Shifting priorities: The effects of the global economic crisis prompt a change in focus

Post-World Cup inertia still lingers in South Africa. While the FIFA event was seen as an overwhelming success by organisers and the domestic tourism body, the country has, thus far, been unable to replicate or sustain the level of visitors the international football tournament brought to the country. The industry has not been helped by the global credit crunch, which has reduced both visitor numbers and spend from South Africa’s core markets, namely Europe and the US. The hospitality business has been in the doldrums, with both occupancy rates and revenue per available room down substantially.

It is not all bad news, however, as figures began to head upwards in the last quarter of 2011 and certain markets, such African and Asian visitor segments, offer a glimmer of light for an industry that remains central to the government’s development plans. As such, there is hope that the sector is merely experiencing a brief hiatus from what has previously been a strong track record of growth.

BUMPER YEAR: South African tourism had a bumper year in 2010. The country saw a 15.1% growth in visitor numbers to 8.07m, well above the global rate of 6.7%, according to South Africa Tourism (SAT), the government-owned promotional and marketing body. In 2011, further growth of 3.3% was recorded, bringing 8.43m people to the country. This headline figure was accompanied by an equally important increase in the total direct spend of visitors, growing by 19.2% to R120.7bn ($17.77bn).

The FIFA World Cup is often cited as the primary driver of this upward trend. While the event was undoubtedly a success, bringing 309,554 foreign tourists who spent a total of R3.64bn ($445.54m), its ability to dominate the narrative obscures, to some extent, the strong performance of the industry throughout the rest of the calendar year. Even without the visitors who came for the international football tournament, South Africa would have experienced arrival growth of 10.7% and an increase in total direct spend of 15.6%, according to calculations based on figures from SAT.

A BOOST IN DIFFICULT TIMES: Just how much of the growth seen in 2010 can be attributed to the exposure and buzz created by the World Cup is hard to quantify. The country has established a strong tourism offering over many years, with visitor numbers moving steadily upwards between 2004 and 2008. While South Africa’s overseas visitor numbers were up 6.3% in the first five months of 2010 – before the tournament kicked off in June – over the same period in 2009, it is clear that the World Cup played a crucial role in staving off the effects of the global economic crisis that left other tourism markets hard hit. According to PwC, an international accountancy and professional services firm, without the World Cup, hotel occupancy rates would have decreased to 46.4% instead of increasing to 47.8% in 2010, and room rates would have grown just 3.7%, rather than the 12.6% that was realised.

AFTER-EFFECTS: The World Cup has now come to stand as a symbol of the good times in a period of stagnation. Indeed, the market is currently in a tender state. While the feel-good factor stretched throughout 2010, the fizz and sparkle in the sector rapidly dissipated in 2011. In the first nine months of the year, visitor figures were down 4.8% on the same period of 2010, according to SAT. Tourism spend has also been hit, with the average spend per foreign tourist, excluding capital expenditure, falling by 7.4% to some R8800 ($1077).

The impact on the hotel market was also pronounced. Room nights sold displayed negative growth in every month for the first seven months of 2011 against the same periods in 2010, with the exception of April, which saw an 0.8% rise, according to figures from Statistics South Africa.

Much of this seems to be attributable to the effects of the global economic crisis, which hit the South African tourism market hard in 2011. The impact of reduced consumer confidence and fewer travellers was delayed in 2010 largely due to the World Cup, but has inevitably hit the industry in 2011.

PERFORMANCE IN 2011: Indeed, the effects of the global credit crunch on European travellers’ habits and intentions do not make happy reading for those involved in the South African market. According to the “ITB World Travel Trends Report 2010/2011” by trade show operator ITB Berlin, European travellers vacationed for shorter periods and spent less in 2009 and 2010. For South Africa, a long-haul destination for Europeans, this has spelt bad news.

According to the Ministry of Tourism, visitor numbers from the UK declined by 7.2% in 2011 compared to 2010, while Germany’s arrivals actually increased, growing 9.3% in 2011. These have traditionally been key markets for South Africa, with the UK accounting for some 453,030 arrivals in 2010, the largest share of foreign visitors outside of the Southern Africa Development Community. Furthermore, spending by European travellers dipped by 4% in the first eight months of 2010, according to ITB.

South Africa, a long-haul destination that often sees a time lag between consumer intentions and actions, felt this sharply in 2011. Arrival figures from Europe for 2011 were down by 3.5% compared to the same period of 2010, according to figures from SAT. Growth from North America has seen a modest uptick (2.3%) for the same period in spite of the economic crisis. Overall, international arrivals in 2011 were up by 3.3%, with this rise largely driven by a 14.6% increase in visitors from emerging Asian giants China (up 24.3%) and India (up 26.2%).

LOCAL SPECIFICS: The general trend of reduced travel and spending has also been exacerbated by country-specific factors, such as the exchange rate. For much of 2011, the rand remained strong, hovering just below R7:$1 (under R10:€1 and R11:£1). This strength, which increased the expense of South Africa as a destination, may well have had a damaging effect on tourism. While the rand has since depreciated somewhat (standing at R7.84:$1 in late April 2012), this may not have all that much of a parallel positive effect on visitor numbers. According to Thulani Nzima, the CEO of SAT, “The strength of the rand, without our doing anything, increased prices by 20-25%. We welcome the decreasing value of the rand, but it can be a hindrance to growth when the currency fluctuates that much.”

AIRLINE COSTS: Whether such fluctuations have the same impact on traveller habits for a long-haul destination as it would for a closer sun-and-sand destination is open to debate. What is beyond dispute, however, is that South Africa has been hit hard by the decline in its traditional markets. This has not been helped by increasing costs for airlines, which will put upwards pressure on the price of flights.

South Africa is acutely aware of the impact that increasing ticket prices could have on tourism volumes. Yet a rapid rise in airport charges within the country is likely to result in a concomitant rise in air ticket prices. Airports Company South Africa (ACSA), which operates 10 airports, including the three biggest – Johannesburg, Cape Town and Durban – increased its tariffs by 34.8% in April 2011 and by a further 70% in October 2011, according to the Centre for Aviation and Airline Association of South Africa. Over the coming three years, ACSA is expected to raise tariffs by an average of 5% a year.

COMPETITION: This will undoubtedly affect both the aviation and tourism industries. However, a greater issue may be the lack of competition and liberalisation in the aviation sector. “One challenge is the cost of South Africa as a destination. Airline costs is a big issue, as an open-skies policy with South African Airways (SAA) does not exist,” said Brian Davidson, the group sales and marketing director for Legacy Hotels and Resorts. Along with promoting individual bookings on scheduled flights, he believes there is potential for charter flights to bring both people and revenues to the sector. “If people found a way to make charters work, to fill up cheaper hotels in Cape Town and Durban, everyone would benefit. The five-star properties could build their rates. You could get spin-offs from the add-ons to Cape Town. If you put some money behind this strategy with an operator, it would change the face of tourism in this country,” he told OBG.

The lack of an open-skies policy with the EU has been an ongoing issue for the government as it tries to balance the conflicting impulses of protecting the profitability of its national carrier and supporting the tourism industry by encouraging greater air traffic to the country. While there is intense pressure from the EU for the government to liberalise access to the country’s skies, a deal has not yet been formalised. It seems clear that the tourism industry has been pushing for this measure.

SAT’s Nzima said, “This has been an ongoing discussion and a very friendly engagement. The question is what is the mandate of SAA and what is our mandate. Ours is to sell South Africa as a destination but we want to ask what is SAA’s mandate. Is it promoting the tourism industry here or is it ensuring its profitability? We are not complaining about it but we are asking them to open up a little.”

TRANSITIONING: The industry began to recover to some extent by the end of 2011. Hotel room nights sold increased by 3.4% in October and 9.2% in November, according to SAT. Occupancy rates were also up, standing at 59% in November 2011. However, these remain difficult days. At a time when the country has been pushing an agenda of responsible tourism and ecotourism, niche segments that should appeal to high-end, long-haul leisure travellers, the dynamics of the market seem to have changed. According to Nzima, “The first consideration [for visitors at the moment] is value for money. This is their biggest concern, but South Africa is a long-haul destination, so whatever we do, we do it within those constraints.”

This seems to be confirmed by figures from Statistics South Africa that show in the three-month period leading up to November 2011, income growth was strongest from camping and caravan sites (58.8%), followed by guest houses and lodges (39.7%), and then hotels (6.5%). Despite comparatively slow growth, hotels continue to provide the majority of accommodation revenue – some R2.2bn ($269.28m) in the same period. Thus, the tourism authorities must hope this segment continues to thrive and that business at the upper ends of the market resumes.

With the erosion of traditional markets, the question for authorities is how to bolster arrivals and spend in a market geared towards long-haul visitors when these customers do not have the same appetite for travel. Finding a solution to this quandary will be key to the future success of the industry. The loss of volume and revenue from key markets has been encouraging a rapid and dramatic rethink of the way the country promotes itself.

ECONOMIC INPUT: Success is crucial for both sector players and the wider economy, and SAT is under significant pressure to deliver. The government has highlighted tourism as a key contributor to economic development. As of 2008, the sector provided a direct contribution of R67bn ($8.2bn) to the economy, equating to 3% of GDP, according to Statistics South Africa’s 2010 “Tourism Satellite Account”. It also estimates the sector directly provides 599,412 jobs, accounting for 4.4% of overall national employment. To boost these figures, the government, through the Department of Tourism and its National Tourism Sector Strategy, has targeted a direct impact of R188bn ($23.01bn) and an indirect impact of R499bn ($61.08bn) by 2020, with the sector directly and indirectly supporting more than 1m jobs. To achieve this, the Department of Tourism has set a target of 15m foreign arrivals by 2020.

Nzima remains sanguine about the enormity of the task that lies ahead of the organisation. While he admits it is currently a difficult market, he believes there are significant avenues for growth. “Part of the tourism strategy is to promote domestic travel. We need all South Africans to understand the benefits of travel,” he said. This falls in line with plans to spread the tourism sector to all corners of the country, building economic growth in rural areas through the industry. The private sector is also a significant proponent of this strategy. According to Wisani Nyamazane, the COO of the Tourism Business Council of South Africa, the representative body for the private sector, “My opinion is that we need to focus on domestic and regional tourism.”

STAYING HOME: However, the potential of domestic tourism to pick up the slack is questionable. In 2010, domestic tourism numbers actually dipped slightly, falling from 30.3m in 2009 to 29.7m, according to SAT. Furthermore, while the domestic market accounted for 72% of the tourist volume in 2010, it accounted for only 17% of the total spend. This suggests it will be some time before domestic travel can be a game changer for local operators.

Nonetheless, the government is confident it can begin to tap into this burgeoning market. While South Africa has one of the more uneven distributions of wealth globally, the development of an emerging middle class with significant spending power bodes well for the sector. The National Tourism Sector Strategy highlighted a study by the Bureau of Market Research at the University of South Africa which estimated that 3.5m adults were within the R100,000-300,000 ($12,240-36,720) personal income bracket in 2010, while a further 789,744 adults earned between R300,000 ($36,720) and R500,000 ($61,200). The national strategy concluded, “These groups represent the core of middle-class South Africans and can significantly contribute to increased domestic holiday travel and further grow domestic tourism’s contribution to the economy.”

TARGETED OFFERS: Reaching out to these markets and providing an appropriate tourism offering for each income level will be key to tapping the domestic segment. According to Nyamazane, “South Africans do not have a culture of travelling. We need to instil a culture of domestic tourism, which is a medium- to long-term target. I think there is the income available, we just need to segment the market.” Indeed, the South African Advertising Research Foundation’s Living Standards Measure, which divides the adult consumer market into 10 segments based on income (10 being the highest monthly income), showed that in 2010 the majority of consumers fell squarely within the middle class, represented by 4-7 on the scale, with average monthly household incomes of R2582-9644 ($316-1180).

As such, there is significant potential to market destinations to this population, but it will require a reassessment of the current offerings for these groups in terms of accommodation, transport and destination activities. According to Nyamazane, “South Africa has a wide range of products, but we need to do an inventory. We need to see what products are out there.” This task is one of the key pillars of the draft tourism bill currently being debated in parliament. Such product assessment and development will be crucial for the growth of the domestic, regional and emerging Asian markets. “African and Asian markets have given us double-digit growth, which core markets cannot provide,” said Nzima.

AFRICA & ASIA: Indeed, in 2011, tourist arrivals from Asia rose by some 14.6%, while those from Africa grew by 6.9% year-on-year, according to SAT. Asian growth started from a fairly low base – fewer than 200,000 arrivals for the first nine months of 2010, but recorded increases in visitor numbers of more than 20% from both China and India over the course of 2011. The African market continues to be substantial, with more than 4.5m arrivals in the first nine months of 2011 and 6.8% growth for the year. This trend holds true in the corporate segment as well, according to Mike Molyneux, the CEO of Westpoint Executive Suites. “American and European companies are not sending as many staff to South Africa as they once were, but we are seeing increased interest from China, India and the rest of Africa, which is helping to offset the loss,” he told OBG.

Not everybody is convinced that regional and emerging markets can act as a counterweight to poorly performing core markets, however. According to Legacy’s Davidson, “These emerging markets do not have the volume to make South Africa right.” Davidson argues that the country needs a significant mass of tourists to push rates up from the bottom and iron out price disparities that have emerged as a result of strong competition for fewer guests.

LAND VS. AIR: It has been argued that the regional arrival figures are distorted by short cross-border shopping trips that have little impact on the hospitality sector and the tourism industry more broadly. Land arrivals account for the majority of visitors, comprising 73% of the total in the second quarter of 2011. Additionally, this was the only market showing growth in the second quarter, increasing by 12.6% compared to the same period in 2010, according to SAT. However, the average length of stay of overland travellers is significantly less (5.1 nights) than that for visitors flying into the country (19.9 nights). The same goes for spending: the average spend per foreign land arrival is R7900 ($967); this is significantly less than the average for those arriving by air, which comes in at some R11,600 ($1420).

SAT remains pragmatic about these trends. “We are focusing on emerging markets because currently they are giving us the growth. They have not been badly hit by the global meltdown,” said Nzima. In this new reality, African travellers are high on the government’s agenda. This will require offering a range of new hospitality and leisure services. “When we look at the African market, we cannot sell wildlife as an attraction. It needs to be a bit like home, but then we need to offer something different as well,” said Nzima. In a statement to the press in April 2012, the tourism minister, Marthinus van Schalkwyk, announced that the government will spend a total of R218m ($26.68m) over the coming three years to help SAT to increase the country’s share of the tourism market on the continent.

LUXURY MARKET: While the new reality of the market will mean sector players cannot expect to thrive on the old model of five-star hotels and resorts, the authority is confident there is plenty of potential to promote luxury offerings to African travellers, with Angola being one example of a well-heeled market. The second-largest source of air travellers in Africa, the average spend per Angolan visitor is more than three times that of a European, according to Nzima. As such, SAT has been aggressively marketing to Angola through a variety of media and workshops.

The key obstacles for growth in these high-spending African markets remain visa processing and constraints on air travel. The government is acutely aware of these issues and has been working to address them. In 2010 the authority signed a joint marketing agreement with Kenya Airways, Africa’s seventh-largest airline in terms of passenger volumes. The Kenyan operator will jointly market travel packages to South Africa through several types of media, including its on-board publications.

MICE: South Africa has also been working aggressively to position itself as a meetings, incentives, conferences and exhibitions (MICE) destination, with encouraging results coming on the back of the country’s hosting of large-scale gatherings including COP 17, a UN climate change conference. In second-half 2011 the government established the National Conventions and Events Bureau (NCEB), which, according to Van Schalkwyk, was set up “to capitalise on the successful hosting of the 2010 FIFA World Cup, and to use that as a springboard to secure more events of a similar scale”. The country has so far secured 300 conferences leading up to 2015, which could collectively inject around R1.3bn ($168.39m) into the economy, according to the NCEB.

OUTLOOK: Such developments seem to be the first signs of an industry reorienting itself. Indeed, the sector has been in a period of introspection since the heady days of the World Cup. The government has begun a transition in its strategy, moving away from its traditional reliance on European and Western markets. While visitor numbers from these areas should pick up with time, the government has decided it is time to look at other markets as well, promoting domestic travel and looking to emerging economies. As such, it hopes this testing period can be a springboard to renewed growth in the future.