With 2007 wrapped up, Helium Report is turning its attention to what’s in store for destination clubs in the year ahead. No doubt that 2008 will include a handful of mergers, as the industry consolidation of the last two years continues. Clubs will also add more membership perks such as hotel alliances and pre-arranged trips for members just as Exclusive Resorts launched their Once in A Lifetime travel program last year.

This year, however, is a true turning point for the industry. With the slowdown in the real estate market affecting many once high-flying second home locales, the door is wide open for destination clubs to make a wider push into the vacation home alternative market. With that in mind, we sat down with Jamie Cheng, Helium Report’s co-founder and chief analyst to talk about what’s next for destination clubs.

What will be the biggest news of the year?

Jamie Cheng: A major hotel company will launch a destination club membership. Until now the destination club industry has been dominated by start-ups, and several have gone from boutique operators to solid players with thousands of members. We see a big opportunity for a new entrant this year in the form of an established player in the real estate field.

Hotel companies like Ritz-Carlton and Starwood have already expanded their reach from pure hotels to fractional developments and even whole ownership communities in areas that appeal to the second home buyer. Ritz-Carlton even allows its private residence club owners to swap a week at say, their fractional in St. Thomas for a week at the Ritz-Carlton fractional in Aspen.

The next natural step for these hotel players? A dive into the destination club industry. Both have growing network of real estate developments that give them an established base of homes to offer in their portfolio. Starwood has real estate properties under their Westin, St. Regis and W Hotel brands, while the Ritz-Carlton continues to expand their real estate portfolio around the world. Destination clubs already see these developments as prime locales for their members. For instance, Exclusive Resorts has eight residences at the St. Regis in Ft. Lauderdale and seven homes at Ritz-Carlton’s Abaco Club on Winding Bay in the Bahamas.

Slowing real estate sales has left some new fractionals sitting on the market and those buyer-less units could easily be rolled into a destination club plan. Additionally, the move could play into the mindset of today’s vacation home buyer. Many are sitting on the fence, waiting out the turmoil in the real estate market, but these folks still want to vacation. An established brand with a base of ready customers could open the destination club market to a whole new group of travelers.

What about the high end of the market? Will there be any new club launches in the style of the Yellowstone Club?

JC: 2008 marks the end of vanity destination clubs. The days of billionaires buying up seven or eight spectacular homes for use by their friends and other mogul-types is over. Last year Ciel announced that it would cease signing up new members as it morphs its destination club model into a real estate investment vehicle with a land conservation element and tax saving benefits. Elysian is no longer operating and Yellowstone Club World isn’t actively signing up new members. The last ultra high-end club standing? Solstice and it has a lock on that end of the market with a collection of homes averaging $6 million in value that are often in more exotic locations like the Brazilian rain forest. The top end Solstice membership is now almost $2 million and we don’t see much room for another player on this level to succeed. Instead there is more market opportunity on the entry and mid-level of the market.

So if the high end of the market is off limits, what does it take for a club to succeed in 2008?

JC: The membership bar to success is rising. Since 2005, we have touted the 100-member milestone as an important measure of a club’s success. And while that continues to be a relevant benchmark, we think that the new bar is 500 members. More clubs are merging and thereby beefing up their member numbers by widening the gap between the largest clubs and the more boutique operations. For instance, when merged, the new Ultimate Escapes will boast more than 1,200 members. Does that mean there isn’t room for a boutique player? Of course not.

There are smaller shops like LUSSO Collection and BelleHavens with a solid market niche and a real velocity to their membership growth. But there are also notable small club failures including My Global Playground and Premier Destinations. As a whole, bigger is going to be seen as better and any start up clubs will likely have to do a big push to meet member numbers that will make them legitimate players in this field.

Is potential regulation a threat to the industry?

JC: Regulation is really much ado about nothing. The R-word has destination clubs and the Destination Club Association on their toes. Last year, Hawaii took a look at the destination clubs and the industry responded with its own plan, which calls for self-policing. It’s important to remember that the destination club industry has already taken proactive measures in the wake of the Tanner & Haley bankruptcy in 2006. The Destination Club Association was created and calls for more financial transparency to members were heeded as clubs have had to prove their financial stability. Consumers for their part understand that this is a lifestyle investment rather than a pure financial investment. They understand that this is membership, not ownership. Overall, the club industry has had a relatively clean bill of health. Without a major club flub, there is no red herring that would prompt a serious push towards regulation.

Will the average second home buyer start to hear more about destination clubs?

JC: Absolutely. Remember the days when you couldn’t open your mailbox without an America Online (AOL) installation CD falling out? I say that 2008 is the year of the Exclusive Resort DVD. After all Steve Case, co-founder of AOL, owns a majority stake in Exclusive Resorts. Ok, maybe there won’t be quite the deluge that we saw with AOL, but this year certainly will see a bigger marketing push on the part of all clubs, including the industry leader Exclusive Resorts.

Last year saw more mergers and a further contraction among the top clubs, but 2008 is prime time for signing up new members. The timing is ripe for a big membership drive given the real estate slowdown and even home price drops in some second home markets. Clubs need to go after that vacation home buyer who is disenchanted with the real estate market and holding off on buying a second or third home. With deposit refund guarantees ranging from 80 to 100 percent, destination clubs can make financial assurances that a ski house in Lake Tahoe or golf course home in Scottsdale might not be able to meet.

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