Kenya's tourism industry diversifies amidst setbacks

Kenya has one of the biggest and most diverse tourism industries in East Africa, with offerings in a range of niches including the meetings, incentives, conferences and events (MICE) segment and safari ecotourism. However, in recent years challenges have arisen for the sector that have negatively affected the country’s economy, including two high profile terrorist attacks. Following the attacks, a raft of security advisories were issued from countries that traditionally make up a large percentage of Kenya’s target market for tourism, putting pressure on visitor numbers and hospitality revenues. In response, the government and a number of private investors are taking steps to improve security and re-establish Kenya as a safe, attractive destination for visitors.

While the short-term forecast is concerning given the role tourism plays in revenues, foreign exchange and employment for Kenya’s economy, the medium-term and long-term outlook is more encouraging. The recent challenges have spurred operators to explore new revenue streams, including business tourism and domestic tourism.

Performance

In many ways, the drivers of long-term demand in Kenya’s tourism sector, including supply diversity, infrastructure quality and destination accessibility, remain extremely attractive and are among the strongest, not just regionally, but across the whole continent of Africa. However, exogenous pressures, including the global financial crisis and the terrorist attacks on both the Westgate Mall in 2013 and, more recently, on Garissa University in April 2015, have had a substantial impact on the country. Tourism earnings, visitor numbers, hotel occupancy rates and hotel stay unit nights have all been negatively affected over the past few years. “Right now our members are deeply affected by the security situation. The travel advisory has really affected tourist numbers,” Jackie Odudoh, HR manager of the Kenya Association of Tour Operators, told OBG. “Trade is down across the board.” Indeed, as a 2015 report published by the Kenya National Bureau of Statistics indicates, Kenya’s total annual tourism earnings dropped by 7.4% in 2014 to KSh87.1bn ($958.1m). The report also shows that earnings have been decreasing steadily by around 2% each year since 2011, when they peaked at KSh97.9bn ($1.1bn).

The sector is a big contributor to Kenya’s overall economy, meaning that the affects of the industry downturn are being clearly felt in terms of the country’s overall economic output. According to the “Economic Impact 2015” report for Kenya by the World Travel and Tourism Council (WTTC), the tourism sector’s total contribution to GDP, including both direct and indirect activity, was KSh561.8bn ($6.2bn) in 2014. Although total value has increased from KSh462.8bn ($5.09bn) in 2013, the sector’s share of GDP has fallen from 12.1% to 10.5%.

Meanwhile, room revenue in the hospitality industry has been in decline since 2012, shrinking by 7.1% in 2014 to $540m according to a hospitality outlook report for the region by professional services firm PwC South Africa. Since 2011, room revenue has fallen cumulatively by 16%. PwC also reports that Kenya suffered a 5.3% decline in stay unit nights in 2014. At the same time, occupancy rates have been dwindling. Across all classifications the average occupancy rate for the country came in at 55.4% in 2014, down from 59.5% in 2013 and 66.1% in 2011. PwC predicts a further fall to 50.7% by 2016.

Forecast

Despite these negative indicators, the outlook going forward is somewhat brighter due to the industry expanding its links with new source markets as well as strengthening perceptions of security. In its report, PwC predicted a further decrease in room revenue of 4.1% in 2015, before modest growth of 2.9% in 2016. In general terms, the firm forecasts a recovery for the Kenyan hotels sector in terms of 4.7% growth between 2015 and 2019, with stay unit nights returning to 2011 levels by around 2018. Many local industry operators seem to agree that the current pressures are in general short term and are attributable to recent security issues. Some European tour operators and travel agents, however, do not expect recovery to begin until the end of 2016.

Impact

The recent slowdown has had adverse effects on both jobs and businesses, particularly in the beach tourism segment, “Hotels across the coast that were full until recently are now registering 10% to 20% capacity, which is not sustainable,” Kiiru Mahiaini, CEO of Incentive Travel, told OBG.

By Q4 2014, the number of charter flights into Mombasa airport had fallen to four a week, compared to 32 per week in Q4 2013. Hotel occupancy rates in Mombasa, Kenya’s second-largest city, halved in the same period – from 70% to 35%. In the tourist towns of Kilifi and Kwale, occupancy in November 2014 was even lower, averaging 20% and 18%, respectively.

In March 2015, before the Garissa attacks, Mohammed Hersi, chairman of the Kenya Coast Tourist Association, told local media that 25 hotels in the coastal region had been forced to close down, with job losses amounting to almost 20,000.

New Markets

Kenyan operators are now seeking to diversify revenue streams through the expansion of source markets in order to grow the tourism sector. “The key markets thus far have been the UK and the US,” Odudoh told OBG, “but there’s a lot of interest in Asian markets and also Latin America.”

Kenya Airways has already begun taking steps to boost its links with Asia by increasing flights to China; In November 2013, the airline introduced non-stop flights to Guangzhou and in 2014 it launched additional one-stop services to Beijing and Shanghai, via Bangkok. China Southern Airlines also launched a service between Guangzhou and Nairobi in a code share with Kenya Airways in August 2015. The carrier is planning to run 20 flights per week to service growing numbers of passengers between the two countries. Overall, in 2014 around 120,000 passengers flew between China and Kenya, a figure expected to increase by approximately 15% per year.

Business

While the increase in air-passenger numbers can be partly accounted for by demand within the leisure market, it also speaks to the growing potential of business tourism in Kenya. According to PwC, with sector growth forecast to show an average compound annual growth of 4.7% beginning in 2016, the business and hospitality industry is helping to compensate for the shortfall in leisure tourists by providing Kenya with business customers. “Corporate travel has been booming. Since the third quarter of 2014 it has been pretty stable and reliable,” Manish Nambiar, general manager of the Kempinski Villa Rosa, an upscale hotel in Nairobi, told OBG.

Meanwhile, high-end hotel chains in Nairobi continue to thrive: room rates at a typical five-star hotel such as the Sankara are published at around $400 per room per night, and actual average rates are between $220-250. Occupancy rates are as high as 70%, achieved through corporate guests who make up around 95% of the hotel bookings.

Located in prime urban locations, and with five-star facilities, Kenya’s leading high-end hotels are well positioned to benefit from government plans to grow MICE tourism (see analysis). According to hotel media outlet Hotel News Now, in July 2015 the upscale hotel market boasted significant annual growth in both the average occupancy rate and revenue per available room. The former jumped from 11% to 61%, while the latter grew by 33.6% to KSh9354.16 ($102.90). The segment also benefitted from a visit by US President Barack Obama in the same month.

New Supply

In a testament to the long-term appeal of Kenya’s tourism industry, Nairobi is set to see the construction of a number of hotels within the next two years, including several by domestic firm Simba Corporation aimed at mid- to low-budget travellers. By the end of 2015, three new high-end hotels will also hit the local market – the Golf View Hotel, the Radisson Blu and the Grand Sapphire – which will provide a combined total of 672 rooms. In total, 1600 new rooms are planned for 2015 and 2016, according to PwC. Moshi Perera, general manager of the Sankara, told OBG, “We are forecasting growth of 28% in bed supply from now until the end of 2016 in the three- to five-star segment of the market. This will force average rates in the industry down.”

The upcoming growth in supply is not only confined to the capital. In the leisure market, the beach and safari segments continue to receive investment and additional supply. For example, in May 2015 the Chinese company Sultan Palace Development announced that it had begun working on the construction of 198 luxury vacation homes in Kilifi County on Kenya’s coast. Liu Tiancai, general manager of Sultan Palace Development, told local media, “The decline in tourism numbers is only a short term occurrence. We have invested in the coast because we believe that Kenya has the potential to return to its glorious days sooner than many think.”

Domestic Tourism

A leading source of revenue for both new developments and existing facilities in the short term is expected to be the domestic market. “Domestic tourism has saved the industry. Without it, hotel occupancy would be near nothing,” Mahiaini told OBG. “Domestic tourism did not even exist 10 years ago, for the most part. This year even August, normally a busy month for foreigners in Kenya, saw many more Kenyans visiting the coast than foreigners. The emerging Kenyan middle class is driving this.”

Indeed, the industry has begun to pay more attention to the domestic tourism segment as it continues to evolve into the sector’s primary source of income. According to the WTTC, domestic travel spending accounted for 58.1% of direct travel and tourism GDP in 2014. This figure is expected to grow by 5.5% in 2015, to reach KSh233.9bn ($2.6bn). Over the next decade, the WTTC forecasts that domestic spending will continue to increase at an average annual rate of 5.2%, reaching KSh386.7bn ($4.3bn) in 2025.

A crucial source of support for the hotel segment, domestic tourists have bolstered revenues for hotels in Kenya’s coastal towns and cities. Over the 2014 Christmas period, for example, occupancy rates in Mombasa’s hotels were between 80% and 90%, with some achieving nearly 100% occupancy. Kenyans accounted for 70% of all festive bookings. Sam Ikwaye, executive officer of the Kenya Association of Hotel Keepers and Caterers, told local media at the time, “We have an influx of Nairobi residents who have come down to the coast. They have really supported us. We are telling those who are still undecided on where to go that Mombasa is the place.”

Hotels are also trying to capitalise on local trade by bolstering their ancillary revenue streams, such as food and drink. “It is key for hotels to offer much more in the Nairobi market, so a lot of them have substantial bar and restaurant offerings. For example, Kempinski has five restaurants with a total capacity of 600 people,” Nambiar told OBG. “With a dual occupancy rate of 1.2 across 200 rooms, the maximum number of guests we can accommodate is 240. Thus a key driver of food and beverage revenue is the local population coming to eat and drink in our restaurants.”

Marketing

In steps to stimulate the sector, the government has introduced a number of measures, the first of which was the launch of the Tourism Recovery Taskforce in July 2014. Headed by private sector hotelier, Lucy Karume, the taskforce was charged with developing a comprehensive strategy for reviving tourism, including initiatives to improve security, develop infrastructure and shift the perception of the country in foreign markets. The short-term budget for the body was set at KSh200m ($2.2m).

The general response within the industry has been positive, “The taskforce is helping. It is composed of people from across the whole tourism spectrum, including the private sector. We believe that whatever they put forward will be implemented.” Odudoh told OBG. Initial confidence building measures have included re-training the Tourism Police Unit.

In its first few months, the taskforce spent much of its time lobbying foreign embassies to remove or soften their travel advisories for the country. “We’ve had one-on-one meetings with the British High Commission, the Americans, the French, the Australians… and a team of EU and Europe ambassadors,” Karume told local media in October 2014.

Although the terrorist attack in Garissa in April 2015 was a tragic setback for the taskforce, the lobbying effort had some success, with the British government modifying its travel advisory in June 2015 to state that travel in most of Nairobi was safe.

The taskforce has also launched an extensive marketing campaign to promote Kenya overseas. In April 2015 the Kenya Tourism Board, alongside a number of private sector representatives, sent a delegation to the World Travel Market Africa exhibition in Cape Town, South Africa, in order to promote the “I choose Kenya campaign” and speak about the enhanced security measures that the country is taking. Prior to the event, Muriithi Ndegwa, managing director of the Kenya Tourism Board, spoke to local media about the importance of reassuring Kenya’s source markets that the country is ready for business. “The destination has faced some challenges recently and we have to rebuild confidence. This is the first time that we will be participating in World Travel Market Africa and we strongly believe that it is a good platform to reassure the African markets,” he said.

Additionally, the Ministry of East African Affairs launched a new branding and tourism campaign called Make It Kenya at the Milan Expo 2015 in Italy. Developed with the help of PR company Grayling, the campaign aims to utilise technology as a tool to promote Kenya to both tourists and investors worldwide. Digital content on the campaign’s website can easily be accessed and shared on portable devices such as smartphones and tablets. Phyllis Kandie, cabinet secretary for East African Affairs, Commerce and Tourism, told local media, “With the continued rise of globalisation, it is imperative that Kenya has a nation brand that can differentiate us and tell our story.”

In May 2015 the government announced that it would increase the tourism promotion budget significantly to KSh7bn ($77m) for fiscal year 2015/16. Annual security spending also increased by 12% in July 2015 to KSh223.9bn ($2.5bn). “Tackling insecurity remains the top priority of the government’s strategy to sustain the growth momentum of the economy while creating jobs,” National Treasury Cabinet Secretary Henry Rotich said in his budget statement.

Classifications

 In Q4 2014 the government implemented a brand new programme geared towards improving quality assurance and standardisation across all of the country’s tourism facilities. The scheme is overseen by the Tourism Regulatory Authority (TRA), and will, in effect, bring Kenya in line with the rest of the EAC, whose standardisation criteria regulates hotel grading and classification in Rwanda, Tanzania and Uganda.

The TRA has already carried out classification training exercises for hotels and restaurants in both central Kenya and the South Rift Valley region, and it expects to complete the programme by June 2016. There will be 19 officials delegated to conducting assessments of facilities and hotel classifications will be held for a period of five years, although individual properties will have the opportunity to apply for a new classification or re-classification within the same period at a cost of approximately $50. The impact of the programme at the top end of the hotel spectrum, however, is expected to be somewhat limited. “The ratings initiative won’t really affect the corporate branded hotels, as they already have their own standards they stick to,” Nambiar told OBG.

Taxation

There is one government measure that many within the industry are keen to see the removal of – the value added tax (VAT). Introduced in 2013, a 16% tax is added onto sales, which some say is harming the recovery of the sector. “In the tourism industry, there is strong competition throughout the East Africa region. VAT has never been levied in other countries, and its removal would mean that we can once again operate on the same level,” Odudoh told OBG. Indeed, neighbouring countries, unhindered by the VAT, are becoming increasingly competitive in terms of prices. In July 2014 Karume, who was then chairperson of the Kenya Tourism Federation, told local media, “Kenya remains the only EAC state that is currently levying VAT on tour operator services, transportation of tourists (hire of vehicles) and conservation fees. This is affecting the sector.”

The effects of the VAT have been compounded by government steps towards devolution, as mandated by the amended constitution of 2010, which has led to several county governments introducing other taxes on tourist establishments. For example, in 2013 the Mombasa County Government introduced a monthly $5 bed tax for all hotels and resorts, plus a $40 per month levy on all tourist vehicles. At a time when the hotel sector is struggling for occupancy and tour operators are closing down, there are indications that these additional expenses are causing frustration for many within the industry.

Outlook

Kenya’s tourism sector, the second-largest foreign exchange earner after the tea industry, is currently navigating a number of significant issues that are proving challenging to its growth, ranging from security concerns to taxation.

However, the current difficulties have been recognised by the government, which is making substantial investments in the promotion and growth of the industry. There are also encouraging signs from the private sector, as businesses seek to tap into new markets and business avenues, including the Asian leisure market, business tourism and the domestic segment. The industry, forced to diversify in the face of the ongoing slowdown will, upon the return of the core international markets, emerge much stronger.