Threats To The Destination Club Industry

By: Destination Club News
Date: March 24, 2009

"We're simply seeing a shakeout from outmoded, unsustainable business practices. When executed properly, it's a winning lifestyle choice for the consumer. Destination clubs are here to stay."

Darin Gilson, now the Senior Vice President of Sales and Business Development at Abercrombie & Kent Residence Club stated these words while serving as the CEO at his former club BelleHavens late in 2006. The industry had just seen the monumental collapse of an industry titan, Tanner & Haley. The industry's founder and Tanner & Haley's CEO Rob McGrath had stepped down from his post. Hundreds of members were left wondering how it happened, prospects stepped back to take a closer look at the destination club model, and industry executives were quick to point out the differences between their clubs and that of Tanner & Haley.

The industry faces even more troubling times as High Country Club, LUSSO Collection, and Yellowstone Club World have all ceased operations and filed for bankruptcy in recent months. Clubs again are emphasizing the differences between their models and other struggling clubs. Industry executives are being relieved of their duties and facing growing pressure from members, but Darin's words are as valid today as they were in 2006, "Destination clubs are here to stay."

Many experts believe that the economy may begin to see improvements during the middle to end of this year. When the economy does turn around, the industry will look vastly different from what it looked like in 2006, but what will the major threats to the industry be?

Resigning Members
The global recession has impacted club members just as much as it has affected the clubs. Others have not been pleased with concessions made by clubs to weather the current economy. No matter the reason, resignation lists across the industry have seen sharp rises over the past year. Traditionally, each club requires a published number of new members to join the club before one current member is redeemed.

Most clubs adhere to a three in, one out resignation policy. Clubs may elect to continue operating under this policy, allowing the club guaranteed growth for every current member that is allowed to exit. The obvious benefit is that the club receives three times the contribution in both annual dues and membership deposits to replace the one member that is allowed to exit. Unfortunately, by maintaining this policy, members low on the resignation list with many people in front of them remain a part of the membership base and can grow increasingly frustrated as they await repayment, at relatively slower rates than years ago (although still relatively rapid compared with some country club resignation lists).

With a backlog of members looking to exit their club, clubs have two options for addressing this issue.

Clubs may elect to allow current members the ability to resell their membership on the open market. By allowing members the ability to resell their membership, making the membership deposit adjustable by the selling member and fixing annual dues and nightly fees, the club could greatly reduce the number of members on their resignation list and bring in new members, but by creating a secondary resale market, the club compromises new membership sales. With virtually identical memberships being sold by both resigning members and the club, resigning members eager to liquidate could universally price their memberships below the publically offered price of the club.

Lastly, clubs could also modify their redemption policies to follow a one in, one out policy. By doing so, the club greatly decreases the amount of time a member would wait on the resignation list while not compromising new sales. While a strong benefit for current members, a permanent change to a one in, one out policy slows the long term growth of the club. In a three in, one out model, the club is guaranteed two additional members for every one that leaves. A one in, one out policy simply replaces one member leaving with one member joining. The club only grows once the resignation list is at zero. In a zero growth model, new property acquisitions also come to a halt. If clubs temporarily transition to a one in, one out policy to help resigning members, clubs could also see a surge of satisfied members add their names to the resignation list to capitalize on the policy.

Member Litigation
Stemming largely out of resigning membership policies, some clubs will face legal pressures as members seek to have their membership deposits returned.

Every club has numerous membership documents that require both member and club signatures outlining every aspect of club membership. As members fear the potential loss of their membership deposit, members have already begun to pursue clubs in an attempt to regain their membership deposits in case their club does go under. Changing membership terms at various clubs have also led members to threaten and pursue legal action.

Nearly all court battles prove costly for both sides. Clubs will be forced to decide whether to fight members in the court room or make accommodations to members threatening legal action. Taking each case through the legal process requires the club to pay legal fees largely unaccounted for in budgets but accommodating members may create a rush of other members following the path carved by former members.

Decreasing Real Estate Values
In many of our interviews with destination club CEOs, executives have cited real estate values 20 to 50 percent below value. While the real estate market will eventually recover, addressing current concerns makes the wait and see perspective impossible.

Short of new membership sales and annual dues, a club's real estate holdings are its primary source of income. Liquidating assets are often the only way to rightsize a club's costs. If clubs face litigation or other unforeseen problems that require large capital outpours, liquidating properties may be the only answer. With real estate assets widely valued less than their purchase price, clubs will have to decide how best to proceed. Member's favorite properties will largely be the most appealing on the real estate market. Likewise, the least accessed properties will garner the least interest on the market.

Do you sell the properties that have the most value or cannibalize your real estate inventory by selling multiple lower value properties? Do you offer discounted memberships to fill the void while you wait for real estate values to recover? Do you selectively liquidate assets by selling properties to members who already have visited properties? Most clubs have marketed a long-term approach to real estate investing: as an example, Equity Estates’ portfolio will not be liquidated until 2021.

Inability To Secure Financing
A club's ability to secure financing is largely dependent on its real estate holdings. With slumping home values coupled with cautious lenders, a club's ability to obtain financing grows increasingly difficult. While owning homes outright is undeniably one of the least risky models, judicious financing, low leverage, and good interest rates may still be a very successful club model.

Look for lenders to become more and more demanding of incoming dues and fees revenue to cover the carrying costs of clubs. Provided that inflows exceed outflows, financing should still be available, although more and more difficult and time-consuming to set up.

Consumer Confidence
Following Tanner & Haley's bankruptcy, many prospects backed away to confirm that the destination club model was sustainable. Much like 2006, 2009 and 2010 will see similar situations where prospective members want to digest each club's model before joining. Despite the Dow gaining nearly 500 points Monday, many prospective members that fit the destination club demographic have lost hundreds of thousands of dollars over the past year. Clubs will increasingly need to sell the financial component just as much, if not more than, the travel aspect.

Providing additional financial disclosure and committing to continual interaction with their membership base will help assure members and prospects alike of the club's sustainability.

"Destination clubs are here to stay." Mr. Gilson's words remain as true today as they did during the industry's last black eye. Member still largely rate the destination club travel experience as world class. While the light at the end of the tunnel may soon be approaching, clubs still will have many difficult choices to make.

What other threats does the destination club industry face in the coming months and years? To provide your own input and to discuss further, sign up free at http://www.destinationclubforums.com/ to discuss every destination club happening with prospects, members, and industry executives.