ET Insider – December 18, 2007

Elite Traveler Insider –

December 18, 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, 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.

CONTENTS:

1. The Next Crisis – Corporate Debt and What it Means for Luxury

2. A Premium for Knowledge: Let the Wealthy Spend

3. It’s Expensive to Be Rich

4. What Went Up Must Trade Down

5. Super Rich Plan Super Spending for the Holidays

6. Elite Wishes for the Happiest of Holidays and a Grand New Year

YOUR BEST CUSTOMERS ARE HERE: Elite Traveler delivers more readers (318,000) with a $1 million + Household Income than Departures (34,000), Robb Report (30,000), Town and Country (47,000), Vanity Fair (44,000) and The Wall Street Journal (128,000) combined. Source: Prince & Associates, MMR

1. The Next Crisis – Corporate Debt and What it Means for Luxury

Let’s just say that my father’s Scottish heritage makes me very skeptical and conservative when it comes to financial shell games. When nearly 10 years ago I first had the pleasure to come across the “fool’s gold” of adjustable rate mortgages first hand, my take was that the play was to get out of the mortgage before the rate adjusted up or have a crystal ball that said rates were going down even though they were pretty low at the time. I sort of thought that most people probably can’t pay off their mortgage in three or five years and the Main Street consumer probably didn’t have a clue what interest rates were going to do over any period of years, let alone the following week.

Fast forward to almost two years ago when, as a vociferous newspaper reader (five a day if you count Women’s Wear Daily), I started to notice more headlines predicting that jumping interest rates and a slowing housing market might cause a rise in defaults. The Wall Street Journal had a few stories buried deep in its guts that we reported in Elite Traveler Insider.

Having been out in front of the curve in discussing the mortgage meltdown, a headline in The Wall Street Journal about five weeks ago – again in one of the interior sections – caught my attention. “The Next Crisis,” the headline announced, “is Corporate Debt.”

In case you haven’t seen the story, it leads off, “Now it might be time to start worrying about a more-remote threat: shaky corporate debt.”

“Amid booming profits and extremely low default rates in recent years, many companies borrowed heavily to make acquisitions, go private, buy back stock or pay special dividends in activities designed to boost shareholder returns. Not long after that binge of borrowing, some cracks are showing in parts of the economy, and the prognosis for corporate balance sheets is looking less rosy. Fitch Ratings says downgrades of corporate bonds rose in the third quarter to $92.1 billion, their highest level in two years. Meantime, interest rates on junk bonds have risen, potentially straining the ability of low-grade issuers to tap the credit markets for fresh loans or to refinance existing debt. Fitch predicts a jump in corporate defaults, from less than 1% of all debt outstanding in 2007 to more than 4% in 2008. If this happens, it will become harder still for companies to borrow.

“Sensing a turn, ‘distressed investors’ – who seek to gobble up debt when it has hit rock bottom – have raised more than $300 billion by some estimates to put to work in the years ahead. ‘We don’t need a recession to see an increase in the rate of corporate defaults,’ says Edward Altman, a bankruptcy expert at New YorkUniversity’s Stern School of Business.”

The article gave three examples of companies already suffering and suggested more will be coming. As playing “Bud Fox day trader” has become somewhat of a passion for many of the Mass Affluent, anything that hurts corporate earnings and drives down stock prices in my opinion will hit the aspirational consumer particularly hard, as my experience is that the self-professed “smart investor” who can outthink the market tends to play riskier bets.

Umberto Angeloni, the former CEO of Brioni, commented that luxury brands have learned or (should have learned) that the Aspirational Mass Affluent is not loyal and doesn’t appreciate the true value of quality. He also noted this segment is most impacted by dips in the personal fortunes. My read is that the possible turmoil of too much corporate debt is going to mean more negative impact on the Mass Affluent. After all, top management and the investment banks will have already taken their money out of the business.

We can mark this down to review in May 2009 and see how this projection plays out. If I could escape my conservative roots and place a bet, I would be shorting the Mass Affluent over the next couple years, at least in the U.S.

SUPREME LUXURY: 91% of Elite Traveler readers consider us “higher quality” than other magazines. Source: Prince & Associates

 

2. A Premium for Knowledge: Let the Wealthy Spend

I often sing the praises of Greg Furman and The Luxury Marketing Council in this space because of the interesting and insightful people I’ve met through his ever- growing network of chapters.

One of those folks is Richard Baker, who runs a consulting company out of Dallas called Premium Knowledge.

Recently in reading through the informative blog he keeps on his web site, I came across “The Economic Case for Luxury Spending by the Wealthy,” which I provide to you below:

“This is the age of surplus capital. Too much money is chasing too few good investments. The current $30-$50 Billion melt-down in the mortgage securities market is a prime example. We regret the consumers tricked into buying homes they couldn’t afford; it’s harder to forgive bankers for getting fooled by the debt instruments they themselves created.

And the resulting tightening of credit is reducing discretionary spending by the general population. We are concerned about the potential of a recession.

In such times, why do some writers encourage savings and investment by the wealthy (which appears to be too plentiful) and discourage their discretionary spending? Why do these writers encourage the accumulation of capital when the same money, if spent on expensive consumer goods and services, would circulate more quickly in the economy, create more demand and result in fuller utilization of existing means of production (including people)?

I think such writers are being politically correct but economically incorrect. As Dr. Johnston told Boswell, “you cannot spend money on luxury without doing good for the poor.” I am of the latter school.

This is a favorable time to restate the case why the rest of the economy benefits when the wealthy spend on luxury. I am indebted to Economic Theory in Retrospect by Mark Blaug, Emeritus Professor at the University of London for triggering the thoughts below. I take responsibility for any weakness in the overall logic of the case.

I believe there are 10 reasons why the wealthy owe it to the rest of us to “shop ’til they drop. Their luxury spending:

• Stimulates a desire for success by others. If there is any doubt, ask the mid-level executive who flies in coach if the he or she would like to be C-level and fly on the company jet. Ask Jack Welch.
• Encourages emulation in spending by the middle class. This is why, for example, apparel companies love to see celebrities wearing their brand of clothes. Sharon Stone wearing couture launches a thousand slips with the same label.
• Stimulates and underwrites new technology. Innovations are often piloted in high end products before they become affordable by the mass market. Check out Steve Jobs’ launch of the iPhone or mark Cuban’s HDTV.
• Creates direct employment. “Household manager” is one of the fastest growing occupational categories in the country. 8 of the 10 fastest growing automotive brands in the U.S. are luxury brands. Count the number of new employees in the new Maserati dealerships.
• Mitigates economic downturns. When the rest of us are cutting back, the truly wealthy keep getting facials and taking safaris.
• Stimulates counter-balancing private philanthropic activity that reduces the need for tax-payer funded programs. See Bill and Melinda Gates, Warren Buffet, et. al.
• Nurtures artists, musicians, jewelry designers, architects and other craftsmen who create the cultural richness in our lives and influence the standards for taste in our communities. We need Medici’s if we are to get DiVinci’s.
• Increases revenues from sales taxes. Wealthy people able to create shelters to minimize income tax still pay sales taxes on cars, boats, planes, etc. They need license plates like the rest of the citizenry.
• Decreases money available to be spent on alternative luxuries like influencing (or attacking) politicians. Money spend on a private yacht can’t be spent on a public “swiftboat” campaign.
• Decreases international risk and Increases global cohesiveness. Most luxury brands are an international language. The Premier of North Korea softened his stand when the Western embargo threatened his supply of Mercedes and cognac. We can only hope that the heads of Iran and Pakistan have similar vices.
• Economics suggests that the rest of us are better off when the rich buy a fourth home, furnish it with Ralph Lauren, hire more household staff, put three new vehicles in the driveway, install original art on every wall and then agree to an interview and photo shoot with Architectural Digest.

“More is more.”

Or in other words, I couldn’t have said it better myself!

OUR READERS LIKE WHAT THEY SEE: 88% of Elite Traveler readers like our “design and format”. Source: Prince & Associates

 

3. It’s Expensive to Be Rich

I first saw this expression on the sofa pillow a very wealthy friend has in his office. I thought it was cute and funny, but the over 15 years I have come to know him, it is also reality. That is a good thing for those companies that cater to the Super Rich.

The pillow underscores the dilemma of any self-respecting Super Rich consumer even if they are getting some financial hit. The bottom line is when you’re Super Rich it is difficult – if not impossible – to trade down from the private jet lifestyle.

It was then with interest I picked up a piece in The Economist, which stated that according to Stonehage, a firm of financial advisers to London’s multi-millionaires, it is costing the capital’s many plutocrats much more to maintain their standard of living than it used to. They reckon that prices of luxury goods and services increased by 6% in the 12 months to July, more than twice the 2.3% rise registered on the official consumer-price index (CPI).

Existing government inflation measures do not quite capture the upper-crust experience, Stonehage says. The CPI, for example, ignores many housing costs that rich and poor alike must pay, and the more comprehensive retail-price index excludes the richest 4% of consumers. Stonehage’s new Affluent London Living Index is designed to fill the gap.

The details are enough to make an investment banker splutter into his increasingly expensive caviar (the price of which rose 28% over the year). Rents in central London have increased by 25% since 2002. A top-line Range Rover today costs 20% more than last year’s model. Fees for day pupils at Westminster (a fancy independent school) are up by 7%, and the price of a case of Lafite Rothschild by an eye-watering 117%. Leisure has grown pricier as well: two days of grouse shooting costs 8% more this season than last, and an executive box at Chelsea Football Club, London’s most fashionable, has risen by 25%. Robby Hilkowitz, a director of Stonehage, blames a rapid increase in the ranks of the mega-rich for pushing up prices.

Yet rising consumption costs tell only half the tale. Most of the ultra-rich have the bulk of their wealth invested, so they have benefited handsomely from the sustained boom in asset prices. The same central London house that costs 25% more to rent is worth 150% more on the market. And sympathy for the plutocrats’ plight may be hard to find among the great hordes of the salaried unwashed (many of whom also live in London), whose real disposable incomes are being squeezed.

For those who sell to the Super Rich, I guess it’s nice to know you can raise your prices. After all, what self-respecting Super Rich lady of London would be caught with a Bottega Veneta handbag going through the regular line at Heathrow? Wow, people would be talking!

BULLSEYE FOR YOUR AD DOLLARS: Only Elite Traveler delivers to luxury advertisers the Super Rich wherever in the world they happen to be via BPA audited distribution aboard private jets and mega-yachts in over 100 countries worldwide!

 

4. What Went Up Must Trade Down

The famous book Trading Up does, in deference to the authors, clearly state that Trading Up is the concept where the upwards trader makes sacrifices in other categories to stretch their credit cards and get that $500 Fendi bag or Hermes scarf.

Mass Affluent publishers, of course, took the “Trading Up” portion of the thesis and wove together sales pitches that would make even the most savvy of luxury marketers believe there was a line of consumers out their doors that made $100,000 before taxes but could spend $125,000 on watches, jewelry and fashion. Their ad agencies, flush with invites to Oscar parties and the Super Bowl, glady endorsed this fantasy.

Of course, all fantasies are based on some reality, so in deference to the delusions of a luxury car in every driveway, the fact is that consumers were leveraging themselves like never before and buying depreciating assets with their borrowed money.

Pam Danzinger of Unity Marketing is one of the best researchers when it comes to keeping on top of the pulse for the “Trading Up” market, so I thought it was particularly insightful that she recently wrote, ” “If consumer confidence continues to weaken among the affluent (whom she defines as $75,000 to $150,000 Annual Household Income), it will be a testing time for luxury marketers and brands. Many luxury brands are going to discover just how dependent they have become upon consumers’ penchant to ‘trade up’ to more luxurious offerings than they otherwise could afford. On the other hand, luxury brands that have built their business on the super-affluent market will likely be immune to this trend.”

Of course, for luxury brands that are overexposed to the “trading up” market, now might be a good time for a change of course. I can guarantee Elite Traveler’s readers with a Household Income of $5.3 million aren’t cutting back (see next item on holiday spending).

WOW: The Average Annual Household Income of the Elite Traveler reader is $5.3 million and Average Age is 41. Source: Prince & Associates

 

5. Super Rich Plan Super Spending for the Holidays

America may be fretting about rising energy prices, the worsening home mortgage crisis and falling home values, but in the rarified air at 40,000 feet where the Super Rich cruise aboard their private jets there is a different story. A custom jewel-encrusted saddle for a pony, a $30,000 couture dress for a four-year-old, a $200,000 restored classic Camaro — these are among the holiday gift lists of the world’s “superrich,” those whose household net worth tops $10 million with many whose Net Worth is much higher. According to the annual Elite Traveler Magazine/Prince& Associates 2007 Holiday Spending Survey, the super rich will increase their annual spending by between 17 percent and 67 percent across more than a dozen luxury categories. Some of these items include jewelry, corporate gifts, events at hotels and holiday travel expenditures including yacht charters and private island and villa rentals. Recognizing that getting there is half the fun, more than 60 percent of the super rich will travel by private jet this holiday season and more than a third will give “jet cards” to friends, family and colleagues. These uber-luxe gift cards start at a price of $40,000 for10 hours of flight time. Not surprisingly, not a single person among the over280 Super Rich interviewed said rising gas prices are impacting their holiday travel plans.

What the Rich are Buying

Specifically, the super rich will spend 67 percent more on jewelry this year, increasing from $91,100 in 2006 to $152,400 in 2007. Electronics also registered huge gains, rising 53 percent from $25,700 to $39,300. Projected holiday spending by the super rich is great news for the travel industry as well. It expects to see an increase of 44 percent in spending on events at hotels, 36 percent on hotels and spas, 23 percent on villa rentals and19 percent on yacht charters.

“Clearly, the super rich are not impacted by the sub-prime crisis that has other sectors of the economy nervous this holiday season,” said Douglas Gollan, president and editor-in-chief of Elite Traveler, the exclusive lifestyle magazine distributed onboard private jets. “More than 70 percent of the super rich will spend an average of $44,900 on electronics this holiday season and they will outpace their mass affluent counterparts by an impressive1,091 percent. Their spending in this and other categories signals a robust economy at the top tier.” Gollan, who recently co-authored “The Sky’s the Limit,” a book about the luxury lifestyle buying habits of the Super Rich, noted, “The Super Rich segment will be the most important source of business for providers of luxury goods and services and as the Mass Affluent trade down and conserve. The segment of the private jet set is absolutely going about their spending in a business as usual way, and in fact as our survey shows, spending considerably more.” The survey tracks spending trends among the super rich (defined as those with a net worth of more than $10 million) and mass affluent (those whose net worth is between $1 and $9.9 million), and it revealed that the super rich will outspend their “mass affluent” counterparts in every one of 16 categories ranging from charitable donations to watches to gifts for pets. For example, the super rich are projected to spend 7,383 percent more than their mass affluent counterparts on corporate gifts. Similarly, quadruple-digit variances can be found in jewelry, fashion, hotels/resorts, watches, wine/spirits for entertaining, in-home spa services, electronics and charitable donations. Interestingly, virtually equal percentages of the superrich and mass affluent plan to make charitable donations this holiday season, registering 99.6 percent and 99.7 percent in the survey, although the superrich donations will outpace the mass affluent by 2,323 percent, rising23 percent over last year from $94,200 to $116,300 in 2007.

The complete survey can be found at www.elitetraveler.com/research.html. The survey queried nearly 850super affluent individuals to determine how the holiday would shape up for luxury retailers.

Super Rich – Comparison 2007 / 2006 Holiday Spending Super Rich: Net Worth $10 million+

HAPPY HOLIDAYS: Our readers will be spending $152,000 per household on jewelry for the holidays…

 

6. Elite Wishes for the Happiest of Holidays and a Grand New Year

2008 marks the seventh year for Elite Traveler. Perhaps being in the right place at the right time is what it is all about, but clearly private jets have set the Super Rich free to roam and shop at ever-increasing levels.

With Elite Traveler readers (some 575,000 today) roaming the globe like never before – 41 trips per year, including 11 intercontinental trips – the idea of traditional magazines which are mailed by subscription to one’s home (which of the four?) no longer is an effective way to reach the Super Rich segment.

Our BPA-audited circulation aboard private jets and mega-yachts in over 90 countries has meant that luxury marketers now know wherever in the world the biggest spenders happen to be, Elite Traveler and their marketing messages reach them.

We are in business today and thriving only because of the companies whose advertisements you see in the pages of each issue. So while I think it is a wonderful investment of their advertising dollars, I want to take this opportunity to underscore my sincere appreciation for the support of our advertisers.

To all of you who read this newsletter, I want to personally wish you a wonderful holiday and all of the successes you dream about in 2008! Happy Holidays and Happy New Year!