ET Insider – April 5, 2007

Elite Traveler Insider –

April 5, 2007

Elite Traveler Insider

By Douglas D. Gollan, President and Editor-in-Chief, Elite Traveler Magazine  

Welcome to the latest issue of Elite Traveler Insider, the bi-weekly newsletter designed to update our top partners on trends in the private jet lifestyle. This information is provided to offer a better understanding of how to target these globetrotting elite travelers, their impact on your business and other trends that affect you. Remember, that private jet travelers are paying up to $10,000 per hour to fly by private jet, so these super rich consumers could be and should be your best customer. We talk about them and how you can get more of them and more from them.

NEWS ALERT — When we say the purchase of luxury products is not an economic decision for Elite Traveler readers we mean it! Last week, a reader walked in to Harry Winston with our March/April issue and bought the necklace right off the cover. Sale price: $95,000!

CONTENTS:

1. In Time for Basel, the Hills Are Alive with Luxury Watches…

2. More Research Shows Limits of Mass Affluent…

3. Income Inequality Grows Further: New York Times…

4. Mexico Rings the Cash Register by Targeting the Rich…

5. Retirement is Easy, Giving Up the Private Jet Isn’t…

“We have made two significant sales based on leads from your magazine… The total value of the pruchases is over $15 million!” Myles Newell — The Ginn Company

1. In Time for Basel, the Hills Are Alive with Luxury Watches…

For the month leading into Basel’s Annual Watch Fair, which starts next week, the hills of Switzerland are abuzz with the sound of money, as watchmakers put the final touches on their presentations to the world’s most important retailers and an ever-growing contingent of global press. Both groups are eager to discover what’s next in a business where a half- million-dollar product can be held in the palm of one’s hand.

Retailers from more than 100 countries meet with watchmakers and place orders. Journalists sit through endless presentations clicking away on their digital cameras. Even the general public is allowed access to the Super Bowl of watchmaking, adding to the pressure to create new and impressive designs.

The mad rush to be “show ready” has the normally well-paced Swiss flitting around in a frenzy of activity. Prototypes are being finalized of watches that won’t be delivered until the fall and spring. Photographers busily shoot glossy pictures of the latest wares to pack onto DVDs with the hopes they will be splashed across newspaper and magazine articles around the world. Design teams spare no expense to construct elaborate three — and four-floor stands replete with such luxuries as full kitchens staffed by Michelin chefs, fountain ponds and furniture more suitable to a Park Avenue boardroom than a trade show. Stands for prestige brands are mansion-like ranging upwards of 20,000 square feet, only to be broken down immediately after the show and stored until next year’s big event.

Blancpain is the emblem of the renaissance of Swiss mechanical watchmaking, an industry left for dead less than three decades ago when hand-crafted timepieces were being buried by Japanese quartz technology. The resurrection of Blancpain made Nicolas G. Hayek, the chairman of Swatch Group adored for saving a beloved Swiss industry. Today both Blancpain, one of numerous brands his group controls, and Swiss-made luxury watches are achieving success nobody could have imagined. In fact, two days before my visit to Blancpain’s headquarters about an hour from Geneva, Swatch Group announced record sales and profits powered by its stable of luxury brands ranging from Blancpain, Breguet, Leon Hatot, Jacquet Droz, Glashutte and Omega to the license for Calvin Klein.

Leading Blancpain today is Hayek’s grandson Marc A. Hayek, who also serves on the Board of parent Swatch Group. Both for Blancpain and others, high-end watches routinely start at US$10,000 and leap quickly to six digits with months-long waiting lists. Many timepieces cost two or three times as much as the average house, with Blancpain’s 1735 priced at 970,000 CHF-or over $800,000. And while much news has been made of traders and investment bankers spending bonuses buying $50,000 fancy watches the way their secretaries buy lattes at Starbucks, the younger Hayek says the market’s strength is far deeper and diverse.

Beyond China, sales increases in the 50% range were recorded from spots as diverse as Spain, the Middle East, Hong Kong and Singapore. Hayek is particularly proud that Blancpain had strong sales growth in Switzerland, a fact he attributes to the brand’s authenticity. According to Hayek, Haute Horlogerie timepieces are now toys de rigueur for wealthy boys. “In the mid-90s, if you wanted to spend $50,000, $80,000 or $200,000 on something, it was a car, boat, apartment,” Hayek noted. “Today it’s a watch as well, and I see no reason to go back.”

If watches have truly established a position as jewellery for men, and there is no sign of a let-up in demand (the only thing Hayek says could have been better in 2006 would have been increased production more in line with demand), one of his concerns is the growing number of companies trying to move into the very top end of the market. “Everyone is selling a tourbillon (considered by many the ultimate in luxury watches), but in 10 years if it needs service, will you be able to fix it? Today, it’s very hard to know what you’re buying,” Hayek says.

Contributing to this challenge is the idea of the watch as jewellery. Purchasing requires an in-depth knowledge and understanding of watch mechanics, but this often takes a back seat with buyers today. “The look (of the watch) is always important. Buying a $50,000 watch is not a rational purchase,” Hayek notes.

Looking forward, the Hayek scion believes educating customers about what they are buying will become more and more important. Most buyers don’t understand that the watch they are acquiring is a complex mechanical instrument he says, noting that the small case on your wrist has about 50% more moving parts than the engine of your car.

However, while customers of automobiles are educated about service requirements, watch buyers will generally wear a watch until it stops working and then be aghast at the time and cost for it to be fixed. Hayek is studying how auto companies educate consumers in this regard and is thinking about how to creatively get customers to make sure they are taking care of their mechanical watches. He mentions a service plan with “the first five years for free with regular service” similar to automakers and a plan with “10,000 mile check-ups.”

Of course figuring out the logistics is easier said than done. With a shortage of fine timepieces to sell, Hayek notes watchmakers are not in the position to provide “loaner” watches as car companies do. Swatch, however, is investing in training more watchmakers, a shortage resulting from the loss of a generation of craftsmen during the downturn. He is also investing in opening more boutiques to better interface with the customer and build greater product understanding. While Hayek has gotten some flack from retailers, he notes that after the Blancpain boutique opened in Geneva, a nearby Blancpain retailer increased sales three-fold.

The American-educated Hayek is in his second stint in the family business. In between he was a successful entrepreneur opening a stylish wine and cigar bar and restaurant in Zurich where he focused on service. If a customer liked a particular wine, he would sell them a case. “It was about enjoyment,” he says.

Hayek has been trying to bring that same sense of customer focus to Blancpain’s boutiques. Noting that you can’t judge who tomorrow’s customer will be from the way they are dressed when they enter the store today, Hayek goes further with his team to stress that how they treat a broke college student who wanders into a boutique will impact whether he or she buys a Blancpain decades later when they become a successful CEO.

To achieve success at the retail level, Hayek has artfully mixed the hospitality of boutique staff with the passion of watch industry veterans. When one walks into a Blancpain boutique, the first conversation may be an offer of a coffee, soft drink or a glass of wine. “We want the customer to be comfortable,” he says, clearly understanding that an extra glass of wine served to somebody who doesn’t buy is much smarter than turning off a billionaire who might have bought a $350,000 one-of-a-kind piece.

The emergence of the Chinese watch buyer has been a learning experience for Hayek and his team. He marvels at how a Chinese tourist in Paris reached into a small plastic bag to pull out tens of thousands of Euros to pay for a watch in cash. Certainly, it is a clear reminder to all in the luxury business of the “Pretty Woman” scenario in which Julia Roberts is turned away by a snooty salesperson!

To Hayek, a customer’s first visit to a Blancpain store is a success if his salesperson “just has a really good conversation.” Based on Blancpain’s success, it looks like all the talk is paying off handsomely.

“Very beautiful magazine, our CEO’s wife loves it when the new shipments arrive, it’s her favorite magazine” Ronn Nelson ÿ Northwestern Mutual Air, Operations Milwaukee, WI

2. More Research Shows Limits of Mass Affluent…

Almost half (49%) of Mass Affluent consumers said they would cut back on spending for luxury hotels and resorts if they saw their assets begin to shrink, according to a new report by The Luxury Institute. Luxury autos (42%), Jewelry (39%), Electronics (37%), Cruise Lines (32%) would also be areas that are quickly impacted, according to the survey of 815 consumers with a Median Household Income of $215,000.

Mass affluent consumers will get nervous and cut back when they see cash, stocks, mutual funds or real estate values dwindle immediately impacting their ability to purchase luxury goods.

High net-worth consumers are more likely to keep spending, according to The Luxury Institute. Referring to its sample of consumers with a Net Worth of $5 million +, Institute President Milton Pedrazza noted, “Wealthy consumers are less likely to decrease their purchases.”

Some reader research by mass market leader Travel+Leisure also highlighted the limited impact the Mass Affluent have for luxury providers. According to its research, readers planned to spend $9,044 for “all leisure travel in the next 12 months.” For foreign travel (ex-US travel) the average spend for the entire next 12 months was projected to be $5,500.

By contrast, the most recent Prince Research on the ultra-affluent shows private jets owners had spent over $400,000 on hotels, resorts and spas in the ensuing year. In other words, one Elite Traveler reader would be equal to some 40+ Travel+Leisure readers.

“Our clients enjoy reading the magazine cover to cover. They enjoy the high quality and look forward to the Hotel, Spa and Resort issues which are an extra perk” Jeanette Wuisman – Landmark Aviation, Dallas, TX

3. Income Inequality Grows Further: New York Times…

The rich are getting richer, which means they have more household income to spend on luxury goods. At the same time, lower income brackets are being squeezed on their already limited discretionary income, as companies and the government cut benefits, leading to higher out-of-pocket expenses such as co-pays for health care. Below is excerpted from a report last week in The New York Times.

“Income inequality grew significantly in 2005, with the top 1 percent of Americans-those with incomes that year of more than $348,000-receiving their largest share of national income since 1928, analysis of newly released tax data shows.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

The disparities may be even greater for another reason. The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures. He said that in addition to rising incomes and reduced taxes, the equation should take into account cuts in fringe benefits to workers and in government services that middle-class and poor Americans rely on more than the affluent. These include health care, child care and education spending.

The top tenth of a percent reported an average income of $5.6 million, up $908,000, while the top one-hundredth of a percent had an average income of $25.7 million, up nearly $4.4 million in one year.”

“Fascinating, they always want to buy something they see. The products offered and destinations are just what my customers are looking for!” Mary Bullock Bagosy — Galaxy Aviation, Orlando, FL

4. Mexico Rings the Cash Register by Targeting the Rich…

Rodolfo Elizondo Torres in my opinion will go down as one of Mexico’s most forward-thinking tourism ministers. My position is simply based on seeing what he has accomplished in his slightly over three years in office which now, quite unusually, spans two presidential administrations (Presidential terms in Mexico are six years and generally ministers change with a new administration).

I remember a breakfast which Elite Traveler’s Chairman, Carl Ruderman, Director General for Mexico, Jerry Landress and myself had with the Minister literally months after he took office. Over the early morning meal, he was all business. While Mexico ranked in the top 10 based on tourist arrivals, its tourism receipts were lagging behind. The then-new Minister astutely recognized that this was a bad sign: More people coming but spending low amounts of money increase the wear and tear on infrastructure without providing the economic benefit that tourism is designed to bring. And while Mexico has for many years tried to promote tourism beyond its beaches to the Colonial Cities and other attractions, the traditional lead-price “sun and fun” market typically doesn’t have the time or money to move beyond the sand. At the same time the Minister had seen the investment being made in various tourism venues such as Los Cabos, where greens fees to play Jack Nicklaus- and Greg Norman-designed golf courses often range as high as $300.

With the skill of a seasoned diplomat, Elizondo Torres has continued Mexico’s strong relationships with the Mass Market but at the same time developed a strategic plan to bolster premium tourism. The plan, according to the latest numbers, is paying off handsomely. While arrivals were down slightly more than two percent, impacted in part by Hurricane Katrina, tourism receipts were up by almost four percent.

According to the new Chief Executive Officer of Visit Mexico, Francisco Lopez Mena, the plan is to continue full speed ahead. He acknowledged that the parallel success to the Minister’s tourism plan is the tremendous amount of high-end real estate development in Mexico that has further positioned the country as a destination fit for the private jet lifestyle.

Lopez Mena, a former Senator who oversaw tourism in his political role, was the impetus behind Cancun’s push to develop into an upscale destination during his tenure running tourism there. High-end destinations such as Mayakoba on Riviera Maya will host Rosewood, Banyan Tree and Viceroy resorts in addition to the just-opened Fairmont, while the country’s first St. Regis is due to open this year on the Pacific Coast and Mandarin Oriental, Montage and Trump are all rumored to be focused on planting a flag in Los Cabos.

The diversity of Mexico also provides a huge opportunity to cater to the private jet market. After all, many of the Colonial Cities are within an hour’s hop by private jet from high-end beach resorts, but by commercial air would necessitate time-consuming connections in Mexico City and limited scheduled air service. A private jet party who flies from, say, Cancun or Acapulco to a Colonial City for the day might spend $10,000 on fuel, $25,000 shopping and another $2,000 hiring local guides and cars and for dining. Other continued opportunities include mega-yachts on both the Caribbean and Pacific coasts and Meeting and Incentives that often times are dictated from the CEO’s office.

In my meeting last week with Mexico’s Tourism Minister and CEO during the annual Tianguis trade-buying event in Acapulco, the Minister acknowledged Mexico’s bright future with the premium market. I believe 10 or 15 years from now, Mexico’s tourism industry is going to look back on the Elizondo Torres years as the cornerstone of the country’s transformation from mass market to a well-rounded global tourism destination led by one of the world’s best and most diverse luxury products.

“Our facility exclusively distributes only Elite Traveler because it’s the best high-end publication. We have lots of clients who request it.” Jim Allbaugh — Career Lab, Parker, CO

5. Retirement is Easy, Giving Up the Private Jet Isn’t…

We know the private jet lifestyle is hard to give up. That’s why it’s not unusual for CEOs and Chairmen to negotiate use of corporate jets even after they leave the corner office. Recent reports detailed Bank of America’s former Chairman Charles K. Gifford and his private jet travels.

According to the reports, Bank of America picked up a $723,699 tab in private jet costs for Gifford last year, and kicked in another $151,705 for the taxes associated with the travel benefit.

Gifford, the former chief executive of Fleet Boston when it was sold to Bank of America in 2004, is allowed 120 hours of private jet time per year as part of the retirement package he got from the bank. A Bank of America spokesman declined to disclose how many hours Gifford flew last year, nor would he say where, with whom, or why he flew, according to the report.

For $723,699, Gifford could buy 58 last-minute first-class round trips between Boston and Beijing on United Airlines, at prices published on the airline’s website. Closer to home, the money could cover 388 round trips for two between Boston and Long Beach, California on JetBlue Airways.

He also received $50,000 in consulting fees from the bank last year and $212,954 for office expenses. His total compensation and retirement benefits in 2006 were valued at $1.38 million. The 120 hours of flight time drop to 100 hours a year after his fifth year in retirement.