Political Risk and Pricing

Venezuela is endowed with the most oil reserves in the world. One would imagine that the country has great potential for business growth for international investors due to the thriving economic aura associated with oil rich countries. Venezuela is an exception because despite being one of the richest countries in oil reserves, it has a high debt, high inflation of about 30 per cent and has the world’s highest crime and corruption (Nichols & Morse, 2010) .

Venezuela has been a politically unstable country under the dictatorship of the late socialist Hugo Chauvez. During his reign the country plunged deeper into debt as well as harassment of foreign investors. Just like Zimbabwe’s president Mugabe and Libya’s late president Muamar Ghadafi, Hugo Chavez policies were unfriendly to foreigners investing the country. Land was brutally repossessed from foreigners and the elite by armed government rebels even when it had been acquired lawfully (Romero & Ellick, 2007).

The climate for foreign investors in any industry has been unstable and proper international market environment analysis is critical for international businesses further stay in the country. Companies must reassess their pricing goals vis-à-vis the political climate. This is because political instability is known to have negative effects on profitability. Profitability is affected by pricing and pricing is determined largely by demand. When a country is experiencing political upheaval, the demand for hospitality products usually drops. This may result in lowering of prices to lure in the available few customers.

This paper discusses the impact of political instability on pricing of products offered by international firms and businesses in Venezuela. It discusses the nature of the marketing environment in Venezuela. Based on an analysis of the market environment, the paper advices on whether in respect to the political instability, the Mariott and Starwood hotels in Venezuela should sell off their businesses. It also offers an analysis as to whether it would be advisable for Marriot in Venezuela to buy Starwoods in case it was to put up for sale.

According to the New York Times the family of an investor named Hines from Cuba started investing in land in the 1950s. In 2007, he reported that amid the impending land repossession at the time he was trying to sell his property in Yaracuy and other states. It was proving difficult to get customers for his property because the potential buyers were afraid of invasion by Chavez’s forces (Romero & Ellick, 2007). Another incidence indicating a threat to international investors is one of Ms. Rivera whose 170 acres of land had been invaded by squatters without compensation. She is a daughter of a Portuguese immigrant and a large part of her sugar cane plantation was burnt down by squatter as an intimidation gesture. This came after her brother had been killed in 2003 and the murderer has remained free and she also fears for her life (Romero & Ellick, 2007). In response to these intolerable invasions happenings, most of the immigrants and foreigners were doing their best to leave the country. These land investors risk losing all the value of their investment due to the political decisions of an investor unfriendly president.

In 2009, the socialist president Chavez ordered the nationalization of the Hilton hotel in Venezuela. He claimed that the hotel would boost projects on tourism under a socialist perspective. The hotel was managed by Hilton worldwide and the complex belonged to two Venezuelan companies and was having problems with the financial regulator in the government. Ownership of the Magarita Hilton and Suites Complex was transferred to the Ministry of Tourism. This move came after the government had forcibly acquired control of Caracas Hilton (Anonymous, 2009). The nationalization of international hotels may reduce profitability for other competing hotels. This is because the Venezuelan government has burgeoning oil trade that would assist with some hotel management costs and it would be easier for it to set a much lower cost for its products to lure in the competitors customers. This would in effect cause the competition to lower its pricing and reduce their profit.

Chavez furthered his strong stance against capitalism and abruptly nationalized the last private oil fields on the midnight of 7^th May 2007. The fields were previously in control of “BP PLC, Conoco Philips, Exxon Mobil Corp, Chevron Corp, France total SA and Norway’s Statiol ASA” (The Associated Press, 2007). Conoco Philips assets were under expropriation threat for failure to agree on the principle state control. The other companies were requested to stay on and develop the field but they exhibited fears about Venezuela being a risky country for their businesses. In case the companies pulled off they risked losing over $17 billion US in investment (The Associated Press, 2007).

Chavez intended to nationalize those sectors of strategic interest to the country and tourism is a strategic sector. Starwood Hotels and Marriott’s has presence in as many countries as Hilton does. It is notable that Chavez ordered nationalization of two Hilton affiliated hotels. Going by the brutal trend of nationalization, it would be advisable for these two hotels to sell their companies because it would only be a matter of few months before they can also be nationalized.

In case the hotels decide to sell their property before the government publicly declares intentions to nationalize them, the companies would sell at a higher price and vice versa. The hotels would have more confidence in determining the price of the companies and they would also have more bargaining power while selling the property. This is because there would not be any perceived threat by the buyer.

In the face of uncontrolled nationalization and Starwood considers selling its property, it would not be advisable for another international hotel such as Marriot to buy that property. This is because although the market is guaranteed, management of key aspects of a business determines profitability. In case management is interfered with by a government department, maximum return on investment is put at risk and it is risky for any business to operate in unsure grounds.

References

Anonymous. (2009, October 14). Venezuela takes over Hilton hotel. BBC.

Nichols, E. G., & Morse, K. J. (2010). Venezuela. Santa Barbara: ABC-CLIO.

Romero, S., & Ellick, A. B. (2007, May 17). A Clash of Hope and Fear As Venezuela Seizes Land. . New York Times (Late Edition East Coast), p. A.8.

The Associated Press. (2007, May 1). Chavez Nationalizes Venezuela’s Last Oilfields. CBC News, p. n.p.