Hyperinflation is no big deal to the CEO of Hilton, who says “We can reprice our product every second of every day.”
He’s not actually expecting hyperinflation, just the Janet Yellen-Jerome Powell kind of course. And though Hilton is a global company, he’s focused on U.S. inflation. But he makes the case that investors who worry about inflation should buy Hilton stock because Hilton can easily raise prices as the value of money falls. He’s not worried if monetary and fiscal policy drive inflation,
The ability to raise prices is helping hotel owners offset higher wages. Combined with new operating standards that require less labor, owners will likely see better margins on the other side of the pandemic, Nassetta said. Meanwhile, the strong leisure demand that’s driving the lodging recovery is likely to stick around for a while.
“If you look at the $3 trillion of incremental savings during Covid, there’s a long way to go to spend it all,” Nassetta said. “Thank you Federal Reserve and the U.S. Congress for fiscal and monetary stimulus.”
So what’s inflation actually going to look like. I don’t know. It seems to me it’s likely to be elevated for some time without recession, above levels we’ve gotten used to, but probably not over 5% (which may still be troublesome)?
- I don’t know how much room the Fed has to mitigate it. When Paul Volcker induced a recession to reign in inflation, he had the support of the Reagan administration (though he was a Carter appointee). Current politicians in power would be more likely to cheer inflation than recession.
- On the other hand, the 10 year Treasury yield is just a bit over 1.5%. In real terms investors may be willing to accept negative yield for safety, but that’s hardly pointing to hyperinflation.
Still, Hilton’s CEO is wrong to brush off inflation as a concern. He’s already changing his business to cut costs, of course, eliminating housekeeping positions by eliminating daily housekeeping service. And the end of free breakfast as a benefit in the U.S. means you have a food and beverage credit to spend as an elite… wherever and whenever food and beverage might be offered.
The problem most businesses face with inflation isn’t that ‘they can’t update their pricing board quickly enough’ so Hilton’s ability to change prices is a solution to the wrong problem. Hilton will face higher labor costs (that housekeeping reduction has already been baked into baseline expenses), higher construction costs, higher supplies costs – and they can’t just pass along those costs because they ‘change the price’.
- Prices are determined by supply and demand, and while cost may influence the lower bound over time, the marginal cost of an unsold room on a given night is almost zero.
- Customers may not be able to pay higher prices if their incomes don’t change at the same rate as Hilton’s cost inflation (wages may be sticky upward, not just downward). And some of their business customers may be more impacted by inflation than Chris Nassetta thinks his will be, causing them to cut back on room spend.
Contra Nassetta, Hilton does enter into long-term pricing agreements, not every room is sold a single night at a time. There are corporate pricing agreements (that aren’t just a percentage off) and event contracts are written 6 months and even years in the future locking in the price of rooms and meeting space.
One way in which Hilton would benefit from inflation is for any managed hotel properties where they’ve made minimum revenue guarantees to the owner they’ll find those guarantees easier to meet, and save on underperformance payments.