Credit Crunch and Its Impact on Hospitality Industry

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Table of Contents

Introduction
Major Issues
The credit crunch
Conclusion
References

Introduction

Holidays mark among the most memorable moments in one’s life. Scenes of people stretching in the warm coastal beaches and others having fun in the blue oceans fill one with a desire that life should have had nothing but safaris in the African natural forests to the glaciers of the great Swiss Mountains. This glamour usually sends the picture of the role players of this industry into oblivion. Actually, without certain industries, it would have been very impossible to travel to strange places and have fun. This is what makes the Hospitality industry one of the most important key players in the strengthening of the tourism industry in any given country. This industry whose main activities include the provision of accommodation, foods and drinks has played a great role in the stability of many economies that depend entirely on tourism. Hotels form the greatest key players in this industry. Having a luxurious orientation, the industry highly depends on the economic stability of the people in order to flourish. Therefore, a credit crunch can have a detrimental effect on the industry (Aaron, 1997).

Major Issues

What are the major issues that affect the hospitality industry? The issues that affect the hospitality industry can range from managerial to financial and economic. Political factors also play an important role in the well being of this industry. The money markets, for example can increase or reduce the number of visitors in a given country both external and internal visitors. In the United Kingdom for example, the strength of the pound in relation to other currencies can lead to more outbound tourism as the British tourists are bound to pay less as a result of the exchange rate. The reverse is true (Rosie, 2008).

With the British pound losing strength on most of the world’s currencies, the outbound tourism is likely to fall below normal levels. By the start of December 2008, British tourists were paying a third more on their hotel accommodations including food and drinks.This is bound to continue in regard to the disturbed world economic status (Rosie, 2008).

Despite the slump in the strength of the British Pound, not all is doom for the hospitality sector. As more people cut on their expenses due to the hard times, in bound tourism is now a glaring opportunity that the British hospitality sector key place should seize. Apart from the internal tourists, the weak pound will also favor other currencies thus making tourists from other countries to feel a relief in their expenditures. While addressing caterersearch.com, Kurt Anson policy director at the tourism alliance, pointed out that the hospitality industry of Britain has to put in more efforts to capitalize on this investment opportunity. The weak pound has provided opportunities for local tourists who are becoming cautious in their spending due to the awareness of the economic hard times that Janson predicts may transient to next year (Rosie, 2008).

Apart from the weakness of the British pound, the credit crunch can have a great impact on the hospitality industry. Mark McCracken defines credit crunch as a sudden reduction in the availability of loans and other types of credit from banks and capital markets at given interest rates. In a layman’s language, credit crunch simply means the state of difficulty in loan acquisition. Several reasons can lead to these phenomena. When lenders perceive an increased chance of risks, they eventually tighten their strategies to cushion themselves from the risks. This may result in imposing of tighter requirements for one to be able to get a loan. This is also a factor that causes a credit crunch. In addition, when there is a restriction in terms of supplying money, there results a credit crunch (McCracken, 2005).

What therefore, is the effect of this credit crunch on hospitality sector? The eating out habits of the British has been affected by the credit crunch. According to the research on 500 families by a media agency MPG, 64% of them had reduced their eating out habits. In addition, 63% preferred spending a quiet night in their homes to going out to cinemas and other leisurely activities. 43% had reduced on their tipping amount. The main indication was that more Britons were changing their eating habits from eating out to cooking. All this places an obligation on the hospitality industry to put in place the correct measures to match with the changing habits. Owing to the drastic change in the consumer behavior, the firms have to put more effort on the sustaining the improvement of the British local delicacies(Keith, 2008).

The labor market has also suffered as a result of the crunch. The hospitality sector is usually among the most affected in the event of an economic down turn. In September 2008, the year to year drop in the labor demand according to the KPMG consultancy study was 8.7% this marked the lowest labor demand for the last 11 years. This according to Mark Summerfield, the head of travel, leisure and tourism at KPMG was caused by the consumer’s keen interest in their expenditure. Gary King, director of Collins King and Associates marked the notable reduction in the demand of labor in the hospitality industry. According to King, September and October are usually the months with the most recruitment in this sector. The fact that the same months in 2008 reported a notable drop in the demand simply shows that most of the consumers were experiencing the weight of the economic downturn. He went on to say that the trend is likely to hold on for six more months (Keith ,2008).

According to Jeff Ross, Managing Director, Hospitality Graduate Recruitment based in Switzerland, most hospitality organizations are likely to change their human resource strategies to meet the current economic downturn. The probable activities include the change in the management structure of the organizations in terms of cluster level and unit level management. He also predicted that most organizations were likely to cut on their budgets for training and development. The remuneration packages in most of the organizations faced a danger of being frozen. Finally, Ross predicted a temporary stop on the recruitment by the hotels. This is not the best strategy when it comes to management of an economic downturn. Organizations are supposed to make their strategies that will enable them to survive for the longest time possible. By making decisions such as the above named, the effect will be felt in the long term. During the recovery it will take the organizations several steps back to start building a solid and efficient human resource base that they had before but restructured due to the short term credit crunch. This is to say that by reducing the number of employees and restructuring the management level in order to cut on the running cost, the organizations play a losing game in terms of their operational continuity and strategic continuity. They also compromise on the quality of their brands. In addition, the organizations lose their knowledge base forcing them to start from scratch. In long term strategist, this will mean that standards of the hospitality sector will go down as a result of the credit crunch (Leo ,2008).

Bob Cotton, Chief Executive of the British Hospitality Association concludes the importance of maintaining the workforce even in the lowest times of the economy by pointing out the importance of skills in the culinary section in the kitchen and the service section up front. These, says are the greatest weapons that can assist one to move out of the hard times.

The credit crunch

The credit crunch will impact on the innovation of in the hospitality industry. New comers who lack experience find themselves in a financial fix as they cannot easily access loans for their business start-ups. Most of them have to wait as the lending institutions have to ensure that before giving a loan, the client must have adequate experience in the hospitality industry. According to Christopher Heard, the director at Marlborough, before accessing a loan, the applicant had to have “relevant experience, a clean credit history and an appropriate cash share. Despite the great number of people approaching them for the loans, very few are able to get them as most of them fail to meet the requirements. As a result, established organizations are able to access loans pushing start-up businesses into a waiting list as the lending institutions are not ready to cater for the risks involved in new businesses (Leo,2008)

According to JP Morgan’s’ James Anile, puts it clear that financing new concepts was much difficult compared to existing businesses as a result of the risks involved. The effect of the credit crunch has also been felt by the pubs in the UK. The figures by the British beer and pub association on the number of pubs closing down due to low the economic downturn was astounding. According to BBPA, 36 pubs are closing down every week in 2008 compared to 27 that were being witnessed during 2007. Due to high taxes, the cost of running a pub have become too high thus cutting on the profit margin. On the other hand, the consumers are feeling the credit crunch effects as the liquidity of money of money leads to a more considerate expenditure. This impacts on the pubs as less and less people come to drink. This leads to little or no money as one has to service all the expenses. This trend has led to a fall in volume of the total sales by licensed pubs by 8% and an increase in the beer sales in supermarkets by 3%. This clearly shows the changing consumption trends. Most people are resorting to drinking from home and thus leading to the increase in the number of closures in 2008 making it nine times faster than closures in 2006 and 18 times faster than closures in 2005 (Nick, 2008).

The cost of hotel properties has gone down due to the economic hard times caused by the credit crunch. Experts predict that the cost could go down by as much as 20% by next year. To demonstrate this, the asking price for Marylebone Warwick Balfour for Malaise and Hotel due van which was 700 million pounds last year has been lowered to 650 million pounds. In addition to the reduction in price, the number of sales has also dropped. This is due to the fear to sell off assets by some hotels due to the low prices. As John Hubbard of Jones Lang La Salle Hotels puts it. Most hotels had put aside the asset disposal “because of the current state of the economy” (Nick, 2008).

The fall in wine sales in the UK is also attributed to the credit crunch. As probably a widely believed tenet, wine consumption measures the degree of spending. The bills that accrue in terms of wine consumption runt thousands of pounds when the conditions of the economy are favorable and reduces drastically during hard times. Consumers are beginning to be more choosy in their wine consumption as compared to the passed times. For example, the wine consumption at Meredith Group according to Marcelo Soars, the operations director has taken a new turn. Consumers have started to cut down on their wine expenditure by sharing one drink instead of buying two. In case of a party, the consumers will go for sparkling wine in the place of champagne (Candace, 2008).

For everywhere with a will, there is always a way. Inspire of the great effects that the credit crunch has impacted on the hospitality industry, there is a solution for it. Experts have invented strategies to keep the organizations afloat in these economic hardships. One of the solutions is the return to the real meaning of the term hospitality. Allegra strategies prescribe an emphasis on the service offered. The organizations should improve their service provision to keep their joints afloat ( allegra, 2008).

In addition to service, consumers’ trends of spending have taken a new turn. they are becoming more and keener on the value of their money. this means that service providers should ensure that their customers are satisfied by the service and the quality of food provided.( Candace, 2008).

According to allegra strategies UK restaurant Leader Report, most Britons are turning to coffee and shunning other expensive drinks due to the economic woes. Coffee shops are opening at a rate 10 a week with the total sales at the end of the year being estimated at 1.4 billion pounds. The number of coffee outlets is bound to rise to 3461 (Candace, 2008). With wine sales going down and pubs closing down, the hospitality organizations have to analyse the current market trend and change their marketing strategy to suite the changing market trend. the report suggests a change in the total chain of production. The organizations should improve their relationship with the suppliers. By engaging in fixed term contracts, the organizations will highly cut on their costs of production (allegra, 2008).

Consistency is one weapon that the organisation can’t do without. By maintaining a certain standard of quality which will not be compromised despite hard economic times, the organizations will be able to stand out and be placed at an advantage above those that will have failed to maintain consistency in their production. consistency can be maintained by keeping and attracting an experienced workforce. Organizations should also provide training and development to their staff members. In addition to this, the remuneration packages for the employees should not be thrown away as a result in the change in the human resource strategies (Roland, 2008).

Conclusion

In conclusion, the results of the credit crunch will continue to impact negatively on the hospitality industry. Inadequate financing, reduction in consumer spending , increase in running costs in terms of salaries, rent, raw materials and other expenses will slow down many hospitality organizations. The most important issue is only those with the commendable strategies through long term planning will emerge winners (Roland, 2008).

References

Aaron. K, 2008, “Time crunch”, Credit Union Management, Vol. 20 No.5, pp.48-50
allegra S.2008,Business Strategies to Overcome a Credit Crunch: New York: Prentice Hall.
Candace J. Pod Hotels cash in on industry room crunch Rising room rates, travel delays: The Wall Street Journal and Candace Jackson, 2008
Gilbert, D.C, Powell-Perry, J., Widijoso, S. (2008), “Approaches by hotels to the use of the Internet as a relationship marketing tool”, Journal of Marketing Practice: Applied Marketing Science, Vol. 5 No.1, pp.21-38.
Keith H.2002, Going International Harding : Oxford University Press.
Leo J. 1998, Management for the Travel and Tourism Industry, London: Cambridge University Press.
McCracken C. 2005,Effects of Credit Crunch In Business Sector. London: Oxford University Press
Nick H. 2008,The Effects of Credit Crunch in Hotel Industry. New York: Prentice Hall.
Nozar, R.A (1999), “Luxury market focuses on customer loyalty”, Hotel and Motel Management, Vol. 214 No.1, pp.29.
Roland C.2008, Trends and Issues in Global Tourisms.New Yolk: Prentice Hall.
Rosie B, 2008 Hospitality Hospital Effects Due to Credit Crunch, New York :Prentice Hall.

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Credit Crunch and Its Impact on Hospitality Industry

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