Luxury hotels: Inelastic demand?

The FT (and just about every other news website) reports on LVMH, a venerable fashion group with over 50 luxury brands, entering the five-star hotel management business initially through a partnership with Egypt's Orascom Development Holdings to build two resorts in the Middle East. The move is being hailed around the world as an indicator of the resiliency of the upper-upscale hotel segment with some such as UKNetguide a UK based portal that provides "independent reviews and ratings" of sites across sectors referring to the acquisition as "shrugging off the economic downturn".

Coming on the heels of the launch of several "new" brands in the hotel industry such as Armani, Bulgari, Ralph Lauren and Versace, the move seems like a natural fit for established purveyors of eclectic and lux services and products. LVMH's hotels will be branded Cheval Blanc, after the Michelin-starred French ski resort opened in 2006 by Group Arnault, the family holding of Bernard Arnault, LVMH's executive chairman. However, a closer look at LVMH's deal which has two hotels scheduled to open in 2012 in Egypt and Oman reveals that they are to be financed by Egypt's Orascom leaving very little exposure to the vicissitudes of economic cycles and the high capital costs of the industry. LVMH will merely "manage the hotels and will take a percentage of sales and profits."  It is a model more akin to the mid-market segment of the hospitality industry with a few notable exceptions such as Four Seasons and JW Marriott.

In a sense, the move does cock a snook at declining revenues in almost every segment including luxury around the world as a consequence of the Great Recession in the west. All downside risk is passed on to the asset owners who like owners of airlines seem driven more by ego and than returns and are fittingly, if somewhat pejoratively, called "big boys with big toys". Established players in the field were not to be left behind with JW Marriott announcing 10 new hotels for '10. There is, of course, no correlation to the year of announcement as Marriott expects a whopping 20 new projects in 13 countries for the following year, all with little to none of the monies coming from Marriott's coffers.

Elsewhere on the luxury travel front, The Wall Street Journal has a piece entitled "What's Next: Luxury Travel". The article cites Aaron Simpson , the founder of "Quintessentially" a luxury travel concierge open only to members which, among other things, organizes vacations such as a trip "to Jordan as an Indiana Jones-inspired rescue mission complete with training from former agents of MI6, Britain's intelligence service." The Journal report does not elaborate on whether or not the agents get to do outlandish things like toppling foreign governments but Quintessentially does deliver on extraordinary requests from extraordinary people including a " request from Elton John to source 100 presents for his friends—out-of-this-world gifts like Chanel diamonds and the sort". Mr Simpson saw that "there was an opportunity out there for a company to satisfy these kinds of (over the top) demands for other people." In the not too distant future Mr. Simpson expects, predictably one might add, "to open our own hotels in London, New York, Dubai, Istanbul and Hong Kong in the next two to three years." Presumably with other people's money.

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Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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