Business Analysis: Center Parcs banks on luxury approach

Holiday village operator hopes £3,000-a-week villas will help to revive its fortunes

Center Parcs, the UK holiday village operator, said yesterday that it was investing £10m in expanding its luxury holiday properties, complete with their own jacuzzis, saunas and outdoor hot tubs. For those that are attracted to the idea, the villas can cost more than £3,000 to rent for a week.

Center Parcs, the UK holiday village operator, said yesterday that it was investing £10m in expanding its luxury holiday properties, complete with their own jacuzzis, saunas and outdoor hot tubs. For those that are attracted to the idea, the villas can cost more than £3,000 to rent for a week.

The plan is designed to attract wealthier people to the sites, which, although popular, have failed to bring in the revenues expected when the company was floated on the stock market a little over a year ago.

The group's shares are 30 per cent below their flotation price and investors must be wondering whether Center Parcs really has the cachet to convince wealthy holidaymakers to splash out thousands on a UK break. Swimming with the Center Parc crowds hardly has the same kudos as renting a villa in the Caribbean, or other more exotic and warmer locations, where properties are available with private pools and private tennis courts.

To many British tourists, a Centre Parcs village represents a nightmarish cross between Butlins and a prison camp, where there is no escape from having to grin and bear a jolly time with hundreds of fellow campers and their screaming children. The complexes are located on 400-acre sites, with woodland areas and lakes that host water sports. The centrepiece of the village, though, is a huge glass dome, which houses a swimming pool complex and numerous water slides - what it calls a "subtropical swimming paradise". This is one of the main attractions for children, as are the indoor racquet and sports facilities. Three-quarters of visitors are families.

The company now is converting 58 of its standard villas into executive villas, which will have a jacuzzi bath, a hydro spa and en-suite bathrooms. It is also building 20 new exclusive villas, which have the additional luxury of their own saunas, steam rooms and outdoor hot tubs.

Martin Dalby, chief executive of the business, defended the Center Parcs luxury proposition, saying demand for short-breaks within the UK was growing. "These are villas of very high quality and there has been strong demand for the ones we have already built. Occupancy levels in our existing exclusive villas are slightly higher than for the rest of the group. The villa can sleep eight people, so when you divide the price between them, it is a very reasonable offer for the quality of what you get," he said.

Having pocketed £4m from the float, Mr Dalby has, at least, few problems affording a Center Parc break.

Guests also get a daily maid service, a television in every room while each bedroom has an en-suite bathroom. The price of the villa includes unlimited entry to the swimming pool centre, but all other activities must be paid for separately. As guests are in the middle of 400 acres of countryside, the on-site restaurants and supermarket have a captive audience and can price their goods accordingly.

Mr Dalby believes domestic holidays are still very popular for short breaks, despite the advent of cheap overseas travel. "The people who come to stay at Center Parcs have more than one holiday a year - we are not their only break. They may go abroad a couple of times - ski-ing and a beach holiday. But they will also come to us with the family. Most of our customers live within 2.5 hours drive from the village. When you are only staying for a couple of days, a short travel time is important."

Despite a degree of travel snobbery towards a Center Parcs holiday, its villages remain more than 90 per cent full year round and 60 per cent of guests are repeat customers.

But the company has been beset by problems that have knocked its results. A fire in its Norwich centre and the costs of rebuilding the site in 2002 hit turnover by £13m and an outbreak of gastroenteritis in its Longleat village earned it headlines such as "Center Pukes". In the six months ending in October, turnover and profits were flat and in December it said rising energy costs would be difficult for the group to absorb. In February, contained within documents relating to its move from Aim on the main market, was a warning that trading over Christmas had been slow. Its Cumbrian site had to close in January following severe flooding and shares are languishing at around 70p.

The company floated with the help of broker Collins Stewart in an accelerated IPO in December 2003. Collins Stewart received support for a float from a group of institutions, bought the company and floated it immediately.

But analysts believe it was this fast-track listing that has been at the root of negative sentiment towards the company. James Ainley, of Dresdner Kleinwort Wasserstein, said, "The process of floating a company in this way is so rapid that many fund managers weren't given enough time to have all the risks of the business fully explained."

Mr Dalby admits that new investors were only given a whirlwind spin round the business before it floated. "We have had to spend a lot of time this year visiting investors and explaining the business to them, as everything moved so quickly at the float."

Of particular concern to investors is the leasing arrangement Center Parcs has with its villages. Before it floated, Center Parcs sold its property to Sun Capital, the investment vehicle of Hugh Osmond, and pays a rent of around £45m a year. Mr Ainley said, "The rent charges are pretty high and go up every year at the higher of 3 per cent or inflation. This means the company has to make top-line growth of 3 per cent a year just to stand still. It came to the market promising growth of 6 or 7 per cent, but this hasn't materialised. The rent can easily become quite an onerous cost."

The further investment in the property, Mr Ainley says, will only add value to Sun Capital's assets and put up the rent charge to Center Parcs.

The resilience of consumer spending is also a worry for Center Parcs' future prospects, given the high price of a Center Parcs break. Matthew Gerard of Investec said, "Center Parcs is exposed if there is a drop in consumer spending. Being the kind of place where people take their second or third holiday of the year, they might abandon the trip if they want to tighten their budget."

But with such high occupancy rates already, Center Parcs has few means of growth. It has little choice, then, but to upgrade villas, put up prices and try to encourage customers to pay more for their stay and spend more on-site. To this end, it is also putting increasing focus on spa facilities. "Spa breaks are a real growth area in short travel breaks," Mr Dalby said.

A fifth site is in planning stage, but this will take some time to develop. Center Parcs will have to hope that the allure of an outdoor, woodland hot-tub a couple of hours drive from your home is enough of an attraction to keep customers coming through its gates.