Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Hotel Industry
Transcript
- Lucas: Luna, I’ve been staring at the latest CPI and GDP numbers, and one industry that’s in a really weird spot right now is hotels. Luna: Hotels? I mean, travel demand has been pretty strong post-pandemic. What’s the weird part? Lucas: The weird part is that stagflation is pulling them in two directions at once. Core CPI hit 336.1 in May, so prices everywhere are still climbing. But real GDP growth annualized is only 2.1 percent — barely above stall speed. People want to travel, but they’re cutting corners. Luna: So they’re still going on trips, just cheaper ones. Are we seeing a trade-down effect? Lucas: Exactly. The luxury segment — think Four Seasons, Ritz-Carlton — occupancy is actually down a couple points from last year. But midscale and economy brands like Holiday Inn Express, La Quinta, they’re seeing solid demand. The average daily rate across the industry is up about 8 percent year-over-year, but a lot of that is just inflation passthrough, not pricing power. Luna: So the rate increase covers higher costs, but margins are still squeezed. What’s eating into their bottom line? Lucas: Labor costs are the big one. Average hourly earnings for private workers hit $37.60 in June. For hotels, housekeeping and front-desk wages have gone up even faster because they can’t find enough staff. Plus, the labor force participation rate just fell to a 50-year low outside of COVID — so the pool of available workers is shrinking. Luna: That’s brutal for a business that runs on shift labor. And I imagine debt service is another headache, with interest rates staying higher for longer. Lucas: Right. A lot of hotels refinanced during the low-rate era, but those loans are coming due. The ones that floated floating-rate debt are getting hammered. We’re seeing some smaller independent properties put up for sale because they can’t cover their debt payments with current cash flow. Luna: So the big chains with better balance sheets — Marriott, Hilton — they probably have an advantage here. Lucas: They do, but even they’re adapting. Marriott is pushing their ‘Midscale by Marriott’ tier harder, trying to capture the trade-down guest. Hilton is doing similar with Tru by Hilton. They’re also leaning into loyalty programs to lock in repeat business. But here’s the thing — corporate travel, which used to be a steady cash cow, is shrinking. Companies are cutting T&E budgets because they’re watching every dollar in a slow-growth environment. Luna: I’ve noticed that. My old firm used to send people to conferences without blinking. Now it’s all virtual or one person goes instead of three. Lucas: Exactly. Business travel revenue is still maybe 15 percent below 2019 levels in real terms. And that’s higher-margin business — the weekday stays, the group bookings. So hotels are fighting over a smaller pie there. Luna: And what about the leisure traveler? With inflation hitting grocery bills and rent, are they just not traveling as much? Lucas: They’re traveling, but they’re staying closer to home, taking shorter trips, and booking cheaper rooms. The road trip market is actually strong. Hotels near national parks or along interstate highways are doing fine. It’s the big resort destinations — Orlando, Las Vegas, Hawaii — where we’re seeing more rate-sensitive behavior. Luna: That makes sense. You can still go to a state park for a weekend. It’s the $600-a-night resort that feels irresponsible right now. Lucas: And that’s exactly the kind of trade-off that defines a stagflationary mindset. People still want experiences, but they’re more deliberate. Hotels that rely on impulsive, high-spend guests are the ones getting squeezed. Luna: So what’s the outlook? Do you see this playing out for another year, or is there a turning point? Lucas: Look, as long as core CPI stays above 3 percent and GDP growth hovers around 2 percent, the pressure stays on. The ten-year breakeven inflation rate is at 2.23 percent — so the market doesn’t see inflation disappearing fast. Hotels are going to have to keep managing costs and maybe defer some renovations. But the ones that can pivot to value-oriented offerings and lean on loyalty will survive better. Luna: Speaking of value and making things work in a tight economy — it reminds me a bit of how we run this show. No big ad revenue, just listener support keeping it ad-free. Lucas: Yeah, it’s a similar kind of trade-down, in a way. We don’t have the big media budgets, but a core group of listeners chips in through buy me a coffee dot com slash fexingo, and that covers the hosting, the research, the production. It’s lean but sustainable. Luna: Exactly. And it lets us stay independent, talk about whatever we find interesting without worrying about pleasing advertisers. So if walking through the economy with us has made something click, that’s the engine. Lucas: And we’re grateful for it. Now back to hotels — one strategy I think is underappreciated: Hyatt is actually expanding its all-inclusive resort portfolio because those offer a fixed price, which appeals to travelers who want to avoid surprise costs. That’s a clever hedge against inflation anxiety. Luna: So all-inclusive becomes the ‘value bundle’ for the stagflation era. Pay once, no nickel and diming. Lucas: Exactly. And they’re not alone. Even cruise lines are seeing strong bookings because the upfront price feels like a better deal than a la carte travel. Luna: So the hotel industry is essentially being forced to innovate — not through fancy new amenities, but through pricing and segmentation that matches the mood of the economy. Lucas: Right. And the winners will be the ones that understand that the consumer isn’t broke, just more cautious. That’s a very different dynamic from a recession. In a recession, people stop traveling. In stagflation, they travel differently. Luna: It’s a fascinating lens. And I guess for investors, the key is to watch which brands capture that trade-down and which ones get stuck with too much luxury inventory. Lucas: Absolutely. And we’ll keep watching the CPI and employment data to see if the pressure eases. If participation stays low and inflation stays sticky, the hotel industry will have to live with this new normal for a while. Luna: Alright, thanks Lucas. That was a great look under the hood of a sector we all interact with but don’t always think about economically. Lucas: Thanks, Luna. Until next time.