activity all were potential customers. Cape Breton Chalets could offer any of these visitors a unique, rustic setting for a meeting, conference, or group overnight stay. Knowing that over 1,000 tour buses entered Cape Breton each year, and having obtained a list of all tour bus operators coming to Nova Scotia, Mr. O'Brien was confident Cape Breton Chalets would be able to attract at least a few tour groups each season. Because he realized the lack of a central dining facility would be viewed as a problem for many tour operators, Mr. O'Brien wondered whether contracting with a caterer to prepare and serve the occasional meal in the central building meeting room would suffice. He also thought that stocking bus tour guests' refrigerators and cupboards with provisions--at cost plus a modest fee--might be another solution. He realized, too, that bus tour organizers tended to like packages of activities and wondered how he might satisfy these needs.

Although figures on market size were not available, O'Brien knew that many organizations held meetings and small conferences in the Strait Area. These included education, health care, social service, community, labour, business and government groups. As well, throughout the year, many tournaments, cultural events and family activities like weddings drew visitors to the area. O'Brien believed he could identify many of the meeting and conference planners as well as the sponsors of key events, and personally solicit their business. As with bus tours, any group could have catered meals or guests' refrigerators stocked with predetermined items.

The Competitive Environment

Mr. O'Brien used the 1988 Nova Scotia Travel Guide, the 1987 Statistical Review of Tourism in Nova Scotia and his own knowledge of Cape Breton to assemble preliminary information on his competition and to estimate the size of the housekeeping unit market. Occupancy rate data are presented in Exhibit 7. An overview of the competitive situation is presented in Exhibits 8 and 9.

A scan of the data suggested that most housekeeping cabin complexes were quite small and essentially provided just the cabins. Only a few complexes (Dundee, Inverness Beach Village, Whale Cove Summer Village, Cape Breton Highlands Bungalows, and The Silver Dart Lodge) provided a variety of amenities and seemed to cater to a more upscale vacationer. The data seemed to support O'Brien's long-held belief that most housekeeping cabin complexes were not actively marketed. Having travelled Cape Breton extensively, he believed many operators tended to open only for the peak season and obtained most of their business simply because the summertime volume of vacationers was so great. He felt many housekeeping operations were run as seasonal hobbies with little regard to volume, profit, repeat business, or visitor satisfaction. Few operations were market sensitive, professionally managed or open year round. Even fewer offered a variety of well organized activities and amenities. It came as no surprise to O'Brien that the occupancy rates and dollar volume of Cape Breton's housekeeping complexes were low.

David O'Brien's Deskwork

As he scanned the available data he realized many people would see only the problems. He also saw these problems, but he saw what most people did not: that an upscale, family-oriented chalet development could fill a void in the Cape Breton hospitality industry if it were open year round and actively marketed to specific segments. With raw data scattered all over his desk and onto the floor, Mr. O'Brien began his analysis. He needed to determine whether his initial impressions of the size and nature of the market and competition were accurate, and whether Mr. MacDonald's preliminary projections were reasonable. Then he needed to set marketing objectives and strategies to turn these impressions and projections into reality.


Exhibit 1

Cape Breton Island

exh104.jpg (20620 bytes)

Exhibit 2

Proposed Site Plan: Cape Breton Chalets

exh105.jpg (36779 bytes)

Exhibit 3

Proposed Chalet Exterior, Interior and Main Entrance Sign

exh106.jpg (30148 bytes)

Exhibit 4

Overnight Non-Resident Travellers (Person Volume)
into Nova Scotia, 1987
- By Type of Vehicle1, By Month, By Country of Origin -

exh107.jpg (47538 bytes)

1 This exhibit excludes the 240,000 visitors who arrived by air between May and October because no breakdown of these visitors was available. The Department of Tourism and Culture had determined the following average number of persons per vehicle:passenger cars = 2.53, recreational vehicles = 2.68, and motorcoaches = 38.70.

Source: Nova Scotia Department of Tourism and Culture, Statistical Review, 1987.

Exhibit 5

Average Weekly Volume
Canso Causeway Traffic into Cape Breton, 1988
- By Vehicle Classification1 For Each 4 Week Period -

exh108.jpg (45458 bytes)

1 "$1.50 vehicles" are under 2,700 kg and include all cars and 1/2 ton trucks; "$2.20 vehicles" are 2,700 kg to 21,800 kg and include buses, vans, R.V.'s, motor homes and mid-sized trucks; "$4.00 vehicles" are over 21,800 kgs and include large transfer trucks (18 wheelers) plus pulp trucks.
2 Tokens were purchased by most frequent users at substantial discounts from the one time only cash fares. For example, passenger cars could obtain 20 tokens for $5.00.

Source: Nova Scotia Department of Transportation and Communication (Canso Causeway Supervisor's Files).

Exhibit 6

Fishing and Hunting Licenses Issued in Nova Scotia1
(,000)

exh109.jpg (42918 bytes)

1 The Department of Lands and Forests generated statistics only on the type of license issued and the county in which it was issued. No systematic data existed to determine where or whether a licensee fished/hunted or the name and address of each licensee.
2 Cape Breton figures are part of the total Nova Scotia figures.

Source: Nova Scotia Department of Lands and Forests Records.

Exhibit 7

Room Sales and Occupancy Rates, 1987
Nova Scotia Bed and Breakfast,
Tourist Homes, and Housekeeping Cabins1

exh110.jpg (42839 bytes)

1 In total in 1987, fixed roof accommodations in Nova Scotia reported 2,017,000 room-nights rented with 388,500 of these on Cape Breton Island divided as follows: motel rooms = 271,600 room-nights (a 58% occupancy level); hotel room-nights 89,700 (a 49% occupancy level); and bed and breakfasts/tourist homes/housekeeping cabins = 27,251 room-nights (a 36% occupancy level).
2 Only regions with 6 or more establishments reporting their results were included in the original statistical report for any given month. Total number of regions equals 10.
3 The 27,251 room sales were further estimated to be comprised of about 19,000 housekeeping cabin nights and about 8,000 bed and breakfast and tourist home nights.

Source: Nova Scotia Department of Tourism and Culture, Statistical Review, 1987.

Exhibit 8

Housekeeping Cabins and Cottages in Cape Breton1

exh111.jpg (57162 bytes)

exh112.jpg (43084 bytes)

 

1 This table does not include the 70 Cape Breton cabins without housekeeping privileges or the 43 housekeeping units which were motel rooms and not cabins.

Source: Nova Scotia Travel Guide, 1988, Produced by The Department of Tourism and Culture.

Exhibit 9

Fixed Roof Accommodations on Cape Breton Island, 1988

exh113.jpg (45748 bytes)

Source: Nova Scotia Travel Guide, 1988, Produced by The Department of Tourism and Culture.