Archive for August, 2017

Why All-Inclusive Resorts Suck (And Why Prices Are a Great Thing)

I’m not a fan of all-inclusive resorts. Having just returned from one in Punta Cana (DR), which appears to offer over 100 all inclusives, the indignities suffered are fresh in my mind. Allow me to share my horror and impart a bit of economics.

The basic problem with all inclusives is vertical integration of hotels into restaurants. The lack of synergy between the two skill sets is made worse by the big bundle, which eliminates prices for the “tied” product—in this case, resort food and drinks.

Don’t mistake this as a rant against vertical integration generally. Some skill sets nicely complement each other. For example, local breweries tend to be good at making food, presumably because someone who has a knack for making tasty brews understands the palate. Economists call these “synergies,” and they should be exploited whenever possible.

I learned this lesson first hand at the Atlantis Resort in the Bahamas. Atlantis offers its own restaurants. It also (wisely) contracts out resort space to third-party restaurateur such as Nobu. Trust your fearless blogger when he tells you the homegrown resort food is barely edible. In contrast to our local brewery example, the skills sets of making elaborate water parks (or just plain swimming pools) and making cuisine simply don’t overlap.

(A quick econ digression: A seminal piece by Carlton (2001) shows how bundling by an all-inclusive resort also can be bad for island natives. Before the resort bundled food with hotel stays, there was a thriving sector of independent restaurateurs, which catered to both island natives and tourists. After the bundle is introduced, tourists now eat all of their meals “for free” at the resort—really at no incremental charge—driving the independents out of business due to a lack of viable scale. Island natives are suddenly beholden to a monopoly provider of restaurants. But this piece is trying to convince you that tourists like you are harmed as well!)

When mediocre, resort-owned restaurants and bars are not allowed to charge a price due to the all-inclusive bundle, the problem of vertical integration in the absence of synergies is exacerbated. Now the interests of the resort and the guests are almost perfectly in conflict—the resort’s new profit objective is to minimize expenditure on food and drink given their zero incremental contribution to margin. And the guests can’t buy their way out of the predicament.

Even when something is “free” for guests at the margin, so long as there is a cost to provide the good (a meal or a drink), the supplier will find a way to ration supply. This is the role normally reserved for prices. But all inclusives kill the normal market mechanism.

In the case of an all-you-can-drink poolside bar—a cool idea in theory once you get over where guests are urinating—that means understaffing the bar so that patrons tread water for long periods before getting the bartender’s attention.

Rationing can also be achieved by decreasing the quality of spirits. Put bluntly, this entails cheating their guests. Stock the crummiest wine possible: Call one “white” and the other “red.” The all inclusive at which I stayed offered one red, one white, and one beer (Presidente). You should have seen the bartender’s expression when I asked for an Old Fashioned with Rye.

At the extreme end of the cheating spectrum, look to the Spanish chain Iberostar, an all-inclusive resort that substituted bootleg liquor for the real stuff across several properties in Mexico, and sent several guests to the hospital and some to their death. (When I fumed on Twitter the other day, Iberostar responded by saying: “We only purchase sealed bottles that satisfy all standards required. Safety and satisfaction of our guests is of utmost importance for us.” Hope they have a better defense in court!)

The same incentives apply to all-inclusive resort food. None of these outfits could survive outside of the resort. I met some New Yorkers who paid a hotel chain $1,500 on day three of their vacation to move from one resort to another (mine), because their family could not stomach the grub at the original resort. They literally upgraded from horrible to not horrible.

In addition to suffering low quality and long queues, guests at an all inclusive cannot incentivize staff via tipping. When you pay for drinks on the beach a la carte, you can add a gratuity at the end of your experience when presented with the bill. The next day your friendly server will remember the tip, and (hopefully) give you the royal treatment. Sometimes the gratuity is even already added to the bill. But at the all-inclusive resorts, because guests are not presented with a bill, the only way to tip your server and thus incentivize him is with cash. But who swims with cash in their pockets?

Are you convinced that prices are wonderful? Of course, charging a positive price at the margin for booze has a drawback, in that it causes guests to drink too little relative to the socially optimal level. Resorts make more money the more you drink, and your friends have more fun (making fun of you) the more you drink. But good resorts that offer food and drink a la carte know how to solve that problem—namely, by giving away free drinks.

“Hold on one second,” my free-market friends insist. “All inclusives are sensitive to the reputational costs of driving away repeat business. There must be at least some all-inclusives that have built up a brand name, have a lot of loyal repeat customers, care about their reputation, and treat their loyal customers well. They follow an all-inclusive model not to screw their customers, but to guarantee an all-around high quality experience.”

If only. The all inclusives rely on a steady supply of myopic, one-shot guests. Sure there are loyalists, but by repeatedly withstanding these indignities, they have revealed that they either don’t put a premium on food—did I mention there was free booze?—or don’t know good food from bad food. And economists like Gabaix and Laibson (2006) have shown that firms would find it more profitable to pursue a pricing strategy that exploited myopic consumers with higher prices than to attempt to steal customers from one another by slashing prices of ancillary services, even in “highly competitive markets.”

There. I’m done with that rant. And I’m also done with all inclusives.

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