How Luxury and Tourism transform economic unsettlement into steady growth

by Alvaro HIDALGO

In this period of calls for higher taxes, worries about Banks’ solvency;  American and Chinese officials telling off Europeans upon debt, currency and measures to  recover confidence;  BRICS meeting today to decide whether they buy European  debt or not; high unemployment  in industrialized countries; severe austerity programs applied in Portugal, Italy, Greece and  Spain;  talks about overheating Brazilian markets;  bubble in Chinese real estate markets and its implications to its financial sector;  etc, etc, etc, there  is an industry continuing to perform worldwide: Leisure, Travel, Tourism and Lifestyle.

Bulls & Bears may fight pulling up and down stock exchange indexes for reasons difficult to grasp (down 50% twice in a decade and then  returning back to the starting point),  but if there is a sector in which we see the largest gap between reality and  its reflection in the markets, this is the Tourism.

Indeed, most analysts continue to forget that Tourism has provided nonstop stable growth for the last 50 years and is now hovering 10% of GDP in average in OCDE countries, increasing its weight every year. China expects to double the weight of Tourism to 11%  of GDP by 2020.

Most importantly, Tourism is an automatic and effective channel for wealth & investment transfer from cash rich countries to cash seeking countries…,  ...something that sounds good enough in these days.

To start with,  international tourist arrivals are estimated to have grown  to 440 M consumers in the first half of 2011, +19M  more over last year period….several world markets and regions growing by +9% !!!. …and all this in spite of the crisis.  (http://bit.ly/py1zwy , UNWTO)

Tourism has also shown its capacity to bounce back from any type of Political, Health or Natural disasters, whether it is mayor global events (9/11), regional ones (SARS crisis, Iceladic volcanic eruption) or local  (Mexican Swine flu, Far east Tsunami), the recovery period comprised between 3 months for local events, to 12-24 moths for global high importance events (OAG Crisis Analysis Aug.2011).

In the midst of troubled financial markets, the Travel & Tourism infrastructure continues to expand: +3.6% steady growth in air seats per annum since 1979; Airport capacity needs to cope with figures that will double before 2030 (UK demand will go from 240 to 465 mppa. See today's article in FT on the cost of postponing investments http://on.ft.com/ocGbk8); Brazil will double its airport capacity before 2013 requiring US$ 3,76 billion;  Air travel in India passed from  6% to 20% growth p.a  in less than a decade., etc). In turn, Airbus foresees strong ongoing demand for commercial aircraft. By 2030 some 27,800 new aircraft will be required to satisfy future robust market demand, with a combined value of  US$3.5 trillion (source Airbus).

If we leave aside the above number crunching exercise, the two crucial points to consider are:

•    Travel and tourism has become multidirectional, the division between originating and receiving countries is fading with BRICS transforming themselves into originating markets and  USA &  Europe receiving more tourists every year  from the rest of the world.

Funnily enough, the  –once (?) - rich countries are battling in fierce competition to attract this inbound traffic, in the knowledge that  all the economic benefits traditionally provided by Tourism  to developing countries as (i) source of development; (ii)  impulse to investment in infrastructure; (iii) job generating sector;  and (iv) source of hard currency;  are now  providing a good recipe to ease western countries troubles.

•    Regional travel is growing fast in all continents  (a point that deserves an entire blog entry on the subject)

Resulting from these points, hotel chains foresee very solid fundamentals for the medium term. Chris Nassetta, CEO Hilton Wordwide, claimed to be “pretty darned optimistic” about the growth of the hotel sector worldwide, adding that he’s seeing “the best fundamentals in my career to date.”  http://on.ft.com/oCcys5 .

It is true that from a financing point of view, hospitality investments have a bleak short term outlook, due to the accumulation of loan maturities (excellent  article on http://bit.ly/oFvARn ) which will result in a difficult  2012. But again, this is due to short term technical reasons, not fundamentals.

However, there is an additional factor entering the equation:  The new tourism is very focused on Luxury and the common aspects between these -once- different industries are now tying them together and blending them it into one sole industry that could be considered as the Lyfestyle Industry. 

As paradigm of long term view, Mr Arnault , president of the French Luxury  group LVMH,  made his first move 25 years ago by merging the champagne & spirits company  Moët Hennessy with the luxury leather goods and fashion house Louis Vuitton  Malletier -a daring move in those days-.  His vision of reuniting French Luxury brands in one company has proved to be accurate and LVMH is now harvesting the results, having consolidated leadership position worldwide with overall success, let alone minor recent bumps (Hermès) in his strategy.

This brand aggregation -or if you wish, consolidation of the distribution channels- is proving so successful that the subsequent step, The Super Luxury Malls, is becoming a reality http://bit.ly/ppqP93   and http://bit.ly/qop15o,  these two examples showing how the Luxury shopping experience is being implemented.

Las Vegas Crystals at citycenter

This quest for luxury has also entered in full force in the hospitality industry, with relevant brands expanding worldwide (again, note also the penetration of Middle East and Far East hospitality luxury brands in both their regional and the western markets).

The last steps in this trend are the consumer goods luxury brands entering into both (i) traditional hospitality and (ii) residential tourism through the branded residences concept (see excellent article in Forbes magazine http://onforb.es/lMJGey )

The analysis, Q&A on the weight and benefits of the brands in hospitality and branded residences can be seen in previous entries to our blog http://bit.ly/n8XRj2 , http://bit.ly/pO0pIn ;  how a brand can shape a tourism destination. http://bit.ly/r4mICb, and how the presence of the brand reduces risk and shortens maturity of projects http://bit.ly/njITKT . (See also, “the brand advantage” in a real estate market conference marked by wariness http://bit.ly/nxHZyC )

So, while old Bulls & Bears, PIGS or any other category continue to jump like cats in hot BRICS, we should concentrate into proposing this new market what it wants and we can shape.... targeted  Luxury Tourism and Hospitality Services conveyed through brand positioning.

……And once you’re in for the brands in the Luxury Lifestyle industry, then there are “brands” and there is the unparalleled “Coolest brand”

For more information please contact FIRSTLOGIC Consulting
http://www.first-logic.com

.