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(Bloomberg) -- The Golden Egg, Davos’s newest luxurious hotel, was the place to be for the global elite at last year’s World Economic Forum, selling out all of its 216 rooms. On one evening, Israeli Prime Minister Benjamin Netanyahu and his wife dined at its restaurant, while Tony Blair was having a grappa in the bar with a colleague, according to General Manager Peter Pedersen.
Six months later, the five-star hotel’s management company went bust and its owner, a Credit Suisse Group AG fund, had to start picking up the pieces. Despite its famous guests, which also included Goldie Hawn and Bono, and extensive research into the local market, InterContinental Davos was faced with empty rooms once the annual forum’s delegates went home.
“Davos is dead in Spring and Summer,” said Karl Wild, author of an annual ranking of Switzerland’s best establishments. “Hotels typically make 20 percent to 30 percent of their income during the WEF.”
In a town famous for an annual gathering of the world’s most influential people, the owners were unable to master the economics of the hotel business, a cornerstone of its economy. The construction of the Golden Egg, which opened in December 2013, was influenced by the WEF’s need for more five-star hotels in the ski resort. Its fate could decide whether more are built.
Keen on more ritzy rooms to welcome international luminaries, the forum’s organizers encouraged construction of the Golden Egg, nicknamed after its golden cocoon shape. Credit Suisse’s Real Estate Fund Hospitality provided 155 million francs ($175 million) cash in financial backing, and the town itself also made concessions.
In the mountains of eastern Switzerland, Davos -- with a population of 13,000 -- welcomes some 2,500 delegates at the annual event, which this year will be held from Jan. 21 to Jan. 24. With big-name attendees such as Angela Merkel, Francois Hollande and John Kerry, each WEF week creates a surge in demand for luxury accommodation.
Including the Golden Egg, the town offers fewer than 400 five-star hotel rooms, while most lodgings in Davos are four- star. Even for these less luxurious hotels, many of which were built more than 30 years ago, prices can quintuple during the forum.
Chronicle of Collapse
So, what went wrong?
Opening a luxury hotel was always going to be a challenge. It takes four to five years to build up a stock of regulars. While many new hotels make a profit in their first year, this may not be enough to cover debt costs, according to Russell Kett, who heads the London office of hotel consultant HVS. It’s normal for a hotel to achieve a “stabilized operating performance” by the fourth year at the latest, he said.
Most Swiss luxury mountain resorts also close in the low seasons in Spring and Fall, while the Golden Egg -- located on the outskirts of town and where an off-peak room can cost as much as 950 francs a night -- stayed open, said Christophe Piffaretti, who took over management of the Credit Suisse fund this month.
To bridge the seasons, the InterContinental hopes to host national and international conferences. This may become harder after the Swiss National Bank yesterday decided to abolish its cap on the franc, pushing the Swiss currency to a record high.
After operator Stilli Park AG went bust on June 2, a new company -- Weriwald AG, formed just a fortnight earlier -- took over the hotel within hours. The hotel also plans to open a sales office in Zurich to better target potential guests.
Still, that isn’t much consolation for Davos’s residents, who won’t recoup all they are owed in Stilli Park’s 4.2 million- franc insolvency proceedings. The planning permission fee of 275,000 francs, whose payment was deferred to entice construction of the Golden Egg, will have to be partly written down because of the bankruptcy.
“It caused a lot of resentment in Davos,” Tarzisius Caviezel, mayor of Davos, said in a phone interview.
The Credit Suisse fund, which manages 923 million francs, also has suffered from the insolvency. It had to reduce the lease for the hotel, resulting in Golden Egg’s valuation being cut by 6 percent to 204.9 million francs, according to Piffaretti, who declined to disclose the terms of the contract.
Davos’s isolated location and lack of luxury accommodation has fueled speculation that the World Economic Forum, a Swiss non-profit organization whose mission it is “to improve the state of the World,” may move its flagship event to another town or country. The townspeople’s decision to support the re- zoning of the area where the Golden Egg now stands -- thus increasing Davos’s attractiveness for the forum’s illustrious attendees -- can be seen in this light.
“As long as we enjoy this level of cooperation, there is no reason for us to move away,” said Alois Zwinggi, head of operations and resources at the WEF. He rejected the notion that the gathering would have moved had it not been for the Golden Egg.
The forum extended its “contract with Davos -- I believe this is also thanks to the hotel,” Piffaretti said. “They considered looking at alternative destinations for this international event due to the lack of quality accommodation,” he said. “What Credit Suisse had done with this hotel is highly beneficial to Davos.”
Mayor Caviezel, who says his fellow townspeople are disappointed in Credit Suisse’s role in the insolvency proceedings, said Davos backed the project because of the forum’s support.
“The main driver for so much goodwill was the WEF,” he said “It was a bit of a demand from the WEF that we would start moving toward more luxury hotels in Davos.”
Hotel reviewer Wild, who ranked the Golden Egg number 27 of Switzerland’s 35 best vacation hotels, is doubtful that this strategy will do the town any good beyond the forum.
“Davos simply does not have a five-star clientele,” he said. “This type of customer goes to Zermatt or St. Moritz.”
--With assistance from Catherine Bosley in Zurich and Dalia Fahmy and Chad Thomas in Berlin.
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