Entertainment Spending and the Experience Economy
“Is not life a hundred times too short for us to bore ourselves?”
—FRIEDRICH NIETZSCHE
Spending on entertainment is through the roof, into the stratosphere. It has become a 24-7 obsession. The games closet at home, the TV watched only after dinner, the movie theater visited occasionally, the golf course, virtually every diversion and recreation has migrated to the iPad and smartphone, with everybody everywhere, at all times. Coupled with the incredible narcissistic orgy of social media and constant connectivity, itself entertainment, and you find a population consumed.
If you are an investor, you can’t possibly afford to ignore the entertainment category—and to pick out of other categories the companies not characterized as entertainment enterprises, yet very much into this game. Apple, for example, is categorized as a tech company, but I consider them a 60%+ entertainment company. Disney®, Lionsgate®, Hasbro®, 100% entertainment. (Note: I’m not dispensing investing guidance, only commentary.)
As a marketer, you have to look for ways to get your own business above the “50% entertainment” watermark. You want to be where the money is flowing like a river. This is more opiate of the masses than addiction of the affluent, but it is pernicious at all strata of society. The affluent consumer is, by and large, engaged with and embracing it all, if slightly more discriminating than most others.
Here, a couple out-of-the-devices scenarios …
Money Spent on Experiences
I’ll borrow their ad copy:
Today, you rescued the plane, prevented a carjacking, and shot your way out of a crowded subway station—and you never left our resort. Save the world by day. Relax with your favorite cocktail, vintage cigar, and fine cuisine at a true five-star mountain resort by night. A lifestyle typically reserved for secret agents and action heroes is now available to those who dare … Valhalla Shooting Club at Elk Mountain Resort. Ultra-realistic, theme-based, live-fire shooting scenarios put you in control of your destiny with pistol in hand. And when the shooting stops, our resort offers a full complement of activities and luxuries designed to satisfy you and your companion.
Aah, shaken, not stirred. As someone who played with a Man from U.N.C.L.E. attaché case in the backyard and grew up on Napoleon Solo, Ilya Kuryakin, James Bond, and the original Avengers, I find the Valhalla adventure appealing. It may or may not be your cup of tea, but some experience—some packaged grand experience or amazing adventure—would be. And there may very well be some such experience you can create within or as an extension of your business with enormous appeal to some number of affluent individuals.
One of our long time No B.S. Inner Circle Members running jewelry stores in small, Midwest communities takes a dozen or so of his most affluent clients on an annual trip to the South African diamond mines, where they pick out their own diamonds firsthand to be placed in custom-crafted jewelry. They can also add on an African safari or cruise if they desire. He collects a sizeable “experience fee” for putting this trip together and escorting his group. The fees combined are nearly as much as one-fourth of the net profit from one of his stores for the entire year.
Even the rather pedestrian cruise industry has grown up and gone affluent. Take the Four Seasons cruise ship. You do not just grab a cabin at a website, hop on board, and line up for the bon voyage buffet. Instead, you buy a time-share in it, for hundreds of thousands of dollars. The shares sold fast. Other condo cruise ships with penthouse cabins priced into the millions are at sea, with more under hurried construction. People purchasing these floating condos and time-shares aren’t doing so purely to take cruises. They are buying into an elite gated community that floats, and they’re purchasing a unique experience. One of these ultra-luxury cruise ship residences, The Magellan, is described this way:
The facilities and services of the world’s finest resorts are part of everyday life aboard The Magellan. On-call housekeeping staff, a world-class spa, 24-hour concierge staff, indoor and outdoor pools, six restaurants, a 450-seat theater with Broadway quality entertainment, a casino worthy of Monte Carlo, and an 8,000-square-foot greenhouse with onsite horticulturists are just a few of the conveniences that make living aboard The Magellan a unique experience.
Since when are a greenhouse and in-house horticulturist and six restaurants conveniences? Since now, for the ultra-affluent. Note this ad is not talking about taking a cruise. Living aboard.
Incidentally, time-shares on dry land or afloat are historically notoriously bad investments. Developers frequently flirt with fraud in overselling capacity, amenities deteriorate after units sell out, bankruptcies occur with regularity—even with this new type of high-end, luxury time-share. Overall, resale values rarely even match original purchase prices let alone yield gains. So, shouldn’t ultra-affluent individuals know better? Only demonstrates that people are people.
If you are following what most consider the smart money, you’ve seen it moving to companies, entrepreneurs, and projects creating and providing luxury experiences. As an example, two of the world’s richest men, Bill Gates and Prince Al-Waleed bin Talal Alsaud, partnered in taking the Four Seasons hotel chain private—with its luxury time-share and condo properties and newest addition, cruise ships. Apparently they see big profit potential in this crown jewel company.
Turning to the mass-affluent, the company I admire most in the world, Disney®, continues to diversify, developing and offering new experiences for sale to its customers. Its wedding business, thriving and expanding. Its multigenerational family reunion business, thriving. Its experience resorts like the Animal Kingdom Lodge, booked solid at premium prices. The FastPass® for many, but for some the $395 (and up)-per-hour private VIP guide with whom you bump all the lines, go backstage, and take shortcuts. In the time-share category, the Disney® Vacation Club is rapidly expanding to meet demand. When I took one of my client groups to Disney World® on a research excursion, we had a private lunch with two Imagineers, one of whom developed the group sales presentation used on board Disney® cruise ships to sell the club, who was thoroughly familiar with its growth. He predicted it would increase at least five-fold in less than three years, with new means of marketing and new luxury options. Since then, Disney® has opened the first of a number of planned stores in shopping malls exclusively devoted to selling the Vacation Club time-shares. The company has also gone west, turning 2.5 acres adjacent to the Grand Californian Hotel and Spa® at Disneyland® into 50 Vacation Club villas.
In total, the Vacation Club time-share program is in its 20th year, has more than 500,000 owners, and simply can’t add facilities fast enough to meet demand. Current expansion includes the new villas at Disneyland® in California, new Animal Kingdom Villas and the Grand Floridian Resort and Spa® Villas in Florida, and Aulani Resort and Spa® Villas in Hawaii.
Disney also opened up its previously “secret” Club 33 at Disneyland, now openly advertising a version of it at Disney World, with an initiation fee of $33,000.00 and annual dues of $15,000.00.
Time-shares aren’t limited to something you stay and sleep in anymore either. Affluent customers are time-sharing collections of exotic automobiles and portfolios of expensive jewelry, and ultra-affluent clients are time-sharing a “family office,” typically comprised of a CPA and life concierge on staff, supervising and coordinating all aspects of clients’ lives, from paying bills to planning trips to finding someone to remodel the barn. Instead of owning only one or two exotic cars, you can buy into a timeshare and drive dozens. Instead of owning only a few $50,000.00 to $500,000.00 pieces of stunning, one-of-a-kind jewelry, you can draw from a collection of hundreds and never be seen wearing the same piece twice. Instead of using your own Rolodex® to find pool cleaners, find home remodelers, organize trips, buy gifts, and check up on your money managers and investments yourself, you can share a dedicated management team with two or three other families.
Today, the affluent customer can get just about anything he can imagine—and will buy many things he didn’t imagine on his own—in the experience category. Oh, if you feel like helicoptering into Valhallas as its next tuxedoed, pistol-wielding, martini-drinking, beautiful-woman-impressing secret agent, you may begin your adventure at www.valhallasecurity.com.
Money Spent Dining Out
We love to eat. We love to eat out.
The shrinkage of the middle-class consumer and the regressed spending of the mass-affluent consumer groups had hit mid-level restaurants hard between the time I wrote the first edition of this book and the year I did the update prior to this one, in 2014.
From 2004 to 2008, U.S. restaurant sales climbed in virtually every category, at every level, topping $180 billion. In those years, 85% of Americans dined out at a minimum of once a month, over 20% paid restaurant tabs at least six times a month i.e., 1.5 times a week, and nearly 10% ka-chinged ten or more times a month.
From about 2009 to 2015, the industry segments experienced very different trajectories.
A late 2013 report in Nation’s Restaurant News revealed a troublesome, overall trend: People who were dining out multiple times every week and the larger number dining out multiple times every month were not only cutting back to, respectively, once a week or once a month, but also reducing their spending when doing so. Their research forecast a furtherance of the trend. Significantly, while overarching the entire industry, this reduction in frequency and check size was most concentrated in the middle. Darden Restaurants is a poster boy for this difficulty. In 2014, it got its Red Lobster® chain sold at a fire sale price, after many months of trying, and its Olive Garden® chain was wounded, limping, and scaring investors—so much so that one of its biggest investors created their own 300-page memorandum of cost cutting and other recommendations, leaked to the media. It included a demand that the chain’s “endless breadsticks” be ended, or at least tamped down by serving only one breadstick in place of a basket and waiting for a customer to request another. Darden’s value has since crawled back up, but fragility remains. The mid-level restaurants have the highest labor cost-to-sales ratio, tight margins, intense competition, loss of customers who trade down, and are most directly affected by the shrinking middle class I thoroughly described in Chapter 1. The enormous boom for the mid-level, fast casual restaurants came to a screeching halt, revealing overbuilding and saturation, resulting in quite a few in Chapter 11 bankruptcy, many others teetering.
In the fourth quarter of 2017, on the shareholder conference call, the CEO of Applebee’s and IHOP and other restaurants proclaimed theirs a company in transition, returning to growth. But a few months later, one of the largest Applebee’s franchisees filed for bankruptcy protection. The entire conglomerate posted losses of $324 million for the year.
The bottom of this food chain, also harmed and hurting. McDonald’s® same store sales year-to-year and quarter-to-quarter were down, leading up to this writing. The category in which McDonalds®, Burger King®, Taco Bell®, KFC®, etc., live has sacrificed price, transaction size, and profit margin just to keep all the doors open and the volume steady. The “$1 Menu,” the “$5 Meal,” and very aggressive promotional offers have taken control of this category, to their shared detriment.
Upscale, fine-dining chains and independents live on their own island. Some bled a little during the 2008 financial apocalypse, but nowhere near the extent of those in the middle and low groups. Many are doing quite well now. This teaches a lot about where you want to position your business, whether a restaurant or not. The least dramatic fluctuations of patronage, price, and profit are toward the top.
As a restaurant moves up, from anybody and everybody, to mass-affluent, to affluent clientele—targeted by its marketing and served by design of its product—price becomes less and less of a factor in customers’ decisions about repeat and even frequent patronage. I listened during a staff meeting at an upscale restaurant as the manager explained, “We do not have specials. Denny’s® has specials. We have chef’s features.” And that sums it up. While the lure of low price for a lot of bulk or price- or discount-driven specials is significantly important to the Denny’s® customer and is of some importance to the Applebee’s® or Outback Steakhouse® customer, it is of near zero importance to the Fleming’s® steakhouse customer.
The same applies to foods delivered to the home. If you compare Omaha Steaks® marketing to Allen Brothers® marketing, you’ll see that Omaha, catering to the mass-affluent, relies heavily on sales, special offers, and discounts, while Allen Brothers, selling to the more affluent, relies much less on price-related marketing. Virtually all the newer, quasi dotcom, prepared meal delivery companies priced to the middle-income consumer are burning through venture capital and losing money with abandon.
While there appears to be fierce competition in the restaurant industry, it is more about each restaurant finding its market. Certainly the higher up the food chain one moves, pardon the pun, the easier it is to carve out and control a unique segment of the market. And the less competition there is.
Finally, there’s a difference between a convenience restaurant and a destination restaurant. Fast-food, low-priced, and mid-priced restaurants marketing to mass-affluent and down tend to live or die by convenience to their customers. For fast-food outlets, location—even side of the street—traffic patterns, and population density are of enormous importance. This makes them vulnerable to shifts in such things, and, although you don’t think of McDonald’s®, Burger King®, Arby’s®, and so on failing, there are surprisingly large numbers of such stores that do close their doors every year, usually having to incur costs of relocation to follow the customers’ movements. Better restaurants marketing to mass-affluent and up are only about 50% dependent on convenience and can successfully draw from a bigger radius around their location, as customers who like that particular restaurant will drive farther to patronize it. Upscale restaurants and upscale and unique restaurants are destinations, so convenience can be virtually nonexistent, and they can still draw maximum crowds every night. Affluent customers are, according to a Food, Beverage, and Hospitality Survey of the Affluent, four times more likely than non-affluent consumers to drive farther than 40-minute round-trips to patronize a restaurant of choice. This is important to many kinds of businesses: As a big thumb rule, the higher the customer affluence, the larger the radius around the business from which customers can be obtained.
Reprinted from: No B.S. Marketing to the Affluent Letter. Diamond Membership, www.NoBSInnerCircle.com
The INTRAV catalogs of tours by first-class private jet are magnificently written—“dedicated journey concierges” …. “redefining travel for the discriminating 21st century traveler.” They utilize a private Boeing 757, customized to accommodate 50 travelers—oops, sorry, “elite travelers”—in total comfort. You have your own personalized entertainment programming, in an iPad®, which is yours to keep. (The crass word “bonus” is never said, but this is a gift with purchase.) There are several different routings each through several countries, with unique experiences in each place—like attending elephant polo in Jaipur, complimented by cocktails, fireworks, and a military bagpiper band. The fee is $9,950.00 (not $10,000.00) per person, double occupancy required—singles pay a $9,950.00 surcharge. This includes the aforementioned iPad® gift and $250,000.00 in emergency medical and evacuation (!) insurance. You bypass ordinary security lines and have expedited customs at each airport, fly direct, have an in-flight chef, and maybe most importantly, are traveling with only 25 other couples—absent crying infants or poor people. You can and should see this: www.intravjet.com.
Money Spent on Travel
Travel was the number-one category for spending in the Ipsos Affluent Survey with a 25% increase in spending on travel in 2016. In 2016, $215 billion was spent in the travel industry, with affluents spending 56% of all travel dollars. Ipsos found that luxury consumers are moving away from spending on things and moving more and more towards experiential. 91% have passports. Almost half took a cruise in the last three years. 92% do research before they travel. 66% say that travel publications and TV programs inspire them to seek out new experiences. They also segmented the affluent travelers as follows:
Affluent Jetsetters. The wealthiest segment, they have a household income (HI) of $175,000.00, have the highest financial resources, and spend the most. 31% are owners/partners in their own business. Forty-four percent are C-Suiters, with gender split at 65% male and 35% female. Twenty-seven percent hail from the West Coast. Eighty-seven percent are married, while 54% have kids. They are highly engaged, frequent business and vacation travelers, with particular interest in foreign destinations. They stay in upscale accommodations and may have traveled on a private jet in the past year. One hundred percent traveled last year. They took 4.3 vacations in the past year, 5.8 business trips, and 93% belong to a frequent traveler program and have a passport. They prefer to stay in five-star accommodations or luxury boutique hotels. They are willing to pay extra for comfort and service, prefer destinations that are off the beaten track, and love collecting frequent flyer points from business travel to use on personal travel.
Affluent Taste For First Class. This group breaks down on generational lines, with 32% Millennials, 38% Gen-Xers, 27% Boomers, and 3% seniors. They have a tendency to splurge on upgrades such as flight upgrades, and fine food and wine, and will pay extra for comfort and service. Looks for quality over quantity when traveling. There were 89% who took a trip in the last year. They took 2.9 vacation trips and 2.8 business trips. They prefer five-star accommodations, rental villas/homes, luxury boutique hotels. Six percent have traveled on private aircraft.
Affluent Domestic Deal-Seekers. These are mass-affluent travelers who seek out bargains, mainly to destinations in the U.S. They spend above average on personal travel, but their trips are no frills. They tend to return to the same spot again and again. Median HI $147,000.00. Median Net worth $639,000.00.
Affluent Homebodies. Tend to be more in the Midwest. Includes more singles and full-time students. They are risk-averse so unlikely to include adventurous escapades. They travel, but not heavily, and prefer to travel domestically. They typically stay in “other” hotels/motels rather than five-star hotels or boutiques.
(Source: 2017 Ipsos Affluent Survey)