A Second Look at Demeure: A Second Interview With Its Founder, Peter Schwartz

By: Guest Author Susan Kime
Date: September 13, 2010

With 20:20 hindsight, it was Karmic, or some kind of syzygy that I wrote a piece on :Demeure, a new travel and accommodations model, when I did. It appeared in Luxist on August 20th: here is the link:

Demeure: Designing A New Worldwide Travel Community

During my interview with Peter Schwartz, I realized, not for the first time, that this model could certainly be a palliative to many of the ills faced by the Destination Club industry. At that time, I had no idea about the problems that would then emerge regarding Ultimate Escapes. So, after the article in Luxist, I wanted to write a more detailed update regarding aspects of this model that apply to the current state of the destination club industry, those aspects that might allow members and others to take another look at a travel/community model that would allow them to acquire all they really want: a great vacation, with amenities, for a reasonable price. This is based on Demeure’s comprehensive and well thought out model, whereby members do not have to pay significant up-front fees to get the destination club experience. Demeure is assembling a significant network of properties worldwide through agreements with hoteliers, owners of rental properties and agencies that represent these properties. And notably Demeure also encourages members to contribute their own properties to pay for their travel benefits.

So, I called Peter again. And in this article I asked him more questions.

Before I get to the interview however, it is important to understand that they have been three years in the conceptualizing and operationalizing of Demeure. It was created by a team of Canadian entrepreneurs, headed by Peter, a young man who has had exceptional business success in his life. He is the founder and CEO of Laurence Capital Corporation; a Waterloo (Canada) based Private Equity Firm with diverse holdings in financial services, real estate and technology. In particular Laurence Capital has developed some very innovative “community-based” initiatives the most significant of which is in the travel industry. Within this last context is Demeure, an entity that appears to have the root systems that could create a significant opportunity for the industry by bringing property owners and travelers together for the benefit of all. Correspondingly Demeure could provide a compelling option for destination clubs to become part of the Demeure community through the implementation of Demeure's unique "private chapter model" which I will further explain below.

Susan: Peter, please explain Demeure from an alternative business perspective, that is, how is your model different from that of a destination club?

Peter: Demeure starts by recognizing the experience that destination club member’s want but haven’t really received because of the limitations that are inherent in the destination club model as we know it. The Demeure model recognizes that there is significant unutilized capacity in villas, flats and hotel properties all over the world. We’re creating a platform to deliver a range of services, including those of a luxury destination club. Demeure delivers this to its members on a standardized and cost-effective basis. Members pay a nominal initiation fee to join the club, have only a five-year obligation and they contract for a fixed amount of travel each year. In return members receive a 40 or 50% discount off the non-member price for the duration of their term. We are able to provide capacity to our members three ways, the most notable of which is to encourage members to contribute their own properties whereby members receive credit as their properties are used. They can then freely use this credit to pay for their travel to all properties available in the Demeure community.

It sounds like a simple concept but there is a proprietary web platform on which we have implemented the analytics that make this possible, to ensure that we facilitate the "exchange" of properties on an equitable basis. The concept of "exchanging" properties has been around for centuries, but making it work is logistically challenging and that is why few people ever do it. And when managing what we call a "many-to-many exchange," the biggest and most difficult challenge was to determine relative value between the members as they contribute time in their properties and receive credit in return. Members are then assured that they are getting fair value by the integrity of the Demeure system (which is audited by a global accounting firm). They can use their "credit" to stay in any property in the Demeure community. We have seen a few models that are beginning to use a credit system but none that makes sense to us when considering the factors that affect fair market value. Demeure is backed by an investor group and board of directors who have deep experience in travel and real estate.

The club also offers the option for club members to organize themselves into private chapters where they can limit the use of their properties to their fellow chapter members, earning credit when fellow members stay in them and then being able to use their credit to stay in properties of equivalent value anywhere in the Demeure community. The chapters are established as joint ventures with the club and can be profitable for the chapter "principals" themselves. The profitability of a chapter is designed to align the interests of all members – both travelers and property owners (who can be one in the same). It does this by compensating the chapter principals for sourcing and setting up properties in the destinations that members wish to travel to.

The club has also begun signing hotel partners and developers who offer capacity at the members guaranteed discount rate in return for offering club members exclusive access to that capacity using their membership accounts.

Susan: I would like to have your explanation as to how the Ultimate Escapes members could derive greater satisfaction by the acceptance of the Demeure model. Please explain what the Demeure model can actually do for them, both from a short and long term perspective.

Peter: Let me first say that we know the UE members love the vacation experience – that has engendered their loyalty over years. But I think they realize it is very expensive, and the financial instability of the club creates risk and uncertainty that don't mesh well with the seamless vacation experience they are looking for. The instability of UE is due to difficulties with the non-equity based destination club model itself. What's most important from a member perspective is that there will be a known cost and surety with respect to their vacation experience. However, this assurance is difficult now, as it appears that management has lost member confidence.

So, our model does the following things:

1. Restore trust in a way that provides a comparable product/experience. Maintain the benefits that are currently afforded to members.
2. Expand travel options beyond what is currently available - Demeure Club members can stay in villas, flats and fine hotel properties anywhere in the Demeure community significantly expanding the selection and choice to members.
3. Mitigate and limit ongoing costs. If the model is broken, and I believe the non-equity model is, then change it. Demeure has spent significant time and effort creating a model that works.
4. Provide the opportunity for members to contribute their own properties to offset some or all of their annual travel costs.
5. Provide a fixed term of five years, which is renewable. Members can renew or not, and with nominal initiation fees the club is more accessible and therefore can expand and continue to offer more and more selection and choice for members.

Susan: How can these five things be accomplished with Demeure?

Peter: Demeure's model separates capital-intensive real-estate ownership from the travel experience. There is plenty of unutilized capacity at fine properties all over the world whose owners are interested in travel and very motivated to put their properties to work.

By combining excess capacity in properties with intelligent and sophisticated travelers who want a predictable experience, Demeure aligns the interests of both sides bringing property owners and travelers together in a like-minded community. We truly know that this is the way the world is headed. Facebook is a prime example of how communities share like interests and in doing so the opportunity exists to align them and then create a powerful service offering to address their needs. We are here to build that kind of community, not only with private residences and villas, but also with boutique or branded hoteliers. The Demeure model is an inclusive traveler’s community rather than a model for an exclusive destination club and yet can provide a wide range of predictable services including those of a luxury destination club member but without the risk and significant expense. And, it is working.

Susan: When the dust is settled, are you saying that you can provide a DC experience without having to pay a DC price?

Peter: Yes, with a few exceptions. Instead of rolling in expensive mandatory services our model includes a menu of options that the members can choose to pay for. This ensures that we can under promise and over deliver, instead of the other way around which is often the case. On an annualized basis our costs are significantly less than what a regular destination club member has to absorb. This is based principally on our ability to source properties without the initial cost of acquiring and maintaining. We do not have to manage them remotely, which is both difficult and costly – especially when things go wrong - and they always do. And last we are pretty sure that given the early stage of the industry, that a lot of promises were made and money was spent trying to make members happy. We believe this spending was principally in order get referrals and to ultimately keep their significant initiation fees coming in. These initiation fees were used primarily to fund operations, including the cost of selling memberships, and then to the extent that they had surplus cash or access to debt they rushed to acquire properties to continue the cycle. This process ended in doom for many when the economy turned, however now that we can offer this experience without owning the properties and with efficient use of the web, we do not believe that a return to better economic times will allow the cycle to re-start. And without these fees – in our view not matched with the corresponding costs – destination clubs, as we know them cannot survive. Our view is that the fees weren’t necessary and that buying the homes to provide the service was not necessary given the historical vacancy rates that exist in hospitality. Hotels and now some of the finer Rental Management companies have been providing destination club type service and experiences, but none on a global scale, and with the type of platform that we are offering. We know that there is also significant demand for villas, flats and multi-bedroom suite inventory in hotels and that travelers increasingly seek the experiences of having these choices. There has been a dramatic increase in this type of inventory and vacation property owners wish to maximize the value of their investments. There is also a significant number of people who wish to both own a vacation property and also continue to travel Putting their properties to work makes sense. All of us here started out in the same place. We wanted to have the dream of vacation property ownership, but we are also interested in using leftover time to exchange for vacation time because we wish to travel as well. Essentially we want to put our investments to work when they are not in use. For people who already rent their vacation homes, it allows them to maximize the value they receive by tapping into the demand for “exchange” in the Demeure community. We also know that the hotel industry and many of the villa rental management companies actively offer discounts when occupancy is down or at the "last minute." Property owners who contribute time to Demeure can offer this time at the same rates but without the future opportunity cost of doing so. Club Members have exclusive access to this capacity and they represent a high-quality guest and predictable demand.

Susan: How will you do that, and how do you see the members’ conundrum?

I wonder whether any people would have joined a destination club if they had 20/20 foresight. Members' faith and trust have been shaken. They did not get what they paid for. Not only were there surprise assessments, there were also internal matters like a possible bankruptcy that members were apprised of quite late in the game. And, members never got to know each other, which in our minds is not how a club, much less a community works. In addition, with many deflated clubs, not only Ultimate Escapes, there are so many unanswered questions.

Our founders and board members bring experience in private equity, technology, real estate and in the travel industry. We have had to put together responsible and cost effective models before and we have been three years designing, building and funding Demeure. We didn’t rush out and hastily introduce another model that wasn’t well thought out. We took time to understand the literally hundreds of permutations and combinations that need to be understood and that need to be managed responsibly. From our perspective we can demonstrate how and why the typical destination club model can’t work in the long term. What was begun was not how it evolved, as in the end; the DC models were neither responsible nor cost effective. The deficiency at the heart of the DC model is rooted in mathematics. Its not a critique of UE but of the DC model itself. It’s always been much more expensive to operate vacation homes than estimated. As the UE members wanted more vacation options, the clubs bought more, or leased more. Overzealous leasing has been one of the Achilles heels of the DC industry, as is the idea of anywhere/anytime access. We have worked through these issues in the Demeure model, documented them profusely such that members can understand how it works, ensure that the club is governed responsibly, and that their money is protected. Member fees are placed directly in a trust account, which is audited by a global accounting firm, and then is settled to all parties ensuring that there is full security. The Demeure model removes the risk for all members of the Demeure community, both travelers and property owners.

To summarize how the model works: Members may join the club with or without a property to contribute. Members, who wish to contribute, contribute a minimum of four weeks per year and they do not have to specify which weeks. Our system value property contributions according to the actual booking dates taking seasonality into consideration when determining the value earned by that member for the use of their property. When their property is used, they receive 75% of the value of their contribution in travel credits to use anywhere in the club. All members receive a guaranteed discount rate. The guaranteed discount rate depends on whether the member is contributing a property or not. Members who contribute properties receive a 50% discount against the non-member rate, while all other members enjoy a 40% discount. Joining fees are $USD 2500.00 and entitle the members to a five year travel plan which is renewable for $USD995.00). Joining fees are waived for members who contribute their properties for a minimum of four weeks for the duration of the term. Members do not pay annual dues but they make an annual travel commitment that applies to the full five year term, starting at $USD3400 per year. This is the minimum annual commitment based on 14 nights and $USD250.00 per night. Members when joining can set their rate at any level, increasing in 7-day intervals and $50.00 increments on the nightly fee. For example our most recent member signed up for a 28 day, $USD1000 per night package. This member is then entitled to receive a 40 or 50% discount for the term. This works as follows;

For example for a villa costing $1,000 per night a member who has not contributed a property to the Club would pay $600 per night for the stay, while a member who provided time to the Club would be charged $500 per night for the same stay. And remember the member contributing a property can pay for this $500 with credits they receive from the use of their own property.

Susan: So in summary how do you plan to meet the expectations of Destination Club members?

Peter: Our goal is to maximize the value of the member’s vacation experience, without the risks inherent in the destination club model as we know it. We allow members to customize their experience according to their own travel preferences ranging from "knowing what they are getting" to a true "luxury" experience rivaling that of any destination club. But it is up to the member as to what level of service they want and on a trip-by-trip basis to decide what services to pay for with each trip. Demeure is actively listing properties and adding club members that deliver on the promise of the destination club industry but in a way that is sustainable and responsible. Our process of bringing members on is methodical and requires that members understand exactly how Demeure works before committing. And because we encourage interaction between all members, we see a point in the very near future where friends and colleagues can rely on each other to decide to join the club and to make their travel experiences better. We are building a true community that operates the way we have learned from the Facebook and other social media networks that are becoming prolific today. For example Demeure also offers its members a significant set of tools for them to interact and to share their experiences. Members can access travel guides that are "WIKI" and that are populated with information and tips that are supplied by the property owners themselves and that are designed to really make the most out of the bounty of experiences and collective knowledge of the Demeure community.

For UE in particular, we feel we can offer the members continuity but also significantly expand the value they receive and without the risks that plague the industry.

http://www.demeure.com/