Visitor spending on the up: Diversifying offer and source markets for bigger slice of global tourism

With 32 World Heritage sites and a gastronomy declared by UNESCO as an intangible heritage of humanity, Mexico is an important world tourism site. For its significance to global tourism, it was chosen as the official host of World Tourism day in 2014. The sector contributes more than 8% to national GDP, generates around 2.5m jobs directly and an estimated 5m indirectly, according to the Ministry of Tourism (Secretaría de Turismo, SECTUR), and is the fourth most important source of foreign currency. Given its importance to the wider economy, the current administration has identified the sector as an important pillar for growth.

However, despite positive growth in the past few years, Mexico’s tourism sector has lost competitiveness in the international arena. A combination of internal insecurity and a deficient transportation network remain its most significant challenges. Nonetheless, with the current administration’s policies to diversify both the tourist offering and source markets, the sector is set to regain some of the competitiveness lost in recent years and develop segments, such as cultural tourism, which until now have been underexploited.

SECTOR PERFORMANCE: According to SECTUR, the sector’s contribution to GDP averaged 8.4% in the period 2001-12. Foreign exchange inflows generated by the sector grew at an average annual rate of 3.6% from 2000 to 2012. Year 2013 registered an increase of 8.5%, reaching a record $13.8bn, 3.4% higher than the previous record of $13.37bn in 2008. With the exception of 2009, tourist arrivals have also increased, from 22.9m in 2008 to 23.7m in 2013. Integrated System for Migratory Operations figures show that foreign arrivals by air also increased in 2013 to 11.77m, 9% more than the 10.8m registered in 2012. According to Banco de Mexico figures, average per-capita tourist spend has also increased from $708.50 in 2010 to $746.30 in 2012. An increase of 5.9% was registered in 2013, with average spending reaching $790.

While the sector’s overall performance has been positive, growth of the past few years should be seen in the context of global tourism and the impact the global recession had on the sector. In 2009, as a result of the global recession and an outbreak of influenza, international tourist arrivals declined 13.6% to 21.4m, while revenue also fell by 15.1%. For the first time since 2009, sector-generated foreign exchange inflows in 2013 surpassed the figure registered in 2008.

GLOBAL PLACEMENT: When analysing indicators in the context of global tourism, Mexico’s tourism sector has been growing at much slower rates than other emerging markets. In the 2000-12 period, tourist arrivals in Mexico grew at an annual average growth rate of 1.1%, while other emerging economies such as Turkey and Malaysia registered significantly higher growth rates of 11.6% and 7.8%, respectively, according to the UN World Tourism Organisation (UNWTO). In 2013 global tourist arrivals grew about 5%, while Mexico registered growth of 1.4%. Sector-generated revenue has also grown at slower rates in Mexico, whose 3.6% growth rate from 2000 to 2012 is a fraction of those registered by markets such as Turkey and Malaysia, where the sector grew by 10.7% and 12.3%, respectively. As a tourist destination, Mexico lost competitiveness, slipping from the seventh place in tourist arrivals in 2000 to 10th in 2009, and now it is no longer in the top-10 most visited places, according to the UNWTO.

The majority of Mexico’s tourist offering consists of the beach resort segment, known as sol y playa. Public investment, offer, services and hotel capacity are all concentrated in this segment. According to the national system of statistical information for the tourism sector (Sistema Nacional de la Información Estadística del Sector Turismo de México, DataTur) in 2012, 65% of international tourists stayed in this type of accommodation; 77% were concentrated in three destinations: Riviera Maya (38%), Cancun (29%) and Los Cabos (10%).

MARKETS: Mexico’s primary source market continues to be the US, accounting for 55% of international tourists in 2013, followed by Canada with 13.6%. Combined, the two markets make up almost 70% of foreign tourists. The second most important region is Europe, accounting for 14.6% of tourists, followed by Latin America and the Caribbean, with 13.2% of market share, and Asia with 2.8%. In 2013 an increase in the numbers of visitors from all regions was registered. According to SECTUR, visitors from Colombia grew 60.4%, followed by Russia (39.9%), Peru (39%), China (26.6%), Korea (24.4%), Sweden (17.1%), the UK (14%) and Japan (13.5%).

DOMESTIC TRAVELLERS: The domestic market represents around 80% of total tourists, and according to the WTTC, domestic travel spending generated 87.4% of direct travel and tourism GDP in 2013. Domestic tourism has registered consistent growth in recent years. Based on the arrival of national tourists at hotels, domestic tourism expanded from 61.2m in 2010 to 68.8m travellers in 2013. In contrast to international tourists, a much smaller percentage of domestic tourists prefer the beach resort segment of the market. According to DataTur, in 2012 only 31% of domestic tourists preferred beach resort destinations.

Given the size of the Mexican domestic market of nearly 120m people and an expanding middle class, this segment has significant potential. Indeed, Rodrigo Gallegos, the director of Climatic Change and Technology at the Mexican Institute of Competitiveness, told OBG, “Domestic tourism is growing faster than international tourism. An increase in low-cost airlines and transport infrastructure has allowed domestic tourism to expand. Opening competition in sectors like aviation should continue to drive more competitive prices and better options for the domestic tourist.”

MEDICAL TOURISM: One segment that has been showing dynamism is medical tourism, which has been growing consistently since 2006 and attracted 1m medical tourist in 2013, making the country the second most popular destination, behind Thailand with 1.2m. According to ProMéxico, Mexico’s investment promotion agency, in 2013 the medical tourism industry was valued at $2.85bn, a significant increase from 2006 when it was valued at $1.55bn.

The segment is benefitting from Mexico’s proximity to the US. According to ProMéxico, Mexico has become the main medical destination for US citizens seeking cosmetic and dental surgery outside of the US. Adding to Mexico’s attractiveness is the price of medical services, which, depending on the procedure, can be anywhere from 36-89% less expensive than in the US, according to the Medical Tourism Association. The most sought-after procedures include cosmetic and reconstructive surgery, dentistry and bariatric surgery.

Growth has also been fuelled by another factor – the significant expansion of medical infrastructure across the country. “The expansion of hospital chains in the past few years is widening the offer of services outside the three biggest cities, in places like Morelia, Puebla, Aguascalientes, where hospitals have been expanding considerably,” Arturo Méndez, tourism associate at PwC México, told OBG.

According to ProMéxico, almost a dozen specialised clinics in Mexico are now accredited by Joint Commission International, an agency that certifies hospitals all over the world that meet international standards of care, quality and safety. Medical tourism has been growing particularly in cities such as Mexicali in Baja California, Puerto Vallarta in Jalisco and Cancun in Quintana Roo, which combine the allure of competitive prices and the beach. According to a PwC study, these three locations have stood out for their holistic approach to the development of the segment. Mexicali, for example, opened a medical fast lane in April 2012 to facilitate the return of patients to the US (see Health chapter).

Additionally, SECTUR has made an effort to consolidate the sector’s offerings and improve the country’s image through the Development, Positioning and Promotion of the Health Tourism Industry Strategy. The plan features ad campaigns and aims to obtain more reliable data on medical tourists, as well their economic impact on the industry.

MICE: According to a study by and Mexico’s Centre of Advanced Tourism Studies, released in 2013, the meetings, incentives, conferences and exhibitions (MICE) segment in its entirety generates annual revenues of $32.5bn ($18.1bn directly and $14.3bn indirectly), more than 700,000 jobs directly and indirectly and contributes 1.43% to GDP. It also represents 18% of total demand for travel and tourism in Mexico.

Given its importance, in the past few years, Mexico has been attempting to position itself as a top-tier destination in the segment. To fuel growth the federal government has invested MXN336.7m ($26.2m) since 2012 on 11 projects to upgrade infrastructure, venues and equipment in six states. One project was the Baja California Centre, a MXN740m ($57.5m) investment co-financed by the local government, inaugurated in 2013.

Infrastructure and capacity have improved significantly in recent years. According to SECTUR, Mexico now has more than 70 venues across the country, a significant increase from 27 in 2000.

Proximity to the US as well as its 0% value added tax on international congresses, conventions, fairs and exhibitions are some of the elements which make Mexico a competitive market in the global industry.

According to the International Congress and Convention Association, Mexico’s ranking improved four places going from 24 in 2008, with 112 meetings to 20 in 2011 with 175 meetings. However, it slipped to number 23 in 2012 with 163 meetings.

According to the WTTC, business travel spending in 2013 reached MXN136.3bn ($10.6bn) and is expected to grow by 6.5% in 2014. With increased spending and improved connectivity, the segment should gain some competitiveness. Méndez told OBG, “Fortunately we have overcome a connectivity challenge. Before every flight to Mexico had to go through one of the three biggest cities. But now we have more direct flights to different parts of the country, and this could generate growth in the segment.”

CRUISES: While medical tourism and the MICE segments have been growing, cruises have been particularly hit by a combination of insecurity, high costs and a lack of a diversified tourist offering. According to the Statistical Information Centre for Tourism Entrepreneurs, cruise arrivals fell 14% between 2010 and 2012 from 6.05m to 5.2m and an additional 6.4% in 2013 to 4.86m. Average spending by cruise tourists also fell an estimated 8.2% to $77.80 in 2013 from $84.70 in 2012.

To promote cruise tourism Claudia Ruiz Massieu, the secretary of tourism, attended the Cruise Shipping Miami Fair in March 2014, one of the most important exhibitions in the world for companies and organisations in the international cruise industry. According to the secretary of tourism, to revive the struggling segment SECTUR is focusing on key strategies to diversify attractions and destinations, improve port infrastructure and increase security for tourists. As a result, according to SECTUR, cruise tourism could increase by 20% in 2014.

CONNECTIVITY: Though connectivity remains a challenge, it has been improving. According to the Secretariat of Communications and Transport, arrivals by air increased 8.3% in 2012 to 56.8m and 36 additional routes became operational, totalling 618 routes (355 international and 263 national). The same year the domestic airline service also expanded by 10.3%. Expansion continued in the first nine months of 2013, which registered a 10.7% rise in total available seats. National seats increased by 12.7% and international seats by 6.6%, while 19 new air routes became operational – 13 national and six international.

INVESTMENT: According to the National Institute of Statistics and Geography (Instituto Nacional de Estadí stica y Geografía, INEGI), the average investment grew 18% between 2003 and 2011 but fell nearly 3% year-on-year (y-o-y) in 2012. Public investment in tourism projects is managed by the National Trust Fund for Tourist Development (Fondo Nacional de Fomento al Turismo, FONATUR) and has been primarily funnelled to the beach resort segment in the many integrally planned centres (centros integralmente planeados, CIPs). CIPs are touristic cities which combine hotels, residential and commercial areas with facilities such as golf courses. One in every three rooms in beach destinations is part of a CIP. In 2013 more than MXN1.6bn ($124.3m) were invested in the creation and maintenance of CIPs. The National Infrastructure Programme 2013-18 allocates MXN195.2m ($15.2m) for the construction of CIPs and proyectos turisticos integrales, tourist-focused real estate development projects comprising areas and equipment or facilities.

Private sector investment fell in 2009 following the global economic recession and though it has been recovering slowly, it has yet to reach 2008 levels, when $4.64bn was invested, adding around 40,000 rooms. In 2012 private sector investment reached $2.16bn, almost half of the amount in 2008. Construction of new rooms and accommodation has averaged 8000-12,000 rooms annually over the past few years; in 2013 around 15,000 new rooms were added to local stock.

However, renewed confidence seems to be attracting a new wave of investment from the private sector. In August 2013 President Enrique Peña Nieto, along with the National Tourism Entrepreneur Council, announced $8.63bn in investments for the sector for 2013-14, to be used for the development of 176 projects, in new resorts, second homes, golf courses and other segments such as medical tourism. In addition to raising hotel capacity by 33,000 rooms, the investments are expected to generate a total of 106,000 direct and indirect jobs and benefit 27 tourist destinations.

Foreign investment decreased in the past decade from $435m in 2004 to $106m in 2012. However, this also seems to be changing. The hotel segment is once again catching the eyes of international investors, in particular from the US and Spain. Hotel acquisition volumes increased from a low of $100m in 2009 to $600m in 2013, and according to consultancy firm Jones Lang LaSalle hotel acquisition volumes are forecast to increase 15% in 2014, surpassing $700m. This would make it the highest annual transaction volume Mexico has experienced in the hotel segment.

HOTELS: The beach resort segment continues to attract significant investment. In November 2013 Hyatt Hotels opened its first two all-inclusive resorts in Cancun and Los Cabos, after multimillion-dollar renovation projects. The two projects are part of a $325m investment in partnership with Virginia-based Playa Hotels & Resorts, which will be used in properties in Mexico, the Dominican Republic and Jamaica.

In June 2013 Starwood Hotels & Resorts, which already owns 24 hotels in Mexico, announced plans to increase its Mexican portfolio by 30% with eight new hotels. According to the company, it also plans to increase its luxury portfolio by 50% in the next three years, including introducing its St Regis and W brands.

Also in 2013, New York-based MetLife and Thayer Lodging Group bought the Hilton Los Cabos Beach & Golf Resort in Cabo San Lucas, a 365-room hotel, for an undisclosed price. This was Thayer Group’s first investment outside the US.

However, according to Gallegos, the biggest growing trend is expansion in the business hotel segment. “Medium-budget smart hotels in middle-sized towns in Mexico are the type of hotel which appeals to both business tourists and the domestic tourist, as they are not terribly expensive and offer amenities such as WiFi and a decent breakfast is a segment that is in rapid expansion,” Gallegos told OBG.

Blackstone group LP’s La Quinta chain, one of the largest owner and operator of budget hotels, has already announced plans to expand its portfolio in Mexico. Demand for this type of hotel has been fuelled in particular by the expansion and opening of new factories by foreign companies. This expansion to middle-sized towns could help diversify the hotel offering in Mexico, which in 2012 was concentrated in eight destinations; Federal District, Riviera Maya, Cancun, Acapulco, Guadalajara, Los Cabos, Monterrey y Puerto Vallarta and accounted for 52% of the offering.

Since 2011 real estate investment trusts, ( fideicomisos de infraestructura y bienes raíces, FIBRAs), have been launched. Increasing liquidity in the market, FIBRAs have had a particularly positive effect on the hotel industry and were responsible for 25% and 50% of hotel acquisitions in 2012 and 2013, respectively. In 2011 Fibra Uno became the first publicly traded real estate investment trust in Mexico. Fibra Hotelera Mexicana, also known as FibraHotel, which is focuses on hotel real estate, went public in November 2012, and a third, FIBRA MacQuarie, followed.

More FIBRAs are also expected in the short term, which should attract more foreign investment and diversify the hotel market, which, up to now, has been dominated by local investors. Hotels in Mexico City are expected to see the largest impact from the new liquidity, followed by Cancun and Riviera Maya, which have traditionally attracted the most investment. Another public investment vehicle becoming more common is certificados de capital de desarrollo (CKDs), a structure composed of securities, which allows investors to take part in private equity projects through long-term public funds. Like FIBRAs, CKDs are expected to become more prevalent in hotel development and acquisitions.

OCCUPANCY: Hotel occupancy rates have generally increased since 2009. According to DataTur, from January to the first week of December 2013 hotel occupancy in the 70 key destinations within the country increased by 5% y-o-y, reaching 193,204 occupied rooms from 183,968 in 2012. Occupancy in the three largest cities, Mexico City, Guadalajara and Monterrey, increased from 47.7% in 2012 to 50.5% in 2013. Border cities registered a fall from 40.9% in 2012 to 39.5% in 2013, while revenue per available room grew by 9.9% in 2012 to MXN801.19 ($62.30).

CHALLENGES: The most significant challenge facing the sector is the perception of insecurity, partly driven by the reports of international media. While it is particularly difficult to quantify the impact this has had on the sector, according to Méndez, the lack of security has had an immediate and particularly visible effect on cruises. Additionally, a lack of innovation and diversification in tourist offerings has led to losses in the competitiveness of Mexican destinations, in particular places such as Mazatlán, Puerto Vallarta, Acapulco and Ixtapa. Since the majority of investment has been funnelled into to the beach resort segment, the country lacks a diverse offering that takes advantage of its cultural, ecological and gastronomic assets. Tourists in the beach resort segment, in particular those travelling to all-inclusive resorts, tend to stay for shorter periods of time and spend less on average than other tourists. As a result, average spending in Mexico has grown at slower rates than in other emerging tourist centres.

The concentration of developments in the beach resort segment has prevented an even distribution of sector-generated revenue across the country. The development of transport infrastructure has been concentrated in populous places and destinations, while the interior of the country is less well-connected.

Cultural destinations are fragmented, with no adequate transport and logistics infrastructure in place for people to travel from one attraction to the next with ease. If there were, this would incentivise the movement of tourists and increase the attractiveness of regions. Gallegos told OBG, “There is no strategy to link cultural tourist hubs logistics and transportation infrastructure is underdeveloped.” Despite an increase in domestic tourism and transport infrastructure, there is much room for improvement. According to Méndez, despite increases in transport by air this remains limited with high operational costs. “There is no competitive offer when it comes to air transportation, which prevents areas such as the coasts of Oaxaca for example from being exploited to their full potential,” Méndez said. On the same note, José María Trillas Trucy, general director at IASA Comunicación, a communications agency, also told OBG, “We have an opportunity to improve the number of airports in Mexico, which would improve connectivity, increase the number of flights and, hopefully, that would also result in better prices.”

High informality rates in the services, hospitality and restaurant business have also contributed to productivity losses and prevented the specialisation and professionalisation of the sector’s workforce. According to INEGI, informal employment in the sector stands at about 54%, with workers receiving on average 40% less revenue than their formal counterparts.

SECTOR PLANS: The current administration has prioritised tourism as a pillar for growth. The sector’s development plan 2013-18 is centred around five key strategies, one of which is to improve inter-governmental coordination. To this end, a Tourism Cabinet has been created, which incorporates FONATUR and 12 ministries, including the Ministry of Tourism, Interior, Economy, Communication and Transport, among others. The initiative aims to better coordinate the actions of the various federal entities around the national tourism policy. Another strategy is to facilitate financing for sector projects and encourage public-private partnerships (PPPs) in projects with high tourist potential. Financing from the development bank increased from MXN3.24bn ($251.7m) in 2004 to MXN7.54bn ($585.9m) in 2012. In the case of small and medium-sized businesses SECTUR is trying to take advantage of specialised government funds to provide access to financing for entrepreneurs, in particular for projects in rural areas, where small businesses require more assistance. According to the development plan, one goal is to work with the development bank in the creation of financing schemes, and with commercial banks on the design and development of instruments and financial products specialised for tourism sector companies, while streamlining procedures for investment. SECTUR, FONATUR and ProMéxico have also signed a collaboration seeking to promote Mexican projects in foreign markets through seminaries, conferences and fairs to attract more foreign investment in development projects, in particular for new sustainable projects with a national impact as well as for projects in the beach resort segment. A third aspect of the development plan is the promotion of more sustainable and equitable development for the sector, encompassing economic, social as well as environmental concerns.

DIVERSIFICATON: The last two plans consist mainly of the diversification of both the tourist offering and the markets for attracting tourists. In order to diversify the tourist offering, SECTUR has focused on developing the country’s comparative advantages, with cultural tourism in particular being highlighted. According to the secretary of tourism, in 2013 approximately MXN1.7bn ($132.1m) were allocated to the promotion of this segment. One initiative is known as pueblos mágicos (“magic towns”), which disperses public funds to projects that improve the attractiveness of towns located across the country. Another initiative is the “Live it to believe it” campaign, a marketing programme showcasing Mexico’s diversity, culture, nature and history, which features a number of destinations including Vallarta, Nayart, Mexico City, Yucatan, Los Cabos and Cancun-Riviera-Maya. Ruben Reachi Lugo, state minister for tourism in Baja California Sur, told OBG, “Our main market is the US and 2013 was the first year in which Los Cabos attracted more US visitors than the Federal District. We welcomed around 1.03m US tourists.” However, as part of the current administration’s goal to diversify markets, a new focus has been placed on attracting tourists from Asia, in particular China and Japan. Besides continuing to target traditional markets such as the US, Canada and Spain, the secretary of tourism has been especially active in Japan, Germany, China, Singapore, Indonesia, Russia and England, and it is showing some success. In 2013 Sunwing, a Canadian airline, announced investments of more than $250m to improve connectivity with Mexico. Versa, one of the biggest tour operators in Russia also announced the start of a direct flight between Saint Petersburg and Cancun, as well as increasing the frequency of the existing San Petersburg-Mexico City flight. A memorandum was also signed between Mexico and Indonesia to promote air connectivity between both countries.

According to the secretary of tourism, Mexico intends to carve out its share of the 100m tourists China is expected to provide by 2020, according to the UNWTO. To this end, SECTUR is increasing its presence in China through more aggressive marketing campaigns, while working to increase connectivity and facilitate Customs and immigration procedures for Chinese tourists. According to SECTUR, 65% of visitors from China arrive through North America. Mexico, a natural extension for Asian tourists to the US and Canada, hopes to attract more tourists this way. Since 2011 Chinese tourists can enter Mexico with a US visa. SECTUR is also working on eliminating visa requirements or simplifying procedures for other regions.

Promotion has consisted mainly of traditional methods such as marketing campaigns, which Gallegos believes need updating. According to him, SECTUR has yet to efficiently use web applications to improve the tourist experience. “For promotion to be effective, it needs more and better use of social media, with well-crafted and user-friendly websites, which improve the tourist experience by offering options to download maps or to quickly and easily see which transport means are available in specific locations,” he told OBG.

ENTERTAINMENT: According to the study “Gaming, Film and Digital Animation: Mexico’s Creative Industry Climbs to Recognition” by Mexicolt and Nearshore Americas, recent years have seen Mexico’s rise in the creative audiovisual arts, in particular cinema, digital animation and video games. The entertainment and media market grew from $14.94bn in 2008 to $20.39bn in 2012, according to the same study, placing Mexico among the 20 most important exporters of creative merchandise in the world. This type of export represents around 7% of national GDP. According to the study, Mexico has the required balance between experience, technology and investment to become a giant in film, digital animation and video games, which have posted growth rates of around 10% in the past few years. Indeed, 2013 was a particularly good year for the film industry, which saw a production boom and record-breaking box-office revenues of $903m (see analysis). According to Mexicolt and NearshoreAmericas’ study, the country’s specialisation in the production of digital animation and the design of video games makes it a particularly attractive outsourcing market, since it enjoys significant government support.

A combination of public funds and tax breaks has contributed to an increase in creative output, including a public fund to finance films, a platform for software design and TechBA, a technological business incubator, and initiatives such as these are propelling the industry forward (see analysis). Moreover, the government has announced plans to set up Digital Creative City in Guadalajara, which is hoped to develop into a centre for digital media development, encompassing a variety of fields such as cinema, TV and video games.

OUTLOOK: With a plan targeting the diversification of the tourism offering and source markets, the sector should regain some of the competitiveness lost in the past few years, provided internal security remains stable. Foreign arrivals should continue to grow, with the WTTC forecasting foreign arrivals to reach 24.7m in 2014. The sector is well positioned to attract significant investment, in particular in the hotel segment. Given its maturity, the beach resort segment is likely to grow at slower rates, while other segments, such as cultural and medical tourism, are well positioned for faster growth. The sector will benefit from increased spending in transport and infrastructure under the National Infrastructure Plan, which includes new airports.