Economics of Hotel Industry
Part 1 Hotel “Glorious” is a small family run hotel in the well-known ski resort of Leysin Switzerland. It has had many ups and downs in the past 6 years. The hotel was affected firstly by the great recession of 2008 / 2009 and then by the strong Swiss franc. Explain and justify with valid references the effect of the different negative factors, and illustrate the effect on Hotel “Glorious” using demand supply and price with diagrams. What strategic advice would you give to Hotel “Glorious” facing these market changes if it wants to maintain its previous occupancy? Justify your advice with reference to hotels and hotel chains that have carried out similar strategies like pricing, added value or promotional campaign in order to shift demand curve back to the right. Part 2 Recently Hotel “Glorious” has been taken over by an international hotel chain (your free to name one?) What effect will this have on costs in terms of economies of scale? Credit will be given for referenced examples of cost reduction in the hospitality industry. What are other advantages that economies of scale can bring to Hotel “Glorious”? Your Report should be Ariel / 12 font and double-spaced. The Harvard Referencing System should be used and if you are not sure about this, ask directly in the library for more information. All References should come from academic books and journals (Emerald, professional journals etc.) or official ‘serious’ sources like hotels, government, tourism office or professional associations, professional business or bank sites (economic data). No other .com sources are permitted (e.g. monster.com, ask.com, Wikipedia and the likes) Your Report should be 2500 words in length (+/- 10%) and include: • An introduction • A main body with the different points • Conclusion • Recommendations • Bibliography
Economics of Hotel Industry
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Introduction
The hotel industry is not immune to the global economy problems, because the resort town of Leysin in Switzerland depends on both locals and foreign tourists to flourish. Since the global recession started in 2008/ 2009, there has been slow down in the hospitality industry. Recession is associated with contraction of the economy and the business cycle phase and the recovery has been slow. The global recession was also accompanied by slowdown in investment, and consumer spending with the two having a direct effect on Hotel “Glorious” because of a fall in the demand of the hotel’s services. The appreciation of the Swiss Franc has mostly occurred because of the Euro crisis, and the country has been losing visitors to Austria, France and Italy (Falk 2014, p. 101).
Effects of global recession on demand
The global recession had a more long lasting effect on the global economy, being the most serious recession since the Great Depression in the 1930’s. The direct effects was that there was higher consumer debt, rising unemployment and stagnant wages and income meaning which all directly affected consumer spending in the hotel and catering sector. Similarly, the rise in the Swiss Franc led to more cautious spending from outsiders who contribute a big percentage in the growth of the hospitality industry. Overall the hotel industry is driven by GDP trends in Switzerland, and this influences the market forces of demand and supply (United Nations., & United Nations Conference on Trade and Development, 2010).
GDP=Consumption+ Investment+ Government Spending+ (exports-imports)
There is leftward shift in the demand curve following a fall in consumer spending, while an increase in the spending would have led to a rightward shift of the demand curve. In essence, the leftward shift in the demand curve shows that there is a decrease in spending which could either be one of the following or a combination of the factors, consumer spending, purchases by foreigners, business spending and household wealth. The tourism industry is price sensitive and hence dealing with the effects of a strong currency will influence the number of foreign arrivals in Switzerland (Falk, 2014).
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AD represents the aggregate demand
Y represents output or income
Strong currency and demand
Even though, the hotel is small, location in a resort town places importance on the number of tourists to the town. Thus, a strong currency will typically reduce the number of tourists visiting the town and Switzerland because this increases the cost of hotel services for foreigners. Tourists are likely to look for alternative destinations, and hence Hotel “Glorious is faced with the prospects of reducing demand or they can also reduce their price, but this could lead to a reduction in the hotel’s earnings. Thus, similar to the impact of the global recession a strong Swiss franc has the potential to cause a leftward shift in the demand curve.
Even though, the change in exchange rate has a lagging effect in the economy, consumers and businesses respond to the fluctuation, where the strong currency has the likely effect of reducing price competitiveness of the hotel. Thus the hotel is left with the option of reducing the firm’s cost incurred, and this may result to outsourcing of raw materials and keeping labor costs lower where possible. Even though, investing in newer products might seem viable, the hotel has fewer resources because of the effects of the global recession, but no matter the strategy chosen the main reason for choosing any option is to maintain competitiveness. By the year 2011 the Swiss Franc had gained 10% against the major world currencies since the global recession, and the government took note of this as it would increasingly make the country’s business uncompetitive , and has also led to a slow down in the country’s GDP (Mijuk, 2011).
Supply and the exchange rate the appreciation of the Swiss Franc could either be as a result of a decrease in the supply of the Francs or increase in the demand of the Francs. However, the global recession had a smaller impact on Switzerland showing that increased demand for the currency is the most plausible explanation. The hotel is unlikely to have relied much on imports and hence the currency’s strength will have little positive effect on the business. However, accepting lower profit margins through lowering the price of the hotel’s products and services will likely have a more long lasting impact (Nabli, 2011)
Strategic advice
The twin issues of financial crisis and a strong Swiss franc call for improved efficiency in the hotel industry. Consequently, Hotel “Glorious” should focus on improving operational efficiency. For bigger hotels improving operational efficiency entails improving the accommodation facilities as well as ensuring that there are available rooms for customers. Even though, there have been a fall in the number of visitors to Switzerland, improving economic prospects are likely to bring in more people, and hence the hotel should not ignore the impact of space planning during festive seasons. By taking advantage of space planning during the festive season the hotel will most likely have repeat customers as they choose the firm over others.
Pricing
Even though, the resort town is new the cities if Lausanne ad Geneva the low pricing strategy is likely to have a positive impact on demand of the firm’s services. Customers have become more price sensitive than before even in major cities where there are higher costs of living. In using the pricing strategy, the hotel should not relent to offer better services even when they have lower prices. Nonetheless, the value of the services should be synonymous with how customer’s views the products. Thus, a change in pricing strategies should also be accompanied by a change in the product’s value where customers view access to the hotel’s services as being a bargain.
Value addition
Quality plays a critical role in the success of organizations in the hospitality industry because the industry mostly relies on service provision. In an increasingly competitive industry, the numbers of tourists have a direct impact on the organization’s performance and hence adding value to customers should be a top priority. To highlight on this, the Hotel will improve on both core activates of accommodation and hotel services, complimented by support services on maintenance, purchasing and use of information technology. Besides focusing on both core and supporting activ...