Interview with Natalia Lechmanova, senior economist of the Mastercard Economics Institute. I'm in charge of covering the European region, And partly also Middle East and Africa. She shares the institute's analysis regarding trends in tourism in 2023. Are we facing a new normal?
Could you introduce your institute?
Travel is obviously a very important sector for Mastercard, and therefore we dedicate special attention to research and to travel trends. As an institute, we are a group of economists and data scientists who look at the economy from the perspective of the consumer and small businesses, because we are Mastercard, after all. Almost all of us were previously bank economists. It's nice to have that slightly different perspective, which seems more connected to the real economy. And we do that by looking both at the publicly available data, economic data released by governments, the fiscal agencies, or OECD etc. And combining it with Mastercard spend data to have this more nuanced view of the consumer and the underlying trends. And that's beneficial not only because it provides extra level of detail, but also because it gives us more real time and up to date information, which is often not reflected in official statistics until weeks later. So, we can be a little bit more on top of what's going on and have a pulse on what's happening in the economy.
How do you guarantee customers safety and security about their data?
NL: We don't look at the spending at the cardholder level. We look at the aggregated and anonymous spending at the merchant level. So, we look at how much are consumer spending in Paris in whatever sector we choose to identify in restaurants, in hotels, in furniture stores etc.
We have seen in our data and interviews with the hospitality industry that this summer has been kind of special because on the one hand, tourism and going away is still very important for the consumer. But on the other hand, with inflation they have very specific budgets. And many hospitality managers told me, well, we had people, but they spent less money in our restaurants or any other additional products. Is this something you saw in your studies?
We see two things with regards to this. One is, as you mentioned at the beginning, there has been really since the economy reopened, a preference among consumers to spend on experiences, including travel and then on things.
People during the pandemic were all buying stuff in their homes, sitting online, and buying furniture and washing machine and extra screen and new yoga pants we can all relate to that. And so, when the economy reopened, we didn't need that If you bought a washing machine 2 or 3 years ago, you don't need one for some time. And instead, we were so happy to be finally able to get out there and have fun that we started to dedicate our limited budgets, which were getting squeezed by inflation, to spending on experiences including travel and mean also domestic spending on things like restaurants going out to bars, etc.
What we also noticed, though, is that consumers have traded down, in segments like groceries, they were buying cheaper alternative of their favorite products. And again, we can see into Consumer Basket and say that instead of buying organic milk that we're buying regular milk. But we see that the average ticket size, even though inflation has gone up, average spend per card in grocery store was going down.
Now the travel category was initially immune to that because what consumers were doing, they were saving money by not buying furniture and all these expensive items because they bought all that during the pandemic trading down in the essentials category like groceries, you save money and then using those savings to park it in the hospitality sector. It's true that from this summer we have seen the emergence of a more price sensitive consumer, and there are a few reasons for that.
“Focus on essentials: fast-moving consumer goods continue to drive retail sales across Europe (+14.6% vs. 2022). Despite the impact of inflation on consumer habits, Europeans continue to buy staples. This summer, the UK led the way with a 13.1% increase, followed by Hungary (12.7%) and Spain (9.6%). In France, spending on everyday consumer goods rose by 8.1%.” – Source Mastercard SpendingPulse
It was mostly the middle to upper income consumers who were doing a lot of travel spending. we have a statistic from the UK where 75% of airline bookings were done by top 50% percentile of income distribution. It was those wealthier consumers, because the lower income consumers were particularly squeezed by high inflation from food and energy. So really for them, travel was a discretionary good. And even though they wanted to travel, it came to them. It went to the bottom of the priority scale.
Those wealthier consumers were traveling. But as interest rates were going up, it's those wealthier consumers who also have mortgages. This is less the case in France, where you have fixed rate mortgages, but for all the other Europeans that go to France, even Americans, they have seen their mortgage bills rise. And so that' trading down in the travel category has started to be shown this summer because by the summer, it was those middle income, wealthier consumers who could afford to travel last year.
I still want to go to France, but maybe instead of a week I'm going to the four days, and instead of going to this fancy restaurant that's reviewed in the Michelin Star magazine, I'm just going to look up whatever is good on TripAdvisor and go there because I'm sure it's good enough. We have also seen certain locations doing better, like Egypt or Turkey, which have seen large currency devaluations, have seen greater influx of tourists because again, you get a deal in those locations more than you do in in Europe, especially in the hot tourist destination like France, like Italy or Spain etc.
How did you analyze the longer-term impact on the industry?
NL: It is also true that bigger group of consumers including those lower income consumers are now benefiting from the flowing inflation. So same inflation that was responsible for which came from energy and food is now reversing, so it’s again those lower income consumers who were hurt so much and now being disproportionally more impacted in terms of beneficial impact of flowing inflation. At the same time the wage growth is rising and most European countries growing wages is now in paced with inflation.
So that should give some spend power to consumers.
Asia continues to be growing. Travel from China has been disappointing, it has been slower than expected. But a lot of the slowness is not so much that there is not demand in China to come back to Europe. It's that there have been supply challenges in terms of issuing visas, in terms of getting enough long-haul flights in the air. As these supply challenges are gradually addressed, we should see ongoing demand for European hospitality, including in France, from Chinese tourists.
So, from your point of view, it's more likely that growth will occur elsewhere than in the old traditional tourist countries, and that we'll see more travelers from the BRICS, for instance?
NL: I think the growth will come for that, again, growth in Europe. It's going to moderate because demand is moderating, and the sector also, as you know in France and elsewhere, in terms of overnight stay, this is your data, we have returned to pre-pandemic levels.
To keep growing at the same pace we did in the last two years, which was extraordinary because we're coming out from the pandemics, obviously those scope for growth, we would need more hotel beds, we would need more restaurants to open. We would need more planes in the sky. We don't have that.
Demand is moderating from the West, but it's not moderating from the East. And by East, I wouldn't say necessarily BRICS, it's specifically China. That's a lot of consumers. So that is going to continue. To me, we're just returning to more normal growth in hospitality sector compared to this blockbuster growth that we have seen in the last two years. It's a maturation, but it's not a decline. It's just returning to normal levels. We know from history that, for example, airline passenger numbers grow always for the last30 years or just last 10 years before the pandemic, it's twice the pace of growth in global GDP and so in the absence of a recession, which is not on the cards, even though forecast for growth are quite modest because of the difficult environment we're in, we should continue to see ongoing recovery in travel going forward.
Geopolitical situation, climatic event, how do you place those elements in your analysis?
NL: Regarding geopolitical crisis, if we just look at the Russian invasion of Ukraine last year. We thought it would have impact on travel because airlines can no longer cross Russian airspace, the cost will go up if you want to go on the mall. Of course, there's war on European borders. It's going to impact appetite of people from outside of Europe coming to Europe for the fear of the war spreading. It could create all kinds of negative scenarios when the war started. And instead, we saw strong recovery. So, consumers seem to be discounting geopolitical risks.
Now climate, it’s very difficult you know, to pinpoint specific behaviors. But as we mentioned in our travel report we have seen that migration in travel very marginally. It happens in very small margins as people try to avoid the insane heat waves and risks of wildfires, etc., perhaps in Southern Europe. We've seen countries like Denmark climbing to the top 10 European destinations, many countries, so in aggregate numbers.
We have seen in our latest data from Spending Pulse, that we've seen greater growth in hotel spending in the north of France compared to south of France, perhaps for the same reason. So, I think it is going to gradually change travelers' preferences.
It's a story worth watching, and I think there's something there. But given that we've only been watching this for the past year and a half, it's hard to say if whatever we see as the changes in the new trend or just the blip.
Paris is still obviously a top destination in France.
“According to Mastercard SpendingPulse™, which evaluates in-store and online retail sales across all payment methods (including checks and cash), Europeans* continued to prioritize outings, experiences and socializing in their summer spending. This trend led to a 9.8% increase in retail sales vs. 2022, over the period July 1 to August 31, 2023. “– Source Mastercard Spending Pulse
I think the great thing about the rugby World Cup is that this year it helps France to extend the tourism season. So, the tourism season didn't end in August as it usually does, or the first week of September, but it's continuing to be healthy and will continue to do so until the end of October when the match finishes.
“Local events boost tourism: during the Hungarian Grand Prix, hotel and restaurant spending Hungarian Grand Prix, hotel and restaurant spending rose by 27.4% and 31.3% respectively compared to the 2022 event. Similarly, spending on hotels and restaurants soared during the "Summer bank holiday" in the UK, increasing by 7.1% and 5,0 %. In France, the top five French departments for accommodation sales where Nord were Nord, Paris, Rhône, Bouches-du-Rhône, and Pas-de-Calais. “- Source Mastercard SpendingPulse
“Restaurant spending on the rise: this summer, many Europeans took time off work to enjoy their loved ones. As a result, the trend towards eating out continued, with restaurant spending increased by 12.5% in France vs. 2022, compared to 8.9% in Italy and 8.8% in Spain.”- Source Mastercard SpendingPulse
“Privileged moments of escape: spending on hotels and vacation homes has increased across Europe: in Hungary (+26.4% vs. 2022), Spain (+9.4%), the Czech Republic (+7.8%) and the UK (+5.5%). In France, on the other hand, spending on accommodation saw a more moderate increase (+1.9%)” - Mastercard SpendingPulse
What about corporate travel?
NL: We have seen impressive recovery in corporate travel, especially last year when the economy reopened. We thought with the invention of zoom teams, we wouldn't need to travel anymore. In the countries that have had faster return to office, including France, there was a faster return to travelling for work, to corporate travel. We had it in Spain, we had it in Italy. And all these countries where interpersonal get together is more important compared to countries like the UK, it's the country where people work from home the most, in Europe.