New York Hospitality by Vijay Dandapani

Credit card Interchange fees: Much ado about nothing?

Do interchange fees (fees paid by merchants to credit card companies) shortchange consumers? The recent consent decree entered into between the U.S. Department of Justice and Visa & Mastercard suggests that the now-settled antitrust lawsuit against Visa and MasterCard could mean better prices for customers (and cost-savings for merchants).

American Express and Discover (not a party to the lawsuit) aver that it will do nothing for the consumer nor much for retailers, many of whom have hailed the Justice department's decision.  Discover rightly points out that  a key provision merchants wanted was the ability to levy surcharges for credit card  usage. That has not changed per the new rules.

The brouhaha about high fees fails to appreciate a basic facet of economic theory with regard to  "two-sided markets" as is the case in this situation. A two sided market is one in which there are two end-users (consumers and merchants), each of whom needs the other for the system to operate.  What ought to be self-evident is the inherent efficiency that arises from fact that all three: merchants, consumers and banks are interdependent with the ability to reallocate costs amongst themselves. That maximizes "value" for all three.

American Express has promised to fight the government aggressively, a move that has already cost the firm in terms of a  heavy hit to its stock price. American Express' CEO, Kenneth Chenault, wrote about the many benefits of credit cards to consumers and merchants in a recent Washington Post op-ed excoriating the government's claim of lower prices for consumers while also suggesting that it would lead to less not more competition in the market place.

Mr. Chennault's essay may be viewed as self-serving but the empirical evidence in other jurisdictions makes his point. Australia enacted sweeping changes to its credit card rules seven years ago including, unlike the recent US change, the ability of merchants to levy surcharges for credit card usage. The result is that credit card customers there now pay more for their cards and receive less in return, and there is no evidence that consumers, including those using cash or other forms of payment, have benefited at all. Neither has overall economic efficiency improved.

Separately, It is also pertinent that the hotel giant, Accor hotels (besides several other merchants) introduced a 1.5 percent fee as a surcharge in Australia in early 2008. US merchants cannot do so even under the new dispensation. The experience of Accor Hotels in Australia after two years of levying surcharges points to scant, if any, resistance from the consumer (hotel guests). There is little reason to suggest a different outcome in the US if it were allowed. Instead, the US emulated only the worst aspect of what was introduced in Australia.  Merchant jubilation over the new found ability to point customers to "cheaper" credit cards ought to be circumscribed.

A logical scenario in the post-decree period in a hotel could result in a hotel front desk employee to suggest to a weary traveler they  use a credit card without rewards to save a few dollars. That is clearly missing the forest for the trees if not shooting oneself in the foot. Major hotel players, like airiines, have branded cards. Discouraging branded cards with rewards attached, which is an expected consequence of the government's move,  will cause hotels to lose at many levels. These range from loss of customers staying with "points" (who tend to spend with real cash while in the hotel) to developing brand loyalty. With regard to American Express, hotels know fully well just how much more desirable customers using those cards are. Beyond that, as a company, American Express is a mine of marketing information for hotel merchants.

So far, hotel companies have stayed out of the fray and not even commented on the DOJ's action unlike the retailing industry. It behooves a closer, if low-profile, look.

Plutonomy and hotels

Reuters reports that Starwood Hotels & Resorts third quarter profits was better than what analysts expected. However the report notes that the company "which operates mostly luxury and other top-tier properties, has been particularly sensitive to the decline in business travel and corporate cost-cutting. It has cut average daily rates dramatically to appease vacationers." The report goes on to quote an analyst as saying that a "recovery (has been) priced into these stocks, and people are just sort of reading the tea leaves from each of the companies about how and when that's going to happen."

If the foregoing perspective is more right than wrong it foretells a very slow recovery for hospitality as a revival in luxury is an essential component of any broader lodging (and overall economic) recovery. The notion that the luxury segment as represented by the rich & super-rich consumer drives overall economic growth was first neatly encapsulated by a Citibank executive in 2005 with the term Plutonomy. The Citibank report of 4 years ago said that "the richest 20% (in plutonomic economies) may have been responsible for 60% of total spending".

Starwood's perspective notwithstanding, the luxury market in the broader economy is reporting signs of life as another Reuters news report quotes a Bain & Company report that forecasts "positive growth for 2010 and quotes a partner in the firm as saying that "luxury goods markets are stabilizing (and) we are seeing less discounting and mark-downs (unlike in Starwood's report) and more signs of increasing consumer confidence." It is not all positive though as Bain predicts "luxury sales in mature markets show continued softness and that 2009 sales will be down 16% in America, 10% in Japan and 8% in Europe versus 2008."

Still luxury (and other) hoteliers can, perhaps, take a leaf out of some other resourceful luxury marketers seeking to overcome a major obstacle to luxury's revival: luxury shame. The Wall Street Journal reports that some are "encouraging Internet shopping, as many brands have been doing to overcome luxury shame—epitomized by the showy act of walking out of a fancy store with a big shopping bag—is one of the main reasons for the estimated 20% jump in online luxury sales this year as per Bain & Co." Another tactic for "taking some of the guilt out of shopping—offering a charitable-giving component—is gaining traction as well."

While hotels can't have guests stay virtually in their properties they can promote their properties and seek to alleviate any guilt from luxury shame amongst guests by offering to donate to their guests' favorite charity a ratio of the room rate at the end of their stay. Another move could be to incorporate more plebeian cars instead of Maybachs and Rolls Royces as part of their transportation stable as a way of alleviating luxury guilt.

Credit crisis' impact - when green trumps green.

The impact from the financial crisis is being felt in virtually every aspect of economic activity with eco-friendly initiatives beginning to come under the budgetary axe. The Financial Times reports on how "The green agenda is at risk of being sidelined by the credit crisis, in spite of attempts to keep issues alive in the commercial property industry".

The paper notes that "a recent study of more than 100 directors responsible for real estate by Knight Frank showed that concerns about the environment and energy efficiency had fallen to the bottom of the agenda. On a list of the 10 most important factors when considering a building, sustainability was 10th. The top issues were rental cost and staff retention".

The Knight Frank survey, though limited to the UK, goes contrary to recent findings in North America where a recent survey found almost 20 per cent of travelers choose hotels because of environmental practices, including housekeeping services that only use non-toxic cleaning agents. The survey also found that "going green in the hotel industry is not just in vogue -- it's sound business to consume less energy, less water and create less waste". The Green Building Council has certified only four U.S. hotels as "green," while more than 800 office buildings already have its seal of approval.

While the Marriott Corporation arguably is at the forefront with its green initiatives encompassing the calculation of its carbon footprint with a view to aggressively minimizing its impact, others from Fairmont to Accor have taken significant steps on the green path including purchasing clean and renewable wind energy for its US hotels. All of that was before the credit crisis began snowballing. A paucity of funds and contraction of travel that seems all but inevitable likely will stifle if not abort many of the green initiatives as hotels scramble to focus on the green(back) rather than on green initiatives.

Bottom in sight?

A mere month ago economists were still debating whether the US is in recession or not but given the unprecedented turmoil on wall street most view a classical definition of recession as put out by the NBER as mere semantics.

Now, PKF has come out with a forecast that calls for two years of declining lodging demand based on a new study by their hospitality research division released today. The study notes that "compounding the negative impact of declining
demand is a projected concurrent increase in supply". The difference between the forthcoming downturn and prior ones is that "the U.S. lodging industry was in good financial shape entering the current trough in the business cycle. Unlike other forms of real estate, lodging was not experiencing any material amounts of foreclosures". Further "This implies that most U.S. hotels can withstand a fairly substantial decline in
NOI and still have the ability to meet their debt service obligations". That should give pause to some of the vulture funds that are being bandied about as a reflexive reaction to an economic crisis.

Predictably, the financial crisis has already threatened development in some markets as the study notes "the current credit crisis may be unfairly punishing developers with sound market and financially justified projects.". The silver lining, of course, is that "the lodging industry will eventually benefit from the near-term development difficulties" as the, presumably, the constriction in supply caused by the credit squeeze will (eventually) likely result in strong ADR and Occupancy growth as the economy picks up.

International growth for hotels

BusinessWeek reports on how international growth remains on a steady upward trajectory that belies the recessionary talk in the US. The magazine notes that "this doom-and-gloom talk of a recession with the well-documented problems of the airline industry, and it would be natural to conclude that the lodging business would be equally afflicted. But the numbers don't bear this out. Commerce Dept. figures show growth in gross domestic product of 0.9% for the first quarter, while a recession is usually defined as two straight quarters of GDP decline. And the lodging industry is projecting almost identical growth figures for 2008". On a similar vein, the Wall Street Journal reports on Hilton's massive growth in Asia noting that the company "wants to add 300 hotels to the 47 it already operates in Asia over the next decade, as it seeks to catch up with rivals and cash in on the boom in business and leisure travel in India and China". And even on the domestic front Marriott reports that growth is "approximately 2%, compared with prior company guidance of 3 to 5%". That amounts to slowing rates of growth rather than an actual decline.

As before, rumors of the industry's demise are greatly exaggerated with the age old but true explanation offered in the BusinessWeek article: "The delay between the perceived need for additional rooms and their coming on line is so great that by the time they do appear, the economic cycle has often turned, with supply once again exceeding demand". Most industry insiders are aware that this out-of-sync activity is one reason for the volatility in the industry but for now, with rate resistance low among customers nationwide the growth trajectory remains upward.

Airlines's woes and hotels II

Picking up on a post earlier this month, the continuing woes of the airline industry caused by seemingly inexplicable high oil prices the Business Travel Coalition has a new study that predicts the "darkest future" for US airlines and passengers that will result in liquidations and likely will "cripple the U.S. economy" which "depends on affordable, frequent intercity air transportation".

The study highlights how a meltdown of the airline industry could impact the US economy in several areas including direct employment, corollary effects in communities, reduced purchases from the industry and probably most significantly a devastating impact on tourism with Florida, Hawaii and Las Vegas singled out. Beyond that a decline in business activity obviously will have a knock on effect on business travel and take the wind out of hotels. Extending that dire scenario further shows local government deprived of tax revenue and so on.

The BTC report may be a full throated Cassandra like prediction for few, experts and others, have a real clue as to why oil prices seem to be defying time tested notions of supply and demand. But one explanation that is currently doing the rounds is the Enron loophole. It may well not be the last but it oil's vertiginous rise surely will obey the laws of physics even if it appears not, for now, to follow basic economics.

Yapta for hotels

In a tangential nod to tough economic times Orbitz announced that it will "Reimburse Some Customers if Airfare Later Falls". Orbitz bills its program as "Price Assurance, a push to gain U.S. market share against other online travel agents, such as Expedia Inc. and Priceline.com Inc". Such a move would have been unlikely in stronger economic times particularly without the aid of sites such as YAPTA, a website that tracks the prices of airline tickets as they change and sends customers a "price drop" email if the price goes down which may entitle the customer to a refund or voucher from the airline. Heretofore, yield management as practiced (and invented) by airlines was predicated on customers paying for seats (at supposedly the best price) based on availability at a given point in time . By moving away from that model and assuring customers they are "eligible" for a refund, revenue modeling is likely to be harder with erosion of profits in a largely unprofitable industry.

Such a trend can have material consequences for hotels, most of whom practice the yield management of yore. So far, there is no YAPTA (an acronym for our "Amazing Personal Travel Assistant") for hotels as hotels' "best rate guarantees" usually pertain to the period when booked. Some such as Marriott's "Look No Further® Best Rate Guarantee" have a 24 hour period for the prospective guest within which a better rate, if found, is the chain not only matches the price but gives a further 25% discount. But no nationally recognized hotel chain leaves that period open ended like the airlines have begun to do. Were that to happen, no doubt in response to straitened economic times, there is little doubt that a YAPTA like site, if not YAPTA itself will emerge.

Economy and renovations

2005 was a watershed year in more ways than one for hotels. Flush with cash hotels around the country renovated at unprecedented levels reaching nearly $5 billion for the entire country. The slowing down of the economy has affected some hotel markets more than others with Washington DC beginning to feel the pinch while others like Miami and New York seems to be doing fine overall. Some news sites have already begun speculating on the impact to consumers of a softening of the economy on hotels. MSNBC's travel columnist Amy Bradley-Hole, states flat out that "service may suffer" as "one of the best ways for a hotel to save money is to slash staff". Interestingly, she goes on to observe that "Hotels may just come through this slow time looking more beautiful than ever" as "Empty rooms and floors can be shut down completely for quick and easy remodeling projects, and empty parking lots can be repaved. And since contractors aren’t building many new houses these days, hotels can hire them fairly cheaply". But, historically, the challenge has been to keep cap-ex up going while revenues drop. But if the downturn that followed 9/11 is an indication it might not be too much to expect a continued investment in cap-ex.

Economy's travails and travel

Economists and experts over the past year have been sounding the alarm bells over the US economy with some claiming that the country is on the brink of a recession if not already in one while others have noted a slow down. While many economists define a recession as one of two quarters of negative GDP growth, a marker that can be only laid down ex-post, the "official" definition of a recession by the NBER, is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales".

Regardless, a general sense of economic malaise is certainly pervasive given high fuel and food costs. Airlines have already responded by squeezing passengers into fewer flights. But the hospitality industry, unfortunately, has no such ability to shed inventory and therefore, whether or not there is a real recession with concomitant cut backs in travel is of supreme importance. The Globe and Mail based out of Toronto has a story headlined "US hotels fear year of thrifty travel". "57 per cent of the nearly 6,700 respondents to (an) online poll said they have less money to spend this year on summer vacations than they did last year and are looking to save costs".

But a survey co-authored by the Travel Industry Association and Ypartnership notes that "Six of ten (59%) Americans who are currently planning a trip with their car, truck or SUV this summer will not change their travel plans even with additional increases in the price of gas, according to the closely watched travelhorizons". Which scenario is the more likely one is of obviously of paramount importance to the hotel industry. An interesting observation from the TIA survey is that "One of six (16%) of those expecting a tax rebate as part of the economic stimulus package approved by Congress is planning to spend their rebate on an overnight or day trip for leisure purposes, according to the same nationally representative survey of 2,233 adults conducted during the month of April". But, as the Globe and Mail's article notes, "e weak economy has already hurt profits at some hotels. Earlier this month, Marriott International Inc., the world's No. 3 hotel operator, reported sharply lower quarterly profit, hurt by higher costs as the slowing U.S. economy takes its toll. Starwood Hotels & Resorts Worldwide Inc., which operates the W, Sheraton and St. Regis hotel brands, also reported a lower quarterly profit last week". The only certainty for now, it seems, is uncertainty.

Tourism and the Dollar - fillip turning to fizzle?

The cheap dollar was to have brought in foreign tourists in droves but the results have been disappointing according to the TIA. A quote - not used often enough is that the " recent resurgence of foreign travel is misleading. The country is still attracting two million fewer overseas visitors a year than it did before Sept. 11 - 23.9 million in 2007 versus 26 million in 2000". But if BusinessWeek magazine's lead story in their latest issue is right the dollar has reached its bottom and, is in fact, trending up. The magazine quotes, among others, Meg Browne, senior currency strategist at Brown Brothers Harriman as saying that "the dollar is carving out a bottom". Apparently, the euro traded at $1.54 on May 2, and the dollar index is 3% off its lows. While BusinessWeek's focus in the article is on the impact of the weak dollar on export (where, interestingly, the benefits have not been uniform) its impact on tourism can hardly be helpful. Hoteliers too, perhaps, can draw some comfort should this result in an upward trend of the greenback as commodity prices may ease up giving the traveling public break in the relentless rise at the gas pump.