International Business Environment, Italy Essay Sample

International Business Environment, Italy Pages
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This work is a presentation of a short review of the current general economic situation in Europe, which includes a description of current trends, a description of the crisis in the economically strong countries in Europe. Most detailed information is presented on the state of the hotel industry in Europe and Italy in particular. This material is based on a demand of AZIMUT Hotels – the biggest Russian Hotel chain by the number of rooms, and its possibility of entering in Italian hotel industry. Current major markets are Russia, Germany and Austria. As it is shown in the data it allows to make a conclusion about the possibility to be presented in Italy key market – Milan, on the current stability of this segment and a good potential for the company AZIMUT Hotels, from the point of view of further expansion on the European market.

Introduction

This is consultancy report produced to a company AZIMUT Hotels which intends to continue expansion into the European market. The decision makers in the company consider the possibility of entering into Italian market. This is report examine the business environment for making right decision. AZIMUT Hotels is the Russian chain measured by the number of beds, market leader in Russia. Today, 22 hotels with over 5,500 beds belong to the international AZIMUT Hotels family. Founded in 2004, the international hotel chain AZIMUT Hotels entered the European marketplace in 2008. There are 10 hotels in the portfolio of AZIMUT Hotels Management Europe today. The business class hotels are positioned in the 3- and 4- Star categories and are located in the most attractive cities in Germany (Berlin, Dresden, Cologne, Munich, Nuremberg, Erding) and Austria (Vienna, Salzburg and Sattledt). (Azimut webpage, 2012)

Analysis of industry (sector)

Europe is at a crossroads. Recession has once again returned to haunt many economies, the Eurozone crisis continues and the dynamics of the global economy grind relentlessly onwards from west to east, and north to south. With policy-makers beset by limited funds and facing an ever-increasing chorus of protest from voters, the prospect of achieving sustainable economic growth seems, on the surface at least, out of reach. But despite this tide of negativity, Europe’s fundamental strengths endure. While the spotlight has focused on the world’s rapid-growth economies, Europe, too, remains a hotspot for investors. Ernst & Young’s European attractiveness survey, which measures the reality of Foreign Direct Investment (FDI) and the perceptions of more than 800 decision-makers, found that after a sharp dip in 2009, Foreign Direct Investment (FDI) into Europe has returned to growth. In 2011 there were 3,906 inward investment projects (Up 4%). Even more striking, the average project was markedly larger and FDI job creation surged 15% to 157,824.

There was also a 13% surge in sales and marketing projects, which totaled 1,977. Manufacturing ranked second, creating 97,229 jobs, with R&D in third place. Share of Europe’s global FDI inflows increased from 26.9% to 28.2% (Ernst & Young’s, 2012) The perception of Europe, too, appears positive. That survey found that investors see Western Europe as second only to China as the most attractive destination for global FDI, with Central and Eastern Europe ranked third. Investors also remain confident about Europe: 81% say Europe will overcome its current economic problems. Such results demonstrate that in these times of global economic difficulty, stalling growth, high sovereign debt and a fragmented political system are not insurmountable obstacles to investment projects. For many investors, especially from eastern markets, such uncertainty is actually business as usual.

To stay competitive, international investors have opted to push ahead with business development. Despite the recent and ongoing economic volatility, Europe remains the world’s largest single market, and the magnetic attraction of its 500 million highspending consumers, together with a stable and transparent legal and regulatory environment, remain powerful draws for investors (Ernst & Young’s, 2012)

Short European hotels market overview
There is no doubt that the Eurozone crisis, the malaise in the banking sector and political upheaval in the Arab world pose persistent challenges for the hotel industry. At the same time, leading industry players are adapting and learning to live with uncertainty. Business confidence in the largest European economies is beginning to stabilize, because people think the worst-case scenario in the Eurozone is unlikely. After the improved transaction levels in 2010, the volume of hotel sales in Europe increased further in 2011 by 9 %, to a total investment of about 7.1 billion Euro (HVS, 2012) The Europe hotel industry posted mixed results in year-over-year metrics when reported in U.S. dollars, euros and British pounds for September 2012, according to data compiled by STR Global, the leading provider of market data to the hotel industry.

“Increases in average room rate are still the main driver for revenue-per-available-room growth across Europe”, said Elizabeth Randall Winkle, managing director of STR Global. “Whilst demand, in terms of occupied rooms, is at historic high levels for September—with 97 million rooms occupied throughout the month and year to date—the growth in demand and occupancy has been stagnating for most of the year. September was a good month for Vienna (Austria) and Dublin (Ireland), with RevPAR (revenue per available room) increases of more than 20 percent. Both cities benefited from congresses and convention business” (STR Global, Oct.2012). Austerity and problems in the banking sector are causing lower spending in the Eurozone, and companies should be prepared for worst cases involving default, exits from the euro and other disorderly outcomes The Data of STR Global reported that 2011 was not a bad year but that the industry is feeling less bullish than a year ago. The political turmoil of the Arab Spring affected performance throughout the Arab world and the eastern Mediterranean. STR Global reports RevPAR across Europe grew by 5.8% in 2011.

Among European capitals, Paris recorded the highest average rate, while London achieved the highest occupancy (82%), followed by Paris and Amsterdam. Closures in Athens boosted occupancy among remaining properties, while Swiss hotels struggled to remain competitive despite the strength of the Swiss franc. UK hotels generally benefited from the low value of sterling. The average rate in London grew by 8%. However, RevPAR outside the capital has still not recovered from the last recession. During a Ernst&Young meeting that was on 1Q of 2012 where the leaders of the hotel market were also asked to answer was where would investors look to invest in 2012. Predictably, 53% of respondents felt that investors would continue to focus on the gateway cities with geographical reason almost irrelevant.

This, of course, is only one side of the story, and operators and tour operators need to continue to find opportunities to expand in new territories as a source of growth — acknowledging that this comes with added risk. This was the focus of one of our sessions, which looked at the risks and opportunities for those businesses looking to expand farther across southern Europe and to break new ground in North Africa. The story for southern Europe was, on the whole, more positive than the story for South Africa, despite the Eurozone crisis. The panelists cited strong customer demand for traditional southern European destinations, such as Greece, Italy and Spain. This was supported by the audience, who voted for the western Mediterranean as their preferred location for summer vacations (STR Global, Oct.2012). Italian industry of hospitality

Italian hoteliers reported mixed RevPAR results year to July (YTD), according to STR Global Sicily’s Taormina & Messina market led RevPAR growth and is one of four markets to report increases year on year. “Whilst Italy has been working toward its economic recovery plan, hoteliers will be looking at signals of improvement, particularly with regards to stimuli for future demand growth”, said Elizabeth Randall Winkle, managing director at STR Global. “Our latest forecast for Rome and Milan predicts declining demand in the two markets for year-end 2012, which will negatively affect occupancy for the rest of the year. For 2013, occupancy is forecast to remain weak, with more positive news for average room rates. However, the market situation for the two markets and the rest of Italy remains volatile”.

Looking at the best performing markets across Italy, the seasonal market of Taormina & Messina in Sicily reported double-digit RevPAR growth (+18.4 percent) YTD. Benefiting from an earlier Easter weekend compared to the previous year, RevPAR growth was led by increased ADR (€144.24) and occupancy growth of 6.8 percent YTD. The top four markets, in terms of absolute RevPAR achieved, were Venice, Rome, Florence and Milan, which achieved RevPAR between €81.98 for Milan and €176.76 for Venice. Declines for the Padua, Genoa and Bologna markets highlight the difficult market conditions. Padua saw occupancy decreasing for all months this year, dropping 12.3 percent YTD. Genoa, located on the Italian Riviera, reported 9.6 percent RevPAR decline YTD. Known for its seaport, the city has suffered from occupancy drop year on year (-7.7 percent) (STR Global, Sept.2012).

Scrutiny of key market – Milan
Milan is one of major hotel markets in Italy, which attracts both business and leisure travellers. After the analysis of Italian economy and the political upheaval, Milan could be considered a good indicator of the true strength of the Italian economy. The total number of hotel rooms in Milan increased by 2% to approximately 38,300 between 2007 and 2010. For comparison, Rome has 47,000 rooms, Paris 77,000 and London 90,000. This increase is mainly driven by an increase of 19% in the four-star category while the five-star category was stable at around 1,900 rooms. Lower hotel categories registered a decrease of approximately 15%. Consequently, the share of four-star rooms has increased from 44% to almost 56.6% whilst the three-star and other categories experienced decreases in rooms inventory of around 6% and 23%, respectively. With the strong and steady visitor growth and the new source countries, the existing five/four-star supply might not be sufficient for future demand Milan witnessed a 4% increase in values to €286,000 in 2011, driven by a 6% increase in occupancy together with a slight increase of 2% in average rates, which resulted in an overall 7% increase in RevPAR. After three years of constant decreases in RevPAR, driven by falls in both occupancy and rate, 2011 was a year of recovery.

Milan is ranked ninth in this year’s index. A few new hotels are expected to enter the market in the upscale segment in 2013-2014, including a W by Starwood, a Mandarin Oriental and an InterContinental. These, together with those hotels recently opened, will result in an increase of approximately 1,000 rooms for the upscale/luxury segment over this period. In 2011, arrivals from two of the main source countries, Japan and the UK, decreased compared to 2003, while arrivals from the USA and from emerging countries such as China and Russia tripled over the same period (albeit from a comparatively small base).

Foreign visitation to Milan has further diversified since 2003, as demand from various other regions – notably Central and Eastern Europe, Brazil, Australia and the Middle East – picked up. This demand still remains proportionally small, nevertheless. It does, however, demonstrate the wide appeal of the Milanese market. More importantly, this diversification should provide further stability and increased demand going forward. The seasonality of demand, depicted in the following graph, shows that domestic and international demand follow a similar trend although with some more pronounced drops in the summer for the domestic market and during the winter for the international demand.

Figure: Seasonality
Recent and Forecast Upscale Hotel Performance
The analysis takes into account the historical performance of a sample of upscale hotels in Milan totalling approximately 2,000 rooms. Analyzed occupancy and average rate performance between 2009 and 2011. The additions to the room inventory have been considered in our forecast and are expected to have an impact on occupancy levels as well as on average rate growth. Figure “Upscale hotel performance 2009-16” illustrates the historical and forecast projections for the defined competitive market. Even though average rate is not yet back to 2008 values, overall upscale hotel performance in Milan for 2011 showed clear signs of growth in occupancy and consequently RevPAR.

After decreasing in 2009, the growth of nearly 10% in both occupancy and rate achieved in 2011 has resulted in an increase of approximately 18% in RevPAR. Occupancy is forecast to decrease from 2012 to 2014 owing to the impact of new supply entering in the market while average rate is forecast to constantly increase. This results in RevPAR decreasing in 2012 and 2013 when the decrease in occupancy is not offset by the increase in rate. We note that the EXPO taking place in Milan between May and October 2015 is expected to have a positive effect on both occupancy and average rate in that year. We consider a few more years will be necessary for the market to absorb the new supply expected to enter the market between 2012 and 2014. Figure: Upscale hotel performance 2009-16

Italy, in general, is relatively modest in terms of volume of transactions. In 2011 no meaningful transactions were registered. There are approximately 33,000 hotels in Italy, but few of these even come into the radar of international investors as they are mainly owned by wealthy families who seldom put them on the market. The constraints of the physical inventory might pose an additional challenge to international hotel operators. Lastly, the complexities of the fiscal and legal framework in Italy might pose, to some degree, a further barrier to entry. However, that three hotels are currently for sale in the suburban area of Milan: the 436-room Crowne Plaza Milan Linate, the 142-room Holiday Inn Linate and the recently refurbished 203-room Holiday Inn Assago. Conclusion

Milan is an established international market driven mainly by business demand, which nevertheless also attracts a share of leisure tourism, mainly for luxurious shopping purposes. Although the pipeline of new supply, with almost 560 rooms in the upscale segment according to the forecast has a short-term negative impact on market-wide occupancy levels, but the market is expected to recover by 2016, and to continue to hold its privileged position as Italy’s financial and fashion capital. If the Milan hotel market is an indicator of the Italian economy in general there will be a slow, steady recovery and growth due to the strong demand from existing and new markets.

Analysis of country (economy)

The country analysis report on Italy provides analytical inputs to analyze the country´s performance, and the objective is to help the reader to make business decisions and prepare for the future. The report on Italy shortly analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure of Italy.

“Over the past two years, Italy has made a tremendous effort to speed up long overdue structural reforms. These reforms have been courageous, ambitious and wide-ranging. They include key improvements of the mediumterm fiscal framework and the labour code, some important liberalisation and simplification measures in product market regulation, and the anti-corruption bill” (Angel Gurría Secretary-General, OECD, September 2012). According of the report of Doing Business 2013 Italy seats on 73rd place in the world on DB2013 rank.

Considering the business environment of Italy we can look for policy makers, knowing where their economy stands in the aggregate ranking on the ease of doing business is useful. Also useful is to know how it ranks relative to comparator economies and relative to the regional average (figure 1). The economy‘s rankings below (see next page) included in the ease of doing business index provide another perspective (figure 2)

Figure 1 How Italy and comparator economies rank on the ease of doing business. Source DB 2013 Italy [pic]
Figure 2 How Italy ranks on Doing Business topics. Source DB 2013 Italy

While this ranking tells much about the business environment in an economy, it does not tell the whole story. The ranking on the ease of doing business, do not measure all aspects of the business environment that matter to investors or that affect the competitiveness of the economy. Still, a high ranking does mean that the government has created a regulatory environment conducive to operating a business. In view of the above, it is interesting to look at survey that made DLA Piper in this year (DLA Piper, 2012). They asked the respondents if now was the time to invest in Portugal, Italy, Ireland, Greece or Spain (PIIGS). And found that 40% think it could be a good time and 60% think it is “too risky”; a reflection of the on-going instability within the Eurozone and the socioeconomic problems in Greece. Spain is thought to be the most tempting investment opportunity, with 26% of respondents interested in investing, followed by Italy with 20% – reflective of the well established leisure and tourism industry in these countries. Portugal and Ireland are less attractive, scoring 9% and 10% interest respectively, and Greece is the most unpopular at 8%, in spite of its established tourism industry. [pic]

Also research of DLA Piper shows the top reasons cited for investment in Spain and Italy: 1. Established tourism destinations, with good assets and infrastructure already in place. 2. Lots of established family business “in need of a corporate home” (Italy) 3. Political stability

4. The anticipation of plenty of distressed assets coming on the market in 2012 (Spain). 5. Proven luxury and “must-see” destination (Italy).

PESTLE Analysis

In terms of politics, Italy seems to have had a great deal of government turnover since WWII. In light of the stability provided by the Christian Democratic Party after WWII, the country fell into turmoil due to scandals and government bribes by mafia associates beginning in 1992. The Christian Democratic Party eventually faded away as a result of the scandals, giving rise to new parties and political movements. Over the years this condition has been further exacerbated by the behaviour of political parties: their anachronistic methods for selecting competent and irreproachable candidates, as well as their inability to initiate the healthy regeneration of political power so badly needed in democracies, both at national and local levels. Consequently, and rightfully given the current economic hardship, issues such as Parliamentarians’ expenses and the large amount of their indemnities come under close scrutiny- first by the press and then by the general lens of the Italian people. It is not populism but popular. Two different set of policies, not incompatible in their substance, could help to ease this political inertia. Since Mr Monti’s appointment, the main objective of current leaders has been the enactment of a political austerity measure package backed by European institutions.

These measures have been immediately put into law and yet broadly criticized by eminent economists for their detrimental impact on national growth. Moreover, this has little to do with the main interests of the Italian people since they are primarily asking the government for domestic political reform. This should have been the priority of the technical government from the outset, currently at risk of alienating the principal political parties currently represented in Parliament. The second set of measures that should be taken involve a transformation of the social and economic institutions of the country in order to achieve structural reforms in all relevant areas of the society. Moreover, the governments both at national and local levels should be willing to tackle inefficiencies and parochialisms. From an international perspective, countries (such as Greece, Italy and Spain) that have experienced a common problem over the last year –the increasing cost of the money borrowed from issuing bonds– have provided different political answers to their debt challenge.

The Italian economy has remained one of the poor performers in the eurozone. Irrespective of cyclical fluctuations, the Italian economy has been registering a low output growth due to its structural problems. The economy grew at a CAGR (Compound Annual Growth Rate) of 1.1% during 2000–06, and the global economic slowdown further dampened economic recovery. In 2006 the economy showed some signs of recovery by growing at a rate of 2%, but slid back to 1.5% in 2007. During the first nine months of 2007 there was a modest upturn, but growth in the industrial and service sectors declined in the last quarter. There was an increase in unit labor cost and in bank debt, particularly among SMEs (Small and medium enterprises). The country entered recession in 2008 when the economy contracted by 1.3%, which continued in 2009 with a contraction of 5.2%. However, the economy bounced back to a growth of 1.8% in 2010 and 0.4% in 2011. According to International Monetary Fund forecasts economic recession is expected to be around 2% in 2012. Unemployment started to grow again in 2012, as a result of greater participation in the labour market, especially among the youth: over 30 per cent of active youths are now unemployed.

On the basis of its geographical location Italy is the country that receives a large number of refugees. Also abundantly supplied labor from neighboring Balkan countries who by the way very often works in hospitality industry (Istat, 2012). The shift towards services has boosted, on the one hand, sectors related to the new information and communication technologies, and on the other those designed to meet the demand for care and assistance and for intangible needs. Today, Italy’s economic structure is more like that of its European partners than twenty years ago. However, Italy’s specialization in manufacturing remains essentially the same as it was in the 1970s and its level of diversification similar to that of 1992, while the importance of large enterprises gradually declined. The results of this process have been a continuous decline in the ratio of value added to manufacturing output, a significantly lower growth in productivity than European partners, and higher inflation even after the introduction of the Monetary Union.

While in 2000 price levels in Italy were approximately 95 per cent of the European Union average, and prices in Germany about 10 per cent above it, in 2010 prices in both countries were around four per cent higher than the average EU level. In ten years consumer prices in Italy have risen by 25.5 per cent, while in Germany they have risen by 18.1 per cent. Only in sectors exposed to processes of liberalization have price trends favored Italy, which has experienced large increases in the relative prices of many services (for example recreational, insurance, financial and transport services) and certain goods (for example unprocessed food and clothing). Inflation remained high throughout 2011, driven by rising energy and food import prices; in the first few months of 2012 it remained stable, at 3.3 per cent, with the inflation gap widening in relation to the rest of the euro area. The increase in prices of frequently purchased goods (4.7 per cent in April) was significantly higher than the average increase. Moreover, in 2011 industry, commerce and a substantial part of the service sector reacted to the decline in demand with a reduction in profit margins, while for the financial and business service sector they remained unchanged, after the sharp drop in 2010 (OECD, 2012).

The majority of Italy’s 60 million citizens are ethnic Italian, with small German, French, Slovene, and Albanian communities scattered throughout the country (Italy: People, 2010). In addition, over 98% of the population is Roman Catholic. Still, more than 97% of the people can read and write. The Italian culture seems to bare many resemblances to the U.S. culture. A manager may expect a relocation to Italy to be an easy process with regard to the cultural factors. However, the subtleties of the Italian culture must be considered as well. For instance, Italians are appearance-conscious, making clothing a substantial part of the Italian lifestyle. Accordingly, if you have a business meeting with an Italian business owner, you may gain better traction by dressing professionally, sleek, and fashionable. While dress is more casual in other places, and seems like such a small part of business, unprofessional dress may hinder your ability to move forward with an Italian business (Bureu of European and Eurasian affairs, 2012)

The positive performance of exporting firms after the 2008-2009 crisis was mostly achieved on non-European markets, while on European markets the expansion has been much smaller, at around half of the former. Over the past three years exports by large firms, for all types of products, have grown more than those by small-to-medium firms, which have a greater presence on the European market. This comparative advantage points to the need to deal resolutely with the problem of the size structure of Italy’s manufacturing industry, which, despite some advantages, risks penalising the Italian economy in the medium run in terms of emerging markets penetration. Italy’s international specialisation is still based on traditional Made in Italy and precision mechanical engineering products, with minimal differences compared with ten years ago, despite the intense process of repositioning “within” the model of specialization and the increase in the quality of exports.

Together with the technological factor is worth marking the fact that it becomes easier of travel by air, land and other public transportation within Europe, also online services such as TripAdvisor becomes more important which helps consumer to make a right choice. Usual channels for advertising become less effective.

Italy operates under a civil law system. “In this system appeals are treated as new trials and judicial review is granted under certain conditions in Constitutional Court” (Italy: Foreign Investment Climate, 2009, p. 1). Alternative dispute resolutions, arbitration more specifically, is the best practice amongst multinational corporations. Alternative dispute resolutions are a very effective way to resolve problems with other businesses, especially since the Italian legal system may take an average of 3 to 5 years for trial in a civil case. Considering the facts of any limitations of the hotel business in Italy none of the changes have been indentified. After the research it seems that general conditions will be similar to those that the company АZIMUT has in Germany nowadays.

Summary/recommendations

The report allows establishing main conclusions:
Despite the fact that the economic situation in Italy remains difficult, however, Italy applies to developed European country with long-term perspective, since the stable economy is good. In the part of the state of the hotel industry, it should be noted in General that the market is in a satisfactory condition in general. Reduction of the domestic demand for hotel services in Europe is compensated by the demand from emerging markets, both in terms of tourism, and the fact that Europe remains attractive in terms of investment and business development. Italian economy is driven in a large part by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises. The current rules of the game for this kind of enterprises are favorable for the hotel business. According to the results of the collected information on the hotel market of the country it can be concluded that the most interesting market in Italy is Milan. The city is not only a tourist place or shopping center, but also it attracts business.

Thus in the case of reducing the occupancy of the hotel centered on the target group, it is possible to compensate the expense with other categories of guests. Current forecasts on the average occupancy of the hotels and on the average rate of the rooms are attractive in Milan, including in the context of regular exhibitions such as EXPO taking place in Milan between May and October 2015 According to the statements made above, and also taking under consideration the proximity of Italy to Austria and Germany, where a chain of AZIMUT hotels is presented fairly widespread, seems logical to continue the further development of business in Milan. Modern systems of hotel management and opportunity management at the same time in several hotels will allow reducing costs for the management of a new hotel (hotels) in Milan at its launch into operation.

List of references

AZIMUT webserver (2012) http://azimuthotels.com/?lang=eng

Bureu of European and Eurasian affairs (2012), U.S. Relations With Italy, Fact Sheet August 14, http://www.state.gov/r/pa/ei/bgn/4033.htm

Carreras A. and Archbold S. et al (2004) Business & Financial Environment I, textbook. Kingston University

Dixon S. et al (2007) Strategic management I, textbook. Kingston University

DLA Piper (2012) European Hotel Outlook Survey: Adapting to a Changing
Environment

DOING BUSINESS 2013 (2012) Smarter Regulations for Small and Medium-Size Enterprises, The International Bank for Reconstruction and Development/ The World Bank

DOING BUSINESS 2013 (2012) Economy Profile: Italy, the International Bank for Reconstruction and Development, The World Bank

Ernst & Young’s (2012) European attractiveness survey Growth, actually

Ernst & Young’s (2012) EMEIA hotel outlook for 2012: another year of uncertainty?

European Travel Commission (2012) European Tourism 2012 – Trends & Prospects, ETC CET, Market Intelligence Report

HVS (2012) European hotel valuation index 2012, HVS-London office, march 2012

HVS (2012) CURRENT TRENDS AND OPPORTUNITIES IN HOTEL SUSTAINABILITY, HVS-London office, feb. 2012

HVS (2012) Milan, Italy –upscale hotel market, HVS-London office, July 2012

Instituto Nazionale di Statistica (2012) Annual report 2012 The state of the Nation, read by Istat’s President, Enrico Giovannini, Rome, May 22nd, 2012

OECD (2012) ITALY REVIVING GROWTH AND PRODUCTIVITY SEPTEMBER 2012, http://www.oecd.org/italy/2012%2009_Italy_Brochure_EN.pdf

Presentation materials by Kent Springdal distributed at IBE-1 course (2012)

STR Global: Europe hotel results for September, 23 October 2012, http://www.hotelnewsnow.com/articles.aspx/9213/STR-Global-Europe-hotel-results-for-September

THE FACTORS OF COMPETITIVENESS IN THE HOSPITALITY INDUSTRY AND THE COMPETITIVE STRATEGY OF FIRMS

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