Luxury Luxury Travel 360: $200 billion and glowing February 11, 2008 Share 1 -- In recent weeks, hoping we could stop guesstimating about total annual spend in luxury travel, we have talked with leading economists and market researchers in travel. We published important data and insights from Oxford Economics, the Travel Industry Asociation and the World Travel and Tourism Council on total travel revenues around the globe and the multiplier effect of travel spending.But the most productive thing we did in trying to get our arms around the luxury travel piece was to talk with Nancy Cockerell, the British researcher who led the team studying international spend for the International Luxury Travel Market report, presented at the ILTM's recent event in Cannes, France.Cockerell meticulously walked us through the methodology that led to the $200 billion tally cited in the ILTM Report for 2007. That amounts to 20% of total international travel spend. While some suggest the percentage may be closer to 25%, we are going to use $200 billion and 20% as our Lux 360 (pleasure and business) baseline in tracking luxury travel internationally.(When we move to domestic luxury travel, no one seems to have mastered all the complexities of a credible calculation.)We also asked Cockerell about the area of affordable luxury, or cafeteria luxury as we call it, people aspiring to luxury and choosing elements of high-end travel spend on a trip rather than taking the full boat."Not a part of their calculation," Nancy said.But we did persuade her, we think, to share some thoughts in an upcoming column about how luxury-goods brands in Europe are reacting these days to the trend toward "massclusivity." In some cases, it looks like a bit of backlash might be unfolding in an attempt to preserve the sanctity of the brand. -- Hershel SarbinBanking on the condo componentLuxury Travel 360 met with Stephen Rushmore, president and founder of HVS and a pioneering expert on the valuation of hotels. HVS is a global company that has provided valuation services for more than 10,000 hotels in all 50 states and 60 countries. The company now offers consulting in a broad range of hospitality areas, from executive search to interior design to marketing. He had some dramatic things to say about the challenging economics of luxury hotel development.Q: What is the outlook for luxury hotel development in the current economy?A: Developing any hotel is a question of economics. The rule of thumb has long been that you need an average daily rate of $1 for every $1,000 invested in a hotel. In other words, if you spend $500,000 per room, you should be able to charge $500 a night. Until about 10 years ago, it made economic sense to develop a freestanding luxury hotel. Then, because of increasing costs, it became necessary to add a residential component to make the economics work.Q: Why is that?A: To compensate for the escalating cost of building a luxury hotel, you needed to sell condo units up front.Q: Then why have the hotel at all?A: The five-star hotel brand will drive up the price of the condo. Take a condo that might be able to sell at $2,000 a square foot; a branded hotel on the property might make that $3,000.Q: How does the current real estate crisis affect that equation?A: Now, even the residential component of luxury hotel development has become an unknown. How are we going to get these five-star hotels to work economically? It will be difficult to build true five-star hotels until the residential component comes back.Q: Are there mitigating factors to that outlook?A: There is an ego factor that will offset some of these economic realities. People simply want to build luxury hotels no matter the economics. Also, the low value of the dollar and the low cost of capital will enable some projects to be built. And there are companies like Tata, the Indian conglomerate that wants its Taj hotels in major gateways and will pay what it takes to get them. We are working on a hotel in downtown Manhattan that is costing $2 million a room to build.Q: What does all this mean for existing luxury hotels?A: For existing properties, the hotel industry offers an unbelievable opportunity.Q: What about the many new luxury brands and luxury hotels that have been announced? What is going to happen to them?A: A lot of people want to build, but they won't get financing. We are working with a developer in Seattle with a great location who wants to build a Marriott. He went to 30 lenders and got one deal. Six months ago, he would have gotten 15.Q: Are resorts in a different situation?A: Resorts are different. There is a higher cost in developing them, but that is offset by even more residential opportunities, such as timeshare. Also, there are significant sources of revenue like spa, golf and banquets and weddings.Q: Speaking of spas, they have become a key element in the luxury product. Are they big money makers?A: They are necessary, but the margin is only about 15%, which is eaten up pretty quickly by taxes and other costs. But spas are more viable than room service, which is a guaranteed money loser, and than restaurants, which are usually profitable only when they are leased to outside operators.Q: What will turn all of this around?A: At some point, demand will become so strong it will become worthwhile to build again. Emerging markets in India, China and Russia will also contribute to that turnaround.How about dinner in bed, reserved on a Bali beach? At the Four Seasons Jimbaran Bay in Bali, guests who reserve a beach bed will enjoy a five-course dinner that includes foie gras and dishes like green tea soba sushi rolls, spiny lobster with couscous salad and a chocolate "extravaganza" -- all with a Four Seasons-style "bedside manner." These are no ordinary loungers: Putu Indrawati, a resort spokeswoman, said the beds can accommodate up to 50 people.Indrawati said there has been growing interest from guests and nonguests; "incremental revenue" also is growing. Publicity has been local, national and international. Most of the guests taking advantage of the beach beds, according to Indrawati, are couples, "and many of them are honeymooners."The program has already been expanded. It started once a week and is now offered twice, every Thursday and Saturday. Says Indrawati, "They love the experience."Visit our Web site at www.luxurytravel360.com to read an exclusive interview with Susan Helstab, senior vice president of marketing for Four Seasons Hotels. Helstab shares insights into Four Seasons' meticulous approach to marketing, up to and including its tagline, "Where life feels perfect." While you're on the site, be sure to sign up for our biweekly newsletter. As a reader of Travel Weekly, you qualify for a complimentary subscription. Contact Hershel Sarbin, Luxury Travel 360 editor and publisher, at email@example.com.