Tourism at a Turning Point
Study by BlueShift seeks to interpret the early signs of tourism slowdown in Portugal and provides insights for hotel companies.
Five years of unparalleled growth
You don’t need to read newspapers or watch television to understand; just walk down the street. Portugal has definitively entered the premier league of world tourism. To give you an idea, between 2012 and 2017, the number of overnight stays – the main indicator of demand for a tourist destination – increased by 45%. Total revenues – which also consider the price factor, as well as revenues from meals, spa, and other services – increased by 83%. Considering that, by September 2018, the cumulative increase was already 6.3%, we understand that we are very close to doubling this indicator.
First warning signs: Has the boom come to an end?
Suddenly, in 2018, the first signs of a slowdown in tourist demand emerged. According to INE (National Institute of Statistics), accumulated overnight stays until September show a slight decline of -0.5%, with the most significant drops occurring in Madeira (-3.8%), Central Portugal (-3.5%), and the Algarve (-1.8%).
The slowdown is inevitable and has been anticipated by industry players. You can’t grow at double digits for a long time, especially in a mature, cyclical, and highly competitive global industry like tourism. However, the intensity of the braking is surprising.
The reasons are varied, well-known, and have been extensively debated among the industry “intelligence”: firstly, the reopening of competing destinations in the Mediterranean basin, such as Turkey, Greece, and Tunisia, known for their strong price competitiveness. Secondly, the impact of Brexit, especially through the devaluation of the pound, and also, in the future, depending on possible restrictions on movement in the European space. Finally, the evident exhaustion of Humberto Delgado Airport, which will tend to worsen in the coming years.
… or just a temporary setback?
But the intensity of the slowdown may be strongly related to other factors, of a one-off nature, which particularly affected us in 2018. If we focus on the destinations with the most significant declines – Madeira, Algarve, and Central Portugal – it is easy to identify these impacts. Particularly relevant for the first two, the bankruptcy of three airlines at the end of 2017 strongly affected air capacity – they represented 10% of seats in the Algarve. However, this should naturally correct itself as slots are appropriated by competing airlines. In the case of Central Portugal, the anomaly is more related to statistics: as 2017 was the year of the Pope’s visit to Fátima, the peak of tourists that year – 15.2% growth compared to 2016 – could not help but be reflected inversely in 2018.
Another aspect that may have been decisive for the slowdown is the typical “overshooting” price effect typical of years of changing cycles. In this industry, a significant portion of rates – for example, tour operators or major conferences – is contracted more than a year in advance, based on expectations at the time. In 2017, it was still believed that another year of strong growth was coming, so the trend of price increases continued. When demand turns less favorable, hotels end up being overpriced, exacerbating the slowdown. The contracts made for 2019 should already reflect greater moderation, which, in itself, will help release demand.
Everything points, therefore, to us entering a period of more moderate growth. But there are reasons to believe that the slowdown will not be as abrupt as the numbers for 2018 seem to indicate.
What if we are facing a more structural change?
But the most intriguing part of our analysis is the divergence between hotel numbers and those of airports. What we have decided to call the “mystery of the missing tourists” can be explained simply: if the arrivals of international tourists at national airports grew by 7.4% until September 2018, and foreign overnight stays fell by 1.4%, where are the missing tourists staying?
The divergence is even more evident if we focus on the regions of Lisbon and Porto. In both cases, arrivals at their respective airports grow by more than 11%, but foreign overnight stays show variations of -0.2% and +0.6%, respectively.
The problem has to do with the inadequacy of tourism statistics, which consider more traditional accommodation types – such as hotels and resorts – but leave out phenomena that are growing significantly, such as AirBNB-type short-term rentals (“Alojamento Local”). Or, to be more precise, it only considers establishments with more than 10 beds, which is almost the same thing – there are only 2,663 establishments out of a total of 77,053 listed in the National Register (RNAL).
With the caveat of speaking about numbers without reliable statistical means, everything indicates that the “missing tourists” are staying in “Alojamento Local”. Bad news for hoteliers: more than a slowdown in demand, we are witnessing a change in the mix of formats, resulting from a shift in consumer preferences.
A slowdown scenario is not a catastrophe
Starting from the observation that – whether due to a slowdown in tourist demand, a change in the mix, or a combination of both – hotel demand is slowing down, BlueShift developed a study on the impact of an abrupt slowdown on hotel companies.
One of the sector’s biggest concerns is the impact of the enormous pipeline of new units planned to open in the coming years. A survey carried out by Publituris Hotelaria magazine identified a total of 140 new hotels in the triennium 2018-20. Although experience shows that part of the pipeline never comes to fruition or is postponed when growth slows, it is unprecedented in its magnitude. These potential openings correspond to growth of approximately 16,500 hotel rooms, or 16.6% of the existing supply in 2017.
Our study assumes an extreme scenario, in which demand stagnates in 2019 and 2020, and despite this change in context, 75% of the planned new supply materializes on schedule. In this theoretical scenario, the deviation of demand to new units would impact the occupancy rate of current units by an average of -6.6%, and the average price by -3%. The RevPAR – revenue per available room, the main profitability indicator of a hotel – would, as a result, fall by about 9.3%.
It is obviously a significant impact. However, it is necessary to bear in mind that this occurs after half a decade of exceptional growth. Just think that, even in this extreme scenario, RevPAR in 2020 would be at the level of 2017. And if I remember correctly, at the time, everyone thought 2017 was an exceptional year.
The future depends on everyone
The behavior of demand is obviously a fundamental constraint on business performance. But, as our study shows, this element alone will not destroy the profitability of companies, even in a more extreme scenario. It depends, to a large extent, on how companies prepared themselves in years of growth, and their ability to adapt to the new context.
Based on its experience in managing and consulting for hotels of various profiles, BlueShift highlights four critical success factors.
The first is product differentiation. Undifferentiated products are, by definition, very vulnerable to price pressure in a scenario of lower demand. In contrast, a hotel with a more differentiated concept has market power and can charge higher prices, even in a crisis scenario.
The second factor is mastery of revenue management, i.e., the ability to understand the business, predict demand, and determine the appropriate channel mix and pricing to optimize revenue and results. When there are no suitable tools and methodologies in this area, the tendency is to focus on ensuring occupancy as early as possible, but at the expense of price reduction, which destroys profitability.
The third is commercial effectiveness. In a stagnation scenario, competition is more intense, and price pressure is greater. It is crucial to diversify markets and channels.
Finally, cost structure. In a cyclical industry, the organization must have the ability to adjust to demand by making a large part of the costs variable. According to the modeling carried out by BlueShift, and considering a financially healthy hotel, a 9% reduction in RevPAR, as estimated, would impact results in the same proportion in a company with a strongly variable cost structure, but could reach 30% in a company with a rigid structure and fixed costs.
None of these factors is instantaneous; they are built with specialized expertise and by investing resources in their planning and implementation. Companies that took advantage of the last five years to build their sustainable competitiveness factors will be better positioned to defend their profitability in a less favorable scenario. On the other hand, companies that did not take advantage of the oxygen of the last five years to invest in updating and optimizing their product and management practices may face additional difficulties.
Written by Filipe Santiago
October, 2021
This article was published in Marketeer. You can access the printed version here.
