Making Waves New Luxury Goods Set Super-Wealthy Apart From Pack

Rising Riches Stir Rivalry For Ever-Bigger Yachts;
Waiting for a Maybach An Echo of Louis XIV's Court 

ROBERT FRANK / Wall Street Journal 14dec04

FORT LAUDERDALE, Fla. — Don Weston used to feel special cruising the world in his 100-foot yacht. Yet on a recent morning at the International Boat Show here, the retired Cincinnati businessman stood on his upper deck, overshadowed by giants.

Next door was the Corrie Lynn, a 130-foot cruiser with a king-sized Jacuzzi, five cabins, retractable plasma TV screens and twin jet skis. Down the dock was the 197-foot Alfa Four, with an indoor gym, swimming pool and helicopter pad. The talk of the show was billionaire Paul Allen's new pleasure boat, Octopus, which extends over 400 feet and has a basketball court, music studio and personal submarine. That's about to be topped by a yacht under construction in Dubai for a Saudi client. It's expected to exceed 500 feet, the size of a small cruise ship.

"I used to think I had a good-sized boat," sighs Mr. Weston. "Now it's like a dinghy compared to these others. How big are they going to get?"

The yacht business reflects a new arms race breaking out among the wealthy. With the population of millionaires soaring to more than two million in the U.S., the rich are finding it harder to set themselves apart. Many are turning to supersized luxury consumer products to rise above the pack. Today's super-wealthy, and the companies that serve them, are creating a whole new category of high-end products that are priced beyond the reach of mere millionaires.

Megayachts have grown in size from a typical length of 80 feet to 110 feet in the mid-1990s to well over 150 feet today. The market for luxury yachts has more than tripled since 1997, with some boats costing well over $100 million. Dozens of boats longer than 200 feet are now under construction.

The most expensive Mercedes used to be the CL600, which cost about $100,000 in the late 1990s. Last year, the Mercedes group, part of DaimlerChrysler AG, introduced the Maybach 62, which sells for more than $350,000. This year, it started selling the SLR, which is priced at over $450,000 and has a long waiting list. Not to be outdone, Volkswagen AG's Bugatti unit is about to introduce a sports car priced at more than $1 million.

Watch makers Patek Philippe, Rolex and Breguet are selling watches priced at more than $200,000, and limited-edition watches can now run in the millions.

The inflation rate for luxury goods reached 7% last year, more than twice the overall U.S. inflation rate, according to a study conducted by Merrill Lynch & Co. and the consulting firm Capgemini Group. The real rise isn't in trinkets for the mass affluent such as handbags, clothes and shoes. It's in the big-ticket items for the wealthy.

Vacation-home prices in Aspen, Martha's Vineyard, Northern California and other elite spots have doubled in recent years, real-estate agents say. Palm Beach has become an island of billionaires, with financier Ron Perelman recently selling his oceanfront estate there for more than $70 million.

Sotheby's and Christie's both topped $90 million in sales at their postwar and contemporary art auctions this month, with only a handful of works selling for less than $1 million. Racehorses are hitting prices not seen since the mid-1980s, with one yearling recently selling at auction for more than $8 million.

The luxury boom stems from a huge increase in personal fortunes. The wealth held by millionaires world-wide rose to $28.8 trillion as of the end of 2003, according to a separate Capgemini-Merrill study, up 11% from $26 trillion in 2001. That's more than the annual gross domestic products of the U.S., Japan, Germany, France and the United Kingdom combined. Those at the very top appear to be doing especially well recently. The wealth controlled by individuals in North America with more than $30 million in financial assets — such as stocks and bonds, but not including real estate — jumped 45% to $3.04 trillion in 2003 from $2.1 trillion in 2002, according to Capgemini-Merrill.

A generally rising stock market over the past decade, soaring executive compensation, higher real-estate values and lower taxes on the wealthy are all cited as explanations for the rising wealth. Also, more and more entrepreneurs who started family businesses after World War II are cashing out because of industry consolidation, creating what private bankers like to call "major liquidity events." Today's instant multimillionaires tend to be younger than the rich of the past, and more likely to splurge on lifestyle goods to differentiate themselves from hoi polloi affluent people.

Edward N. Wolff, a professor of economics at New York University who studies wealth, likens modern-day big spenders to nobles at the court of France's Louis XIV, who reigned from 1643 to 1715. To ensure the nobles' loyalty, Louis continually raised the "entry price" of being in his court, requiring them to wear increasingly expensive clothes and keep larger and larger homes. The nobles' need for greater wealth made them even more dependent on the king's good graces, and left them less money to spend on arms.

Today, Mr. Wolff says, it's the wealthy themselves who are bidding up the price of being on top. "For the wealthy to keep their status, they have to compete in terms of luxury consumption," Mr. Wolff says. "The mere fact that this group can pay these prices becomes an indicator of social standing."

Of all the unnecessary purchases, yachts are among the hardest to justify. Owners of a yacht — generally defined as a vessel longer than 85 feet registered for private use — rarely use their boats more than a month or two a year. Upkeep can cost millions of dollars a year, and yachts typically fall in value after three or four years. A new paint job alone can cost more than $100,000. What's more, international maritime law generally prohibits yacht owners from carrying more than 12 guests, excluding crew members, although some big boats can get permission for 36 guests. That means a yacht can't host large parties while cruising offshore.

Yachts do give their owners one important value: exclusivity. Norberto Ferretti, chairman of the Ferretti Group, one the world's top yacht builders, says his customers like the privacy and freedom that comes with cruising on a yacht. Entertaining guests on a yacht is "much more special than just bringing them to your villa," he says. Best of all, yachts separate the seriously rich from the merely well-off.

"Rich people can go to a beautiful hotel and pay $3,000 a night for a suite," he says. "The trouble is, when you go down the elevator, you're in the lobby with people who paid twenty times less. My clients don't like that."

Yet even yachts are becoming more mass-market. With cheaper, composite-material hulls and mass-production techniques seeping into the yachting world, yacht builders can now crank out larger volumes. There are 257 orders for "starter" yachts — between 80 feet and 100 feet — scheduled for 2005, up from 139 in 2001, according to ShowBoats International, a magazine for yacht owners.

For yacht owners to feel special at the marina, they now have to have boats of at least 200 feet, builders say. As of July 2004 there were 35 boats under construction of over 200 feet, including five measuring 295 feet or more, according to the magazine Yachts International.

Today's biggest yachts are loaded with new technology and toys. Computer-controlled stabilizers — which anticipate the rocking movements of a boat and offset them with underwater fins or gyroscopes — make megayachts perfectly still even when anchored. High-tech security systems, stereos, theaters and swimming pools have become standard. Most come with garages, to house jet skis, motorcycles, small motorboats and other vehicles.

In the U.S., the yacht wars started when Leslie Wexner, chairman and chief executive of Limited Brands Inc., built the 315-foot Limitless in 1997. The ship has 3,000 feet of teak wood along with a gym.

Shortly after, Microsoft Corp. co-founder Paul Allen bought the 354-foot Le Grand Bleu, which has its own 72-foot sailboat on board. Then he commissioned Lürssen, the German builder of the world's largest yachts, to produce the 414-foot Octopus. It was planned to be the biggest yacht in the world. Delivered last year, Octopus has a 59-foot speedboat, personal submarine, swimming pool and music studio, according to builders. The helicopter pad on the main aft deck doubles as a basketball court. People familiar with the boat say it cost more than $250 million to build and will cost more than $10 million a year to run.

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