Euro Change and its effects
Géza Nyers The good, the evil and the expensive Project Report for BA (Hons) Business Studies Oxford Brookes University International Business School Budapest 2002 Table of Contents EXECUTIVE SUMMARY - 3 - CHAPTER I : THE GOOD - 4 - GERMANY - 4 - BACKGROUND - 4 - LOCATION - 5 - POPULATION - 5 - GOVERNMENT - 7 - ECONOMY - 8 - MACROECONOMIC OUTLOOK - 11 - HOTEL SECTOR OUTLOOK - 12 - RECENT TOURISM TRENDS - 13 - THE HORECA SECTOR - 15 - DIRECT EMPLOYMENT - 15 - INDIRECT EMPLOYMENT - 16 - TOURISM AND HOSPITALITY - 17 - CHAPTER II : THE EVIL - 18 - THE MARIENBURGER BONOTEL - 18 - THE CHRISTOPH DAUM-CASE - 19 - BONOTEL IS DENIGRATED - 21 - THE BLASTS ON BONOTEL - 24 - CHAPTER III : THE EXPENSIVE - 26 - BRIEF BACKGROUND - 26 - PREPAREDNESS - 27 - RETAILER PREPAREDNESS - 27 - CONSUMER PREPAREDNESS - 29 - CONSUMER SPENDING - 29 - DUAL CURRENCY PERIOD (JANUARY – MARCH 2002) - 31 - OTHER EFFECTS - 33 - HOSPITALITY - 34 - FINANCE AND ACCOUNTING - 35 - TREASURY MANAGEMENT - 36 - LEGAL AND TAX - 37 - CUSTOMER RELATIONSHIPS - 37 - PURCHASING AND VENDOR RELATIONSHIPS - 39 - INFORMATION TECHNOLOGY - 39 - COMMUNICATION - 40 - HUMAN RESOURCES - 40 - CONCLUSION - 42 - REFERENCES - 43 - PICTURE GALLERY - 44 - Executive Summary As the title impulses, my report consists three main chapters concerning three different but even so connected topics. In the first chapter I am going to speak about Germany and its economy which belongs to one of the best and most successive countries. ... I would not like to say more only that this ‘thing’ generated the almost-bankruptcy situation to the hotel and to its owner, who was/is my familiar – that is why I know the episode from almost from the horse’s mouth - and my direct boss. ... I am going to (try to) analyse the effects of the euro change. ... The Germans call the euro simply ‘Teuro’, which comes from the fusion of the ‘teuer’ and ‘Euro’ words (teuer = expensive). ... Frankly, I experienced this change and it seemed to that ‘they’ simply changed the ‘DM’ signs to €. ... In January 1999, Germany and 10 other EU countries formed a common European currency, the euro. ... On account of its paramount importance it is often considered to be an index for general inflation. ... This has been the lowest annual rate of change since the first index for the whole of Germany was calculated in 1991. ... In its broadest delimitation, the consumer price index relates to all households in the Federal Republic of Germany. ... The Ifo index, Germany’s most important business confidence indicator recorded its third successive monthly increase in January. ... The owner and director of the Bonotel, Ronny Sporn – who was my direct and the only boss - is himself being accused for the retail of drugs, and its consumption. ... As I mentioned this chapter is about the euro, the countries affected by the euro and the hospitality industry. ... Brief Background The euro became a legal currency in its own right on 1 January 1999 when the currency exchange rates of participating nations were irrevocably converted to the euro. ... National currencies are now considered as denominations of the euro. They remained in circulation until euro bank notes and coins were introduced on 1 January 2002. It was followed by a short period when both currencies co-existed with euro notes and coins being introduced while national currencies are withdrawn. ... The euro currency consists of banknotes and coins. The banknotes of 500, 200, 100, 50, 20, 10 and 5 euro are of different sizes and colours, and possess identical designs in all 12 countries. The coins are in denominations of 1 and 2 euro, and 50, 20, 10, 5, 2 and 1 cent. ... Preparedness Retailer preparedness Overall, retailers indicate that customers are not yet prepared for euro introduction. This is further reflected in the confused level of consumer spending with some retailers predicting increases up to euro introduction yet a majority predicting a decline during the dual currency period. ... Although the majority of retailers believe that they are ready for the euro, when questioned on preparations already undertaken, it emerges that substantial numbers have not addressed some of the key requirements for conversion. In particular, a relatively high proportion of retailers interviewed have not implemented changes to cash-in-transit processes and counterfeit note identification and only one fifth of companies have so far made provision for a euro shortage. ... The extra costs of this euro introduction are noted in the survey with over half of all retailers believing their costs will rise. ... Of the Germany survey respondents, the vast majority of retailers operating in tourist areas are making changes due to euro. Figure 2 shows the percentage of respondents giving a response of 5 or above when asked to rate the euro-readiness of their organisation using a 7-point scale where 1 is ‘not ready at all’ and 7 is ‘completely ready’. All euro zone retailers will be impacted by the introduction of the euro and will have either already implemented business change or have plans to do so. In answer to the question ‘How prepared are euro zone retailers for the euro?’ 71 per cent of euro zone retailers overall, believe that they are prepared for the introduction of the euro, with Germany being most prepared and France the least. Consumer preparedness Figure 2 shows the percentage of respondents giving a response of 5 or above when asked to rate the euro-readiness of their consumers using a 7-point scale where 1 is ‘not ready at all’ and 7 is ‘completely ready’. Only 28 per cent of all retailers interviewed believe that their customers are ready for the euro, with Spanish and larger retailers in particular, more frequently expressing the opinion that their customers are not yet prepared. Consumer Spending Overall, in the run up to euro adoption, retailers are fairly evenly split between the 40 per cent that believe consumer spending will remain unchanged and the 36 per cent that believe it will increase – with the average anticipated increase in consumer spending at 8 per cent. ... Figure 4 shows the percentage of retail respondents by country that expect consumer spending to increase, decrease or stay the same in the period leading up to euro adoption. ... French retailers are unique in that half of those interviewed believe consumer spending will increase in the euro run up, as consumers concerned about its impact, bring purchases forward. ... ‘Customers will prefer to buy before the introduction of the euro and they will spend the cash they have saved (in French Francs)’. ... They will be very confused due to this drastic change. ... The overall expectation is that German consumers will be unfazed by the euro – perhaps because, following reunification, the Germans have recent experience of currency conversion. Interestingly, the Spanish respondents are significantly out of step with the rest of the euro zone with 58 per cent of retailers interviewed predicting an increase in consumer spending during the dual currency period, while the Italians and French anticipate a downturn in spending. ... Surveys showed that the Austrians, Dutch and Luxembourgers were most prepared to work with the euro. ... The Irish needed to step up their euro awareness, as only a low 22 per cent of the population memorised prices in euros before the introduction. Greece needed to introduce catch-up measures as it was the last country to join the euro zone, at the start of 2001. Both the Swedish and Danish rejected the euro in a referendum and the UK has - for the time being - decided to sit on the fence. Other effects Now, the euro is a reality, its advantages and disadvantages are been seen in everyday personal and business environments. It is expected that it will take some years before the inevitable growing pains have stopped and the full effects of a single currency, both positive and negative, are apparent. Some of the immediate effects, such as consumer price inflation, market transparency and decreased transaction costs, are discussed below. Firstly, one big concern among citizens and companies in the euro zone is price inflation due to the rounding up of prices after changeover from local currency to euro. ... Interesting figure is that actually everything has changed in price - 0 per cent stayed at its former price. ... A result of a more transparent market is increased competition between businesses in the euro zone. Finally, one group of businesses clearly lost out when the euro was introduced: the bureaux de change. ... However, other businesses have gained by the reduced currency exchange costs in the euro zone. ... Conversion to euro will affect virtually every aspect of hotel operations - from the front office to the marketing programs targeting business and leisure travellers. ... Whether the UK is eventually in or out, UK hotel companies may be significantly affected by the introduction of the euro. ... The euro will eliminate any risks associated with fluctuating. Hotels and conference venues in euro countries will have a competitive advantage when attracting new business within the conference market. Human resource management issues relating to the euro are also critical to the hotel industry. ... Enhanced job mobility throughout euro-land will enable hotel companies to better develop their management training and career development programs, and therefore assist in senior employee maintenance. ... And if customers change how they make their purchasing decisions, hotels inevitably have to review their sales and marketing strategy 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 reporting. A major challenge will be to convert financial systems to the euro. ... Treasury Management 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 corporate. ... As a result, properties in euro countries will have a competitive advantage when it comes to attract 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. ... 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. ... These include complex issues relating to the costs of euro introduction, and foreign exchange gains and losses, which are effectively realised on adoption of the euro.