BULGARI TO OPEN LUXE HOTELS
Byline: James Fallon / With contributions from Luisa Zargani, Milan
LONDON — Bulgari SpA is going on holiday.
In what could presage the next major market for luxury goods and designer brands, the Italian company Tuesday formed a joint venture with Marriott International Inc., to open Bulgari Hotels & Resorts in major locations throughout the world. The first two hotels are expected to open in 2003, followed by five more over the next four years.
“Our role is to think about doing things today to insure the long-term growth of the brand,” Francesco Trapani, Bulgari’s chief executive officer, said at a news conference here. “Hotels are one of the fastest-growing sectors in the luxury market.
“We see the hotels as the ultimate expression of the Bulgari brand,” he added. “We’ve calculated that 10 to 15 times the number of people who visit a Bulgari store will stay at a Bulgari hotel.”
The hotel industry currently generates more than $300 billion a year, with the luxury segment accounting for about 10 percent of that, Trapani said. About 28 million American travelers stayed at luxury hotels last year and the number of wealthy travelers over age 45 is expected to grow by 20 percent by the year 2005.
“Luxury hotels are growing faster than some other sectors of the luxury goods industry,” Trapani said. “We are doing something that will enhance the Bulgari lifestyle and experience. If you do something prestigious, you will nurture the prestige of the brand.”
Bulgari isn’t the only one targeting the sector. Krizia has operated hotels for several years and recently brands such as Versace, Ferragamo, Diesel and Alberta Ferretti have moved into this business. Even Giorgio Armani is rumored to be considering the possibility of opening Armani hotels in Europe.
But analysts generally reacted negatively to Bulgari’s announcement. Bulgari’s stock at one point was down almost 8 percent on the Milan Bourse and closed down 4.5 percent at $10.48. (The share price was converted from euros at current exchange rates.)
“It’s an unusual move,” Claire Kent, a managing director and luxury goods analyst at Morgan Stanley Dean Witter here, said of the Bulgari-Marriott deal.
Another analyst termed the venture “quite bizarre” and said it was totally out of character for the normally cautious Bulgari management. Analysts weren’t concerned with the scale of the venture but with the potential damage it could do to the Bulgari brand — even if the hotels are successful.
“Sometimes these things aren’t related to the scale of the investment,” one analyst said. “It’s the possible dilution of the brand in the long term that is dangerous.”
But rival hoteliers applauded the joint venture. Ian Schrager of Schrager Hotels predicted Bulgari’s move could be copied by other luxury brands in years to come.
“It’s not stretching the Bulgari brand too far at all,” Schrager said in a telephone interview from New York. “What Bulgari is doing is conjuring up a level of expectations that comes from the image of that brand. There’s no reason the Bulgari brand should be restricted to jewelry, it could be anything. The key is for them to execute the concepts well and fulfill the expectations of their customers.
“I think what we started 20 years ago — and it has taken a long time to catch on — is this idea of small, fashionable hotels with a strong brand image. I certainly think you’ll see more of these companies move into this area. It’s a natural extension to what all the designers are already doing with their home collections. You might see an increasing convergence. Wouldn’t it be funny if, in years to come, LVMH [Moet Hennessy Louis Vuitton] was the biggest hotel operator in the world?”
Bulgari and Marriott expect to invest a total of about $140 million over the next five years. The investment will be split equally between the two partners and between equity and loans. Bulgari will contribute 65 percent of the equity and 35 percent of the loans, while Marriott will contribute 35 percent of the equity and 65 percent of the loans. The partners estimate the total portfolio will be worth about $800 million after five years, including the real estate.
The investment is expected to be earnings dilutive for Bulgari in the first two years because of startup costs. However, each hotel is expected to be profitable within a year of its opening and the venture should contribute to Bulgari’s earnings in a material way within four years, Trapani said.
The partners forecast total revenues from the venture of $300 million by the seventh year. Bulgari will receive royalty payments for the use of its name as well as dividends, while Marriott will receive management fees and dividends.
“We are looking at locations in major gateway cities like London, Rome, Paris, New York, Miami, Southern California and certain resort locations,” Trapani said, adding that the first hotel is likely to be in either London or Southern California. “But we also are looking at the Far East as an important market for this venture.”
Bulgari Hotels & Resorts plans to open five city hotels over the next seven years and two resorts. The hotels could be either newly built ones or existing hotels that are converted to the Bulgari format. There are reports that Bulgari Hotels & Resorts is interested in acquiring the Lanesborough Hotel in London, which is owned by the Rosewood Corp. of Texas.
Bulgari will be responsible for the design and style of the hotels and the services they offer, while Marriot’s Luxury Group will manage all the properties. The Luxury Group also manages Marriott’s 38 Ritz-Carlton Hotels. The actual real estate will be owned by property developers separate from the joint venture, Trapani stressed. The joint venture will lease the real estate on a long-term basis. Each property is likely to be owned by a different developer.
Each of the hotels will have 80 to 250 rooms, with the ideal size being about 150 rooms, Trapani said. The hotels are expected to combine modern architecture and interior design with features such as permanent exhibitions of Contemporary Art, world-class Italian food, innovative spa concepts and services, state of the art technology and high-level security. They are designed to appeal to the caliber of consumers that already buys Bulgari fragrances, jewelry and accessories.
Bulgari’s customer base was one of the main attractions for Marriot’s Luxury Group. William R. Tiefel, vice chairman of Marriott and chairman of The Ritz-Carlton Hotel Co., said Bulgari Hotels & Resorts will appeal to a clientele that currently doesn’t think of The Ritz-Carlton as its hotel of choice. The venture also will enable the group to leverage its strengths in luxury-hotel branding and management, reservations systems and procurement, he said.
“We do not see this as diminishing Ritz-Carlton,” Tiefel said. “That’s a more traditional kind of hotel, more grand in setting. The Bulgari hotels will be more contemporary Italian in look with a clientele that will be quite different — fashion, celebrities, the media.”
Trapani sees the venture as another way to raise awareness of the Bulgari brand in the increasingly competitive luxury-goods sector. The venture creates significant cross-marketing opportunities and reinforces the image of Bulgari as an innovative brand operating in a variety of prestige markets, he said. He acknowledged the stock market’s reaction to the announcement but said he wasn’t surprised by it.
“I’m not surprised because when you make bold moves, the reaction sometimes at the beginning is a bit skeptical,” he said. “But we believe this venture will enhance the Bulgari brand and enhance our value to our shareholders.”