DC4MS

Question: How will Destination Clubs fair during a recession?

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First of all, we are NOT officially in a recession (very funny, if you know what I mean).

However, high energy prices, weaker home values make people feel less wealthy, and a deteriorating jobs market all figure into more caution on the part of consumers. The fear is that people will clamp down on the spending and businesses will put a lid on hiring and capital investment, sending the economy into a tailspin.

"The Federal Reserve is not currently forecasting a recession," Bernanke said last week. "We are forecasting slow growth."

According to Yahoo News:
Odds are growing for economic recession - Yahoo! News

The odds have grown that the economy will slip into a recession. At the beginning of 2007, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable during 2008.

Bill Cheney, chief economist at John Hancock Financial Services, puts the odds of a recession as high as 40 percent. "There are a lot of headwinds and the economy probably has enough momentum to get through, but when things get rough, there are a lot of ways things could go wrong," Cheney said.

The last recession was in 2001, starting in March and ending in November.

LTTravel

The success of destination clubs is dependant on two factors;

1. Increased Desire for luxury vacations and

2. Increase in property values

Both of these of course are dependant on the economy.

As the desire for luxury vacations increases, more people will realize the true value of destination clubs. A friend of mine called up the Ritz Carlton in Grand Cayman to book a vacation for Easter. They needed two rooms because they have three children. The Ritz quoted them a price of $15,000 for the week for two plain garden view rooms (not including tax of course). Over Christmas, the Ritz in Grand Cayman was sold out. ER has 21 residences. There are many other examples of the incredible value of some of the residences in destination clubs. This shows the true value of destination clubs.

Though some destination club yearly dues appear high, I think that many are still functioning in the "red". The DC club model counts on increase in real estate prices for the model to work. If real estate prices do not increase, the DC model will not work. Some DC's have gotten through this with purchasing properties in desireable locations where values have not fallen and in some cases where prices continue to rise. ER is building 10 homes in Vail and they won't be completed for another year. They are probably worth 50% more than what their purchase price was and will notice an increase in value the day the units are complete. THe HCC property in Cabo has appreciated nicely despite the housing down turn. These are just a couple of examples. But if real estate prices decrease, the model will fail.

If there is a recession, hopefully it will be short and the economy will rebound and fuel the growth of the DC industry.

Kagehitokiri

bad central bank policy is the only thing that will lead to recession. unless the media somehow causes significantly more confidence problems than they already are.

only 2 markets are having issues, real estate and finance.

luxury real estate is never really affected by market forces. although maybe it is somewhat right now, because everyone except credit suisse took a hit from the US mortgage/investment problems.

HCC and UE could actually benefit, if they were aggressively looking and negotiating for deals right now at the $1MM level..

Steamboat Bill

I actually think all DCs can benefit if they buy wisely.

It is usually better to buy when everyone is selling than buy when everyone is buying.

The one thing that impresses me about all DCs is that they usually have very intelligent buying teams and seem to get good deals on most properties. It will be fun to see what properties are acquired in 2008.

Tedpilot

Interesting thread. I would imagine that someone facing a drop in resort property prices would be more inclined to put less money at risk in a DC and reap the associated benefits vs plunking a large sum for outright property ownership that could be several years before it's market value restabilizes. I understand most people buy for the long term but the pyschology of it will make them think twice.

If there is a recession I don't think it will last too long. I project a relative moment in time compared to the lifespan at which most DCs operate so I am sure that they will hold steady as a worse case scenario and ride it out.

Kagehitokiri

bill, in what markets are $3MM properties not selling normally?

MAYBE prime location on manhattan?

dcsales

What basis do you use to say that DCs have intelligent buying teams? I'm not saying SOME don't, but to whom do you refer?

Kagehitokiri

i liked what nick (CEO of DHH) had to say on TUG, re property acquisitions.

lusso and ciel seem(ed) like the best average/overall to me personally.

my value/design focus would make it "unintelligent" to really cater to me, because its likely contrary to the mass market.

LTTravel

Also ER buys or develops in bulk, getting very good prices.

Steamboat Bill

Luxury shoppers feeling pinch, too, study finds

By Jaclyn Giovis
South Florida Sun-Sentinel

January 16, 2008

NEW YORK - Shoppers who typically aren't afraid to drop some serious cash on the latest, must-have designer handbag are thinking twice about such purchases, results of a luxury consumer study released Tuesday shows.

High gas prices and burdensome mortgage payments are weighing down consumer confidence and affecting the buying habits of affluent consumers who are often immune to such woes, according to findings of a recent BIGresearch study. Data from the study, commissioned by American Express, were presented Tuesday at the National Retail Federation's annual convention and expo.

"People are feeling the pinch," said Kim Rayburn, senior vice president of marketing for BIGresearch.

The national survey found that 46.9 percent of females with household incomes higher than $100,000 say they have become more practical and realistic in their purchases in the last six months. It also showed that 48.9 percent of those women are focusing more on necessities than what they personally desire.

The study's data are not broken out by region, but its findings still resonate in South Florida. The region has long been a gem for luxury retailers and consumers, who lately have begun to feel the pressure of a tough economy.

Sabrina Barndollar, 41, a fashion-conscious hairdresser who lives in west Lake Worth, said she's seen her salon business drop by about one-third in recent months. As a result, she's cut back her own spending by dining out less and buying fewer goods at luxury shops.

"I'm trying to avoid the luxury stores," she said, as she entered Town Center mall at Boca Raton. "I'm looking for the sales."

Barndollar said she likes to indulge on Escada clothes and Victor & Roth perfumes. But this past Christmas, she avoided the high-end boutiques and did almost all her shopping on the Internet. "I got the best prices, with no shipping or taxes," Barndollar said.

It's shoppers like Barndollar who are cutting back spending and making fewer trips to the mall that could make 2008 a difficult year for luxury merchants, analysts say.

"People will not want to be obvious spenders," said Cynthia Cohen, president of Miami-based Strategic Mindshare, a national retail consulting firm.

Even the super-wealthy and often flashy South Floridians will be more cautious going into 2008, because "psychologically, it will appear crass and unfeeling" to drop obscene amounts on the designer goods, Cohen said.

Some retailers with stores in South Florida malls have already noticed a shift in the attitudes of luxury consumers.

"We're seeing that retail in Florida is tough right now," said Bill McComb, CEO of Liz Claiborne Inc., which owns brands such as Juicy Couture, Kate Spade and Lucky Brand jeans.

Consumers are becoming much choosier about what they buy, giving weight to certain items and not others, McComb said, adding that accessory shopping still is "a real sweet spot."

Other luxury retailers are hesitant to talk about the coming challenges, but say that South Florida's sales might fare better than other areas of the country because of the influx of European tourists.

"That's the kind of thing that can insulate an area from economic pressures," said Janet Carr, Coach's senior vice president of strategy and consumer insight.

Kagehitokiri

IMHO aspirational shoppers are not really "luxury shoppers".

perhaps HCC/DHH have some aspirational members, but i cant see many joining other clubs..

DC4MS

Luxury Retail Feels the Credit Crunch

Luxury Retail Feels the Credit Crunch - Yahoo! News

By Pallavi Gogoi
January 18, 2008

Is the "mass luxury movement" dead?

It certainly looks that way. Executives at luxury retailers such as Saks (sks.), and high-end brands ranging from Coach (coh.) to Karl Lagerfeld, are bemoaning the disappearance of free-spending shoppers. "You're seeing more pressure on that aspirational luxury consumer at our entry-price points," says Steve Sadove, chief executive officer at Saks. The New York luxury department store reported that sales at stores open for a year or more slowed to a miniscule 0.8% gain in December, compared with a 25.7% increase in the previous month.

"Entry prices" are, of course, a relative concept for outfits like these. Still, in the last few years, many retailers had posted phenomenal growth rates thanks to middle-income shoppers who were able to trade up in an era of easy money. Gas was cheap, as was credit. And there was a ton of cash left over after taking out home equity loans or refinancing mortgages. With more green in their pockets than ever before, consumers ratcheted up their tastes accordingly and bought goods from designer and luxury-brand names that previously were reserved for the rich.

Luxury companies responded by offering new categories of goods that the not-quite-ber wealthy could afford, effectively transforming prestige goods into what some called "masstige." Coach started offering handbags for as low as $148 and key chains starting at $28, compared to about $1,200 for a higher-end leather bag. Better-known haute couture designers like Stella McCartney, Roberto Cavalli, and Lagerfeld designed pieces for mass retailer H&M (CDNX:HMB.V - News) that sold out in hours. Discount chain Target (tgt.) signed up high-end names like Isaac Mizrahi, Cynthia Rowley, and Liz Lange to its stable of designers. Department stores like Nordstrom (jwn.) touted their affordable luxury offerings. H&M's sales slowed down in November, while Target's same-store sales in December fell 5% as shoppers spurned its higher-margin apparel and home offerings, both of which attract the most designers.

Consumers Rein in Spending

But today, that same middle-income shopper is under immense pressure. Gas isn't cheap anymore, credit is hard to come by, and many of the same people who rode the housing bubble now see their monthly mortgage payments jumping while home values plunge. It makes for a nervous consumer who doesn't exactly feel like treating herself. "There has to be some rethinking from luxury retailers right now, because the lower end of the high-end market has evaporated," says Brian Bethune, an economist at financial analysis firm Global Insight.

Take Tricia Ehrlich, a 38-year-old mother of three in East Setauket, N.Y., who runs her own online boutique. Ehrlich has a soft spot for classy jackets and matching shoes; in November, she spent $300 on a Perry Ellis black shearling textured jacket and bought a black suede Coach bag for $250. But Ehrlich has shelved plans to make a purchase this winter. "I'll probably hold off until spring. We spent a lot on refurbishing our house last year, and I know we're not going to reap the benefit of that, so the last thing I need right now is another jacket," says Ehrlich.

Retailers Revise Projections

That's not too surprising, given the headlines a middle-income consumer faces every day, says Michael Silverstein, a managing director at Boston Consulting Group and author of Trading Up: The New American Luxury. "She hears that banks have tightened their lending and listens on CNBC that credit markets are intense, so she's going to be careful with her money and look for value," Silverstein says.

Coach saw its eight-year growth streak come to a screeching halt during the holiday season. It recently took the highly unusual step of issuing discount coupons to drum up sales. CEO Lew Frankfort says that the 20% annual growth in handbags since the second half of 2003 has ended. He's dialed down growth expectations accordingly. "Our assumptions going forward are built upon 5% growth," says Frankfort. Sales of Nordstrom's more affordable brands, "Point of View" and "Narrative," faltered, and prices had to be marked down. At Nordstrom stores that had been open at least a year, sales fell 4% in December as compared with the same period a year earlier, after an 8.7% increase in November.

A tougher question faces luxury companies, however: Will the trade-up customers come back? The answer isn't clear. Consumers are in a state of flux, and are hard to read. Trudy Sullivan, CEO of upscale women's apparel chain Talbots (tlb.), said her core affluent customer is demanding more classic clothes and "wants us to be serious." Yet the slightly younger, less affluent customer who had been dropping in once in a while is in a "show-me stage," and "wants us to be somebody else." Sullivan's solution? She has posted winning Talbots styles from the past 60 years in a room at the company's Hingham (Mass.) headquarters. She's hoping those classic campaigns will give her inspiration in a time of great uncertainty.

Kagehitokiri

pretty much, but just for the moment.

ELITE TRAVELER

Sherpa

Just came across an interesting report from Ernst & Young with their view of 2008 trends in the hospitality sector. They ended their piece on fractionals, destination clubs and condo hotels with:

"In summary while the various second home hybrids are expected to be tested by a softening US housing market in 2008, the underlying fundamentals of the baby-boomer generation - their upcoming wealth transfer and the time to enjoy it - will lead to continued growth and metamorphosis of the sector."

We've done the Sherpa take at Ernst & Young Forecasts for Destination Clubs & Fractionals - SherpaReport


Cheers

__________________
Sherpa
www.SherpaReport.com

DC4MS

Ernst & Young offers top ten U.S. hospitality trends - Good Hotel News Amid Uncertain Economic News In 2008

Monday January 28, 7:00 am ET

LOS ANGELES, Jan. 28 /PRNewswire/ -- The credit crunch, a weak US dollar, new construction, green building, globalization and rapidly shifting US demographics are all factors that will shape the US hospitality sector in 2008, according to a report released today at the Americas Lodging Investment Summit (ALIS) by Ernst & Young.

"Conventional wisdom might suggest that the US hospitality sector is likely to suffer if we head into a recession, but the unique fundamentals of the hotel industry over the last few years suggest otherwise," said Michael Fishbin, Hospitality & Leisure practice Director for Ernst & Young US.

Fishbin points to a supply growth slowdown prior to last year's correction in the debt markets as contributing to the positive cycle in the hotel sector. "With the financing tap essentially turned off for a few months and underwriting terms changing dramatically, there will be less new construction in the next two to three years than originally planned," said Fishbin. "Essentially, supply will continue to maintain a balance with demand."

The report points to globalization as another major influence on growth in the hospitality sector. The weak US dollar is attracting capital into the US hotel sector from a variety of sources including sovereign wealth funds, which is the new major player in world finance. At the same time, US hotel operators and investors are looking to Europe and Asia in search of new opportunities. Based on recent survey research of hospitality industry leaders, Ernst & Young expects to see more international investment from major US hotel companies in the near- to mid-term, and this may include new US entrants to the international hotel scene beyond those already operating internationally.

Other trends outlined in the report include:

Continued growth in the condo hotel/destination club sector as more Baby Boomers seek second home options in the US and abroad;

A proliferation of 'green' hotels as construction premiums for green building designs and shortened cost recovery times encourage developers to pursue sustainable properties.

Further emphasis on branding both at the tourist level (by cities and regions) and the property level (by operators) as companies look to gain marketshare - and increase the bottom line - in a much more competitive marketplace.

To view or download a complete version of Ernst & Young's Top 10 Thoughts on the Hospitality Sector in 2008, visit Assurance, risk, tax, transaction, and finance services for real estate companies.

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