Desties

The luxury travel industry came to a bumpy finish in 2008, as falling real estate prices and waning interest — and ability — to invest six-figure deposits in superior vacation experiences left their marks.

Rather than look back at the year that was, let’s take a look at how 2009 will play itself out. I have a few predictions. Let me know what you think.

1. Consolidation will continue, at the hand of the hospitality giants

It’s inevitable. The shakeout of weaker clubs started last year and will continue until either the economy improves or just the self-sustaining operators are left. This is the kind of environment that is ripe for sector consolidation, but who will do the buying when the credit markets are tight? By the end of the year, you will see the fractional and interval giants like Ritz-Carlton, Marriott, and Disney swooping in. They want into this sector, and it’s going to be a lot cheaper to buy an established club with a dedicated member base to learn the industry from the inside out than to start from scratch. 

2. Deposit hikes are history, for now

Remember the days when fast-growing clubs would hike their initial deposit fees to shake potential members off the fences they were straddling? That is unlikely to happen in the near-term. Clubs will simply move to temporary promotional incentives or offer to grandfather new members in with old perks as a way to rattle observers into action.

3. The 3-to-1 member redemption ratio will be toast 

During its glory days — circa anything leading up to the summer of 2008 — clubs could get away by offering to redeem exiting members on the resignation list once three new members signed up. That won’t work on either end these days. Resignations are likely to pile up in a recession. New memberships will be harder to come by. Some clubs have supposedly been quietly implementing a 1-in, 1-out plan to help clear up the bottleneck at the exit turnstile. Now that clubs are shoring up their annual fees and slashing expenses to be self-sustaining enterprises, it makes sense that the new member to resignation ratio go to 2-in, 1-out, or even 1-in, 1-out.

4. More clubs will follow Ultimate Escape’s lead in creating luxury hotel and resort partnerships

Cutting overhead will mean increasing the member-to-property ratio. The solution to avoiding frustrating availability levels will be deals where clubs broker great rates to have members exchange their plan nights at third party destinations. The entire luxury travel industry is smarting, so everyone wins in that scenario. Clubs will also ramp up the use of seasonal rentals for peak travel periods.

5. There will be more failures, but the industry will close out 2009 stronger than it started

There will be more failures in the industry. Some will get scooped up by larger players, while others will not. However, real estate prices should stabilize by year’s end. This doesn’t mean that prices will head higher. That aspect of the DC model is toast for at least several more years. However, new memberships will begin trickling in once the dust settles and bigger names move in to validate the industry while educating the country on the concept. Larger clubs will introduce concepts like club-financing at attractive rates, broadening the reach of the market. It will be a bumpy 2009, but it will be worth it in the end.

Again, these are just predictions. If I’m way off on some — or all — of these, blame my crystal ball.

During a teleconference for Ultimate Escapes members last month, the final slides in the prepared statements before the Q&A broke out were on smart home technology. Ultimate Escapes is no stranger to high-tech gadgetry. Most of its homes have Wi-Fi routers, entertainment centers controlled by Logitech Harmony controllers, and Xbox 360 video game consoles. Many homes have actual computers, full-house audio systems, and loaded iPods. The club is even stocking some of its homes with Amazon Kindle e-book readers.

However, the real head-turner during the presentation was the likely introduction of smart card technology in 2009. Members would be given customized cards that can be scanned (either RFID-based or scanned bars) to completely personalize the home. The member’s favorite music would go on, the temperature would be pre-set at the desired thermostat reading, the lighting levels would be adjusted, and — the gee whiz part — is that snapshots that the members uploaded through the member website would then be popping up on the flat screen televisions. I imagine adding digital picture frames would be no-brainers too.

It may not seem like much to those who prefer to set everything up the old-fashioned way. However, it’s going to be a great selling point for clubs to deliver an experience that no ritzy hotel chain or luxury rental can match.

The club has its reasons too, of course. Smart home technology will allow the club to monitor the home remotely. When the property is vacant, the club can make sure that thermostats adjust properly and that automated window blinds close to keep out sunlight. It’s also beneficial for security purposes. It doesn’t hurt that the “green” thing to do is also the economically prudent thing.

Either way, the destination club concept may not just be forward-thinking in luxury travel but home technology too.

The destination club industry took another hit yesterday, when boutique operator Lusso Collection filed for bankruptcy reorganization.

Lusso seemed to be on the fast track of growth — just like High Country Club — before falling victim to the triple-whammy of falling real estate prices, tightening credit markets, and the cascading financial markets that make disposable income so less disposable these days.

It is important to point out that this is Chapter 11 (reorganization) and not Chapter 7 (liquidation). Save for losing out on some real estate in Anguilla, apparently, the club will continue operating with business as usual as creditors dictate its fate.

The industry obviously did not need this. A pair of prolific buckling speedsters isn’t going to help sway any fence-straddling potential destination club industry members to dive in. Consolidation would have been much better. Surely Exclusive Resorts could have made room for Lusso under better circumstances.

As it stands, with HCC and now Lusso, it appears that the industry’s biggest players are either letting the shakeout take place or have enough to worry about internally to take on companies with deteriorating financials.

Lusso has always been one of my personal favorites on the scene. It gets high marks from me for its polished website, detailed floor plans, and virtual tours. I hope it is able to get everything cobbled back together and grow again, but before any of that happens real estate prices need to stabilize.  Now that even Hank Paulson is committed to that goal, we may be closer to the bottom than anyone may realize. Let’s hope so.

These are tough times for the destination club industry, but no one is having it harder than High Country Club. The club is facing an implosion if enough members don’t buy into the company’s “Success Plan” this month.

Ultimate Escapes is in a position to help.

Forget a buyout. High Country Club supposedly owes more on their properties than they are currently worth in resale, and the CEO’s stern warning that liquidation of the club won’t likely leave any funds to repay member deposits implies that acquiring members is also a liability.

However, as the new entry-level destination club (with High Country Club temporarily ceasing the marketing of new memberships), Ultimate Escapes is in a great position to offer disenchanted HCC members another way out.

The proposed new HCC dues to keep the club afloat are within spitting distance of what Ultimate Escapes Premiere is charging. Once you factor in the more DC-centric features of Ultimate Escapes (greater booking flexibility, lack of exit cleaning fees, the presence of a local host to tackle grassroots problems, serve as concierge, and stock requested groceries) it’s arguably a better deal.

The rub, of course, is that High Country Club members are unlikely to fork over new deposits to a second club. The negative equity of HCC makes UE unlikely to take on members with a lack of deposit funds.

However, if — and only IF — the HCC Success Plan falters, why doesn’t UE take in the HCC members with “dues only” memberships?

UE has the same problem that all of its peers have at the moment. Membership growth has stalled. In fact, going by UE’s own marketing materials, one can deduce that several of the Private Escapes members (in the dozens, since recruitment emails to the public have gone from touting a club with “1400 members” in mid-August to “more than 1300 members” today) decided not to stick around after the merger with Ultimate Resorts to form Ultimate Escapes.

In other words, Ultimate Escapes could use more members. Since every club’s goal these days is to bump up occupancy levels, it also makes better sense to take on new “dues only” members than to unload properties. 

I know. Dues pay for maintenance fees but deposits pay for new homes. Taking on SOME of the HCC members won’t bankroll new properties. It doesn’t have to, as long as the move wins over “dozens” of HCC members instead of “hundreds” — which in of itself wouldn’t be a bad problem to have.

The beauty, of course, is that UE can offer HCC members the “dues only” memberships for a limited time. Let’s say, for instance, it offers folks who can confirm that they were HCC members a “dues only” deal for the next 2-3 years. At that point they would have to pay a deposit to continue as members. This would give HCC members a sampling of the club and it would also give UE bodies to ride out the near-term slump.

It’s a win-win, and that’s rare these days.

Is there a white knight waiting in the wings to scoop up High Country Club? 

I’m hoping somebody does, if only to take a hit for the team so the industry doesn’t have to go through the whole Tanner & Halley fiasco in winning back consumer credibility.

And by taking “a hit for the team” I don’t mean that HCC wouldn’t be a great collection of properties and members. It would. The problem is that it’s unlikely that a rational club would buy in. Since the mortgage holders are owed more than the properties are worth, it would be cheaper for any club to just buy new properties instead of inheriting homes that are underwater. Dues-paying members are great to have, but most clubs would have to jack those dues to make it commensurate with what current members are paying in their own clubs. Perhaps more importantly, is that they would be acquiring members who have expectations of getting their deposits back with the acquiring club not getting anything in return.

After Ultimate Resorts acquired the T&H properties in bankruptcy, it offered its members the ability to join the club, with the expectation that they would get most of their original deposit back if they stuck around for another 5-7 years. The math made sense on Ultimate’s part at the time, becasue it had a ton of new properties and needed bodies to fill them. I don’t know if a club would make such a generous offer this time around. It costs plenty to acquire a new member, but clearly not the amount of any initial deposit.

So what’s it going to be? Is someone going to step up and take a hit for the team? Steve Case? Are you angling for karma points?