|Developing an EMU Strategy|
|Implications for the hospitality industry worldwide are significant|
|By Neville Pike and Charles Barlow - Summer 1998
The European Monetary Union's (EMU's) launch of its single currency just months from now starts the countdown for businesses throughout Europe. The euro becomes a currency in its own right at the beginning of 1999. The advent of a single currency and monetary policy among participating nations will bring complex change, as these economies become transparent for the first time in an enhanced single market. This bodes well for hotel owners and investors. Euro is expected to promote economic growth, and stability in inflation and interest rates. It will encourage investor and consumer confidence in economic cycles, which are expected to flatten in the single market following introduction of the new currency. In addition, increased foreign investment in euro countries and immediate savings from eliminating foreign exchange risk will provide compelling benefits for hospitality companies. Euro companies doing business in euro countries will no longer need to include a margin in their price to hedge against adverse movements in exchange rates. This will place competitors in non-euro countries at a disadvantage.
The shift to the euro currency, however, also poses significant challenges for the hospitality industry. The conversion is much more than a technological problem involved with converting financial accounts to a new currency; euro will transform the way business is done throughout Europe. Companies must plan for difficult structural changes in operations. Conversion to euro also potentially sets the stage for new strategic opportunities and improved competitive position for many companies in the global hospitality industry.
Timetable for an Historic Change
The EMU and its introduction of a common currency begin on January 1, 1999. On that date the currency exchange rates of participating nations are irrevocably converted to the euro, in the process creating the single currency. National currencies will remain in circulation as denominations of the euro until euro banknotes and coins are introduced. Hotel guests and other consumers in participating countries, for example, will continue to use national currency notes and coins during a three-year changeover period as sub-denominations of euro (e.g., a FRF 100 note will equal approximately EUR 15.17). The conversion process will be completed by January I, 2002. Six months later, national currencies will be withdrawn from circulation.
Countries Converting to Euro
The introduction of the EMU common currency has taken place amidst considerable uncertainty and debate. The EMU's Council of Finance Ministers developed convergence criteria for participating nations, including economic standards, for those countries seeking to convert to euro. The Council has monitored performance of each of the member states against the convergence criteria since last year. The European commission on March 26,1998 formally recommended that 11 European countries should adopt a single currency from 1999.
The first wave of countries includes Germany, France, Belgium, The Netherlands, Luxembourg, Austria, Ireland, Finland, Italy, Spain and Portugal. The United Kingdom is not scheduled to participate in the first wave of EMU, hut the new government recognizes that Britain cannot remain indefinitely outside a successful single currency. Whether or not the United Kingdom participates, however, U.K. companies will be significantly affected by the introduction of the single currency. The same holds true for companies in other non-participating European nations -Denmark, Sweden, Greece, Norway and Switzerland - as well as international hotel chains based in the United States and elsewhere in the world.
A Complex Changeover
During the changeover period beginning in 1999, there will be no requirement
to use the euro. National banknotes and coins remain legal tender as uneven
denominations of euro. Companies in euro countries will trade with each
other, raise debt and pay employees in euro, even though no euro banknotes
or coins will exist. The banks will convert national currencies into euro
(and vice versa) at the fixed conversion rates to facilitate transactions
in cash and to accommodate customers without euro accounts. Companies in
non--euro countries will transact in euro just as they do in Deutschemarks
or U.S. dollars today.
The implications for the hospitality industry worldwide are significant. For individual organizations, including the international chains, knowing where to begin is a major task in itself. Conversion to euro will affect virtually every aspect of hotel operations - from the front office to the marketing programs targeting business and leisure travelers. Investigating the impact of the euro on each company requires a multifunctional pan -European team. Both technical problems and strategic opportunities need to be identified in key areas for the hospitality company and individual hotel properties across Europe:
Finance and Accounting
For multinationals operating in euro countries, the single currency provides the opportunity to budget, forecast, report and account in the same unit of currency, settle all intercompany transactions in euro and instantly compare the performance of business units across national boundaries. These advantages will be significantly diminished if European business units in non-euro countries continue to operate in national currencies Therefore, it is likely that multinational hold companies will require all their properties to convert to euro, and establish the euro as the functional currency for management- and possibly statutory - reporting.
A major challenge will he converting financial systems to the euro. All current and historical data will have to be translated into the new currency, including both hack and front office hotel operations. For example, yield management systems, which rely on historical rate and occupancy data, will have to he translated to the new currency. Dual pricing and invoicing also present a special challenge with key implications for systems, customer service, rounding and display of prices, long-term price agreements and commercial documentation.
Strategic opportunities include more meaningful controlling and reporting with easier identification of inefficiencies, and reduced finance costs. It will be much easier, for example, to compare a hotel's performance in Madrid against one in Paris.
Under a single currency, exchange rates will not cloud benchmarking properties against each other. In addition, there will also be greatly enhanced opportunities to create shared service centers, which process financial and other types of information from multiple hotel properties in a central facility. Under a single currency, many hotel chains can now consider these centers as viable ways to reduce costs and improve operational efficiencies.
Adoption of the euro as a common currency will make many current hedging arrangements in hotel acquisition and development obsolete. At the same time, the euro will eliminate foreign exchange risk from some investment appraisal decisions of euro-based corporates. It also has significant strategic implications and benefits in sales and marketing. A corporate customer booking a major conference a year in advance, for example, will not be forced to deal with potential changes in the currency exchange rate between the booking and conference dates. As a result, properties in euro countries will have a competitive advantage when it comes to attracting many large corporate customers in the conference business.
However, non-euro countries that previously invoiced customers in local currencies may now be required by their corporate customers to invoice in euro. This will lead to foreign exchange exposure previously not experienced and may result in the need to hedge operations.
Legal and Tax
Introduction of euro will not change any tax, legislative or regulatory provisions. With the euro, however, costs and profitability in one country will be transparent to another. This transparency will highlight the structural differences in taxes and employment add-ons from country to country. Tax questions must be examined from country to country for the organization as a whole, and for individual hotel properties. These include complex issues relating to the costs of euro introduction, and foreign exchange gains and losses, which are effectively realized on adoption of the euro. Tax issues arising from operational changes associated with the euro's introduction also need to be carefully considered. For example, tax may mitigate toward locating a shared service center in one euro country over another. Ultimately, the single currency is likely to encourage much greater uniformity of tax and other laws across euro countries.
The conversion of national currencies to euro will have a broad impact on customer relationships in the hospitality industry. Business and leisure travelers, as well as corporate customers requiring conference facilities, will be able to compare prices with much greater ease, becoming more sophisticated in their purchasing decisions. Customers can be expected to shop for the best deal and become more knowledgeable than under the system of multiple national currencies.
Nevertheless, strategic opportunities for the hospitality industry in
euro countries abound:
If customers reorganize how they make purchasing decisions, hotel companies may have to restructure sales and marketing. Relationships with key customers may need to be established on a pan-European basis rather than at a national or even local property level, as is commonly the case today. Companies need to consider ways of redefining their products to take advantage of new marketing opportunities, increase differentiation to offset price comparability, and give serious consideration to revision and maintenance of psychological price points in euro currency.
Purchasing and Vendor Relationships
Hospitality companies operating in euro countries will undoubtedly ask suppliers in other European countries to quote prices, issue invoices and accept payment in euro. Conversely suppliers based in euro countries may demand payment in euro from non-euro based companies. Transparency in pricing is likely to eventually lead to lower costs and differentiation by product quality. We expect this convergence across euro countries may well be slow, particularly when there is high labor input to a product or service, or in respect to the purchase of food or other perishable goods since labor costs vary widely across euro countries, as do transport costs. The use of advanced purchasing techniques can help mitigate structural inefficiencies in supply chains and maximize benefits from low cost/high quality providers.
Adoption of the new currency will require hospitality organizations to make many technology systems changes, which range in complexity from altering field widths on existing systems to accommodate extra decimal places (Belgium, Italy, Spain and Portugal) to maintaining dual currency systems during the period of changeover. Complete replacement of software systems and their hardware platforms also may be required.
Implementation of required technology changes will be complex, time-consuming and expensive. A key concern is the availability of skilled staff given the concurrent demands of the Year 2000 effort. These problems are compounded in the hospitality industry where variations in front office and back office systems between properties operated by the same company are still commonplace. The euro conversion therefore offers a strategic opportunity to hotel organizations in realigning and integrating all systems. The result can be improved efficiencies and technology investments.
There is relatively little understanding of how the euro will affect businesses and consumers. Businesses, as a result, need strong communication programs to enable employees and guests to understand how the changeover affects their companies and their personal lives. Employees may perceive their salaries have been reduced. Guests will perceive increased costs. In Italy, for example, employees may be currently paid in millions of lira. After conversion, they will be paid in hundreds of euro. Clear explanations of purchasing parity will reduce misconceptions. However, the cost of this re-education is likely to be high. At the same time, hospitality companies have the opportunity to be seen as an industry leader in the development of a single European market, and to take maximum advantage of marketing via new interactive media, such as the Internet.
Labor is the single, most important operational cost for hotel companies. Communication and training a large workforce, which also includes many semi-skilled and unskilled employees, will require significant management attention. Human resource management issues relating to the euro are critical. Conversion of wages of large numbers of workers to euro may be wage inflationary because of rounding differences alone. Management must be prepared for pressure to inflate wages when employees can easily compare wages in different locations. On the positive side, employees should be less reluctant to move from country to county. Enhanced job mobility under the euro will enable the enhancement of management training and career development programs, and therefore aid senior employee retention, to the benefit of the hospitality industry.
There are three potential entities involved in hotel operations -owners
managers and franchisees - and each will be affected by a conversion to
euro. Of special interest to the hospitality industry is who pays for the
conversion to euro for managed or franchised properties. In addition, adoption
of euro must be seamless from the guest's perspective. Companies will need
to bring clarity to decisions regarding conversion to euro and who pays
for it to ensure that requirements of all parties are met. Agreements and
contracts will need to be made and liaison structures put in place to ensure
that conversion is sufficient for the needs of owners, and is consistent
with procedures put in place by other hotels in the managed or franchised
(Neville Pike is a Partner in Arthur Andersen's Hospitality and Leisure Services Practice. Charles Barlow is a Senior Consultant. Both are based in the firm's London office.)
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