Interview with Isidoro Geretto - CFO Kempinski Hotels

Deloitte: How strong was the hoped-for rebound effect for the travel industry after the end of the COVID-lockdowns (in most of the world), and to what extent could this still have a positive effect over the next year?

Isidoro Geretto: During COVID, most governments imposed severe mobility restrictions on their citizens in order to control the spread of the virus and avoid overwhelming the capacity of the health sector and intensive care beds. These measures were absolutely necessary. But they hit the travel industry hard. Luckily many European governments set up various support programmes, from which the travel industry including Kempinski Hotels benefited.

As soon as the mobility restrictions were lifted, people wanted to meet, eat and travel, enjoy all those activities that hadn’t been possible for some time. There had already been some increase in leisure travel during the periods between the COVID waves; and now that the worst seems to have passed, demand has come back quickly and strongly.

During COVID our prices remained quite stable, and when the demand came back strongly, we were able to raise prices that now are partially offset by inflation and higher costs of labour, food and energy.

We are almost back to the pre-COVID level. Quite remarkably this has been achieved even though two very important pre-pandemic elements are still missing:

• Travellers from China, who represented a large portion of the total in 2019. Our clients who travel for leisure are typically less affected by rising energy prices and inflation.
• Business travellers and MICE business segments (Meetings, Incentive, Conventions and Events) are more sensitive to inflation and rising interest rates, so these segments may take longer to recover fully.

Privacy, space and security are currently among the most sought-after travel features. At Kempinski, we therefore anticipate strong growth in the years ahead, especially once Chinese and business travellers re-enter the market fully.

Deloitte: How can CFOs navigate the extremely volatile situation at the moment: war, inflation, recession risks?

Isidoro Geretto: It seems that the war has driven up food and energy prices in particular, but prices have risen elsewhere as well, with businesses taking advantage of the inflationary environment. The main economic issues, apart from the war itself and the tragedy it brings to the civilians, soldiers and their families, are the gas supply into Europe and the disruption to harvesting and export of Ukrainian agricultural products. Both issues are being addressed, but at a price of course.

Higher interest rates and higher energy prices will have negative effects. In terms of energy costs, I hope that the governments will provide temporary support to companies and low-income households to help them cope with the higher prices so they can survive the winter. This current situation is exceptional and caused by Europe’s high dependency on Russian gas. I regard it as a temporary problem, until the alternatives are up and working.

The problem of inflation may take a bit longer to resolve. We are already seeing a sharp decline in the rate of inflation for goods, but we will likely see a continuing moderate upward trend in the cost of services. Commodity prices may remain under pressure, but the major increases have occurred by now and excessive upward adjustments in the past will most likely be subject to downward corrections.

Deloitte: What are the consequences of the end of “free money” (ultra-low interest rates), for example on investments? How can CFOs react to that?

Isidoro Geretto: We expect the increases in interest rates to be relatively moderate, maybe to a level around 2-3% higher than before. Most hotel owners have long-term financing in place and will likely not be affected immediately. Non-realised or not-yet-financed projects in the pipeline could be delayed if interest rate assumptions in the investment plan were based on low interest rates. But with the end of the ultra-expansive monetary policies of central banks and increased interest rates, our investors will expect higher returns.

I believe that the surge in demand for services, and the need to travel, meet people and explore the world, coupled with the fact that Kempinski is operating in the luxury segment of the market, will allow for better profit margins, increased returns to owners and a favourable valuation of assets. However, investments will be scrutinised more than ever and the ultimate goal remains to sustain and develop the business and to enhance the product and customer experience.

Deloitte: In your opinion, what will the finance function look like in the future? What roles will technology, human factors and business culture play in its transformation?

Isidoro Geretto: In my opinion, the role of the CFO will not change too much. CFOs will continue to monitor and measure what is happening in and around the enterprise and in its markets in order to steer and adjust for the future. Wise allocation of resources remains the top priority as well as keeping a healthy balance sheet. I believe that weakening the balance sheet, for example through excessive dividends or bonus schemes, is not good for the safe and sustainable development of the business.

IT offers great opportunities to automate repetitive, time-intensive, and monotonous work. It makes processes scalable and takes away routine tasks from people, leaving them more time for value-generating and interesting work.

A redefinition of processes that exploit new possibilities will be essential. New systems must be flexible and open and easily adaptable to ever-evolving requirements. The days of rigid complex solution from one supplier seem to me to be in the past.

Redefined and automated processes will help employees to make better use of their skills and capabilities: their time will not be taken up with boring and repetitive work, but rather can help to continuously improve and reinvent the ways in which we operate. It will make the workplace more attractive.

Leading by example remains crucial. A respectful, self-confident, wise, and humble approach by management is key to sustainable growth of the company. It will generate trust among employees, shareholders and other stakeholders.

This in turn will create an environment where people want to belong to, to grow and excel.