Efforts underway to diversify Mexico's rapidly growing tourism sector

Receiving more than 35m international visitors in 2016 – 2.8m over 2015 – Mexico continues to move up the world tourism league table. The country’s ranking in terms of arrivals in global tourism destinations improved from 10th to ninth position in 2016, according to the UN World Tourism Organisation. A weak peso has boosted margins for operators and attracted more visitors while at the same time bolstering domestic tourism in Mexico. The famous sun, sea and sand destinations of Cancún, Los Cabos and Puerto Vallarta continue to dominate the international tourism market, and new projects are set to expand capacity of this tried-and-tested model.

However, it is becoming apparent that the country needs to make significant investment in connectivity if it is to fulfil its true tourism potential. Medical tourism, gastronomic and ecotourism, and the cultural heritage of Mexican colonial towns could see major growth given greater promotion and accessibility (see analysis). According to the Ministry of Tourism (Secretaría de Turismo, SECTUR), the industry represents 8.5% of GDP, and it remains a central pillar to the government’s National Development Plan 2013-18. “Tourism in Mexico is not only a major contributor to GDP, but it has been growing faster than the overall economy for the last 18 months,” Enrique de la Madrid Cordero, minister of tourism, told OBG. “In 2016 the tourist balance was $9.33bn, a 22% increase on the previous year.” At a time of significant uncertainty for many segments of the Mexican economy, the tourism industry is forecast to register continued strong growth in 2017 and 2018.

Sand & Sea

Beach resorts remain the primary attraction. In 2016, 6.99m international passengers arrived at Cancún International Airport in the state of Quintana Roo, a 7.1% increase on the previous year. The other main airports for beach tourism, Los Cabos in Baja California and Puerto Vallarta in Jalisco, both registered a double-digit percentage increase in international arrivals, receiving 1.44m and 1.31m travellers, respectively. “Resorts in Mexico had an extraordinary year in 2016,” Carlos Trujillo Balmaseda, executive president of the Mexican Association of Tourism Developers, told OBG. “As well as attracting record number of visitors, the weak peso meant that resorts – which price their stays in US dollars – made bigger margins. Meanwhile, tourists benefit from cheaper tours, shopping and dining in local restaurants.”

All-Inclusive

The all-inclusive model, where unlimited food and drinks are included in the hotel price, has come to dominate Mexico’s major resort towns. “In Cancún there are only five hotels that use the European plan model,” José Luis Castro, director-general of CTS, a corporate travel agency, told OBG. “The rest, well over 95% of hotels in the city, have adopted the all-inclusive model. It’s the basis on which all resorts now compete in terms of price and services.”

With competition between Cancún’s resorts so intense, some of the biggest winners have been the online travel agents (OTAs) that compare and promote hotels to tourists, predominantly from the US and Canada, which make up over two-thirds of international arrivals. “The OTAs are taking a huge bite of the market, often between 15% and 50% of the total booking fee,” said Castro. “Hotels have had to adopt the yield management model. First, they sell rooms at the cheapest price to cover their fixed costs for the year, then they sell promotions for the low season. The high season is when prices rise, and profits are made.” Price competition also has the effect of keeping prices low in the mass-tourism model.

Income

In 2016 the country earned $19.6bn in foreign income through the tourism industry, a 10.4% increase on the previous year, SECTUR figures show. However, while Mexico ranked ninth in terms of visitors globally, it was only 17th in terms of revenues generated by tourism as a result of the relatively low average spend of tourists arriving by air, which stood at $931 in 2016, up by just 1.3% on the previous year.

Long History

The seeds of Cancún’s success were sown 50 years ago. In 1967 Mexico’s central bank identified five regions suitable for mass-tourism resorts to be developed with the support of the National Trust Fund for Tourism Development (Fondo Nacional de Fomento al Turismo, FONATUR). The chosen regions were Cancún, Los Cabos, Ixtapa in Guerrero state, Loreto in Baja California and Huatulco in Oaxaca state. Having developed the infrastructure for mass tourism, Cancún has also made significant strides into the luxury tourism segment, most notably with the Mayakoba resort, which contains several five-star hotels and a PGA golf course, and with the Puerto Cancún project, a gated community including a marina, an ecological reserve, hotels and shopping malls.

However, while Ixtapa has also seen modest development, Huatulco and Loreto have still not developed in line with expectations. “In the past the government gave stronger incentives and stimulus to the strategic projects,” said Trujillo. “At present investment in Loreto and Huatulco is in a catch-22 situation. Hoteliers don’t want to build new projects until there are more flights, but the airlines won’t open the routes unless there is sufficient supply of accommodation.”

Connectivity

Poor transport connectivity affects all but the most popular resorts. In 2017, 1m additional seats on direct flights to the country will be added – new routes include Tokyo to Mexico City, Warsaw to Cancún and Helsinki to Puerto Vallarta – but they cater to the same principle destinations. The hidden gems, such as jungle archaeological sites and its pueblos mágicos (magical towns), a group of 83 colonial towns identified as having exceptional cultural value, see few international visitors apart from backpackers (see analysis). Mexico City’s Benito Juarez International Airport is also operating at full capacity, with little opportunity to add incoming flights until plans for a second airport in nearby Mexico State come to fruition.

Cruise Ship Passengers

According to SECTUR, in 2016 a total of 2262 cruise ships docked at Mexican ports, carrying with them 6.4m passengers, an 8.2% increase on the previous year. However, the annual performance was a tale of two oceans. On the Pacific coast passenger arrivals at Cabo San Lucas Port in Baja California remained stable at 383,000, while at Ensenada Port, passenger arrivals fell 5% to 650,000. On the Caribbean coast, however, the island of Cozumel registered 6.9% growth, receiving 3.64m visitors, while arrivals at the Costa Maya Cruise Port in the town of Mahahual on the Yucatán Peninsula soared by 59% to nearly 674,000. Cozumel edged out Nassau to become the world’s most popular cruise destination in 2016.

Domestic

The $19.6bn spent by international tourists in Mexico is the country’s fourth-largest source of foreign currency. But foreigners actually make up a small proportion of the total number of trips in the country. Given that they do not pass through immigration and often use their own transport, domestic tourism can be tricky to measure. However, SECTUR estimates that in 2016 the number of domestic visitors reached 226m – almost two trips per year, per person. Of those visits, 89.3m were spent in hotels, with the remaining 137m choosing other forms of accommodation, such as timeshares or staying with friends and family. The OECD estimates that 88 out of every 100 pesos spent by tourists in the country come from local pockets. “For domestic tourists the main resort cities are still the top-three destinations, but they are also more inclined to visit smaller resorts such as Mérida, Hermosillo and the pueblos mágicos,” said Castro. “The weak peso means that more Mexicans choose to take vacation in their home country rather than travel abroad, but the budgets for national tourists are often smaller, and they travel more by bus and car than by plane.” To encourage and facilitate domestic tourism, SECTUR launched the “Viajemos Todos Por Mexico” (Let’s All Travel Through Mexico) programme in April 2016. The programme’s website aims to promote new destinations to domestic tourists and had contributed to an 8.4% rise in hotel occupation in participating destinations by February 2017.

Hotels

With bullish growth and plenty of untouched potential, opportunities in the hotel and accommodation segment continue to grow. According to SECTUR data, there were 74.3m total tourist arrivals at Mexican hotels in 2016, up 6.4% on 2015. Occupancy rates at the 70 principal resorts covered by SECTUR surpassed 60% for the first time on record.

Spanish construction firms have been the primary developers of Mexican projects. In 2016 over a dozen new luxury hotels and resorts opened their doors, including the Chablé near Mérida, the W Punta Mita resort with 119 villas and the Hyatt Andaz, a 213-room hotel in the Mayakoba resort located on the Riviera Maya. The rate of new projects is set to continue apace for the coming two years. Among the new openings in 2017 are the Rosewood Puebla, the Garza Blanca Resort & Spa Riviera Maya and the Ritz Carlton Reserve in Los Cabos. The following year will see the W Kanai Retreat in Riviera Maya, the Four Seasons Resort Los Cabos at Costa Palmas and the Sofitel Mexico Reforma in Mexico City accept their first visitors.

Portuguese developer Mota Engil is developing a new master-planned seaside community, Costa Canuva on the Riviera Nayarit in cooperation with FONATUR. With a land area of 225 ha and 7 km of beach, the resort will offer luxury hotels and more than 2500 residences under different hotel brands. The development will also have a golf course designed by Greg Norman and Lorena Ochoa as well as a range of activities such as paddle surfing, more than 20 km of cycling tracks and a canopy park including zip lines.

Improvement Plan

In addition, small private hotels are also undergoing an overhaul thanks to the “Mejora tu Hotel” (Improve Your Hotel) programme launched in April 2016 by SECTUR, the Ministry of Finance and Public Credit, and development bank Banco Nacional de Comercio Exterior. Under the scheme, hoteliers can receive long-term loans of between MXN100,000 ($6030) and MXN60m ($3.6m), in pesos or dollars, to invest in infrastructure upgrades and improving services. The first report on the performance of the scheme is set to be released in 2017. As yet the total number of hoteliers accessing the project is unknown, but in February 2017 De La Madrid said that 43 hotels had received more than MXN1bn ($60.3m) from the programme. However, the initiative has been criticised for not having sufficient direct selling points in banks and needing more promotional work to build greater awareness. “Mixed investments of private and federal capital to build tourism capacity is a good idea, but we are far from where we need to be,” Castro told OBG. “We would need double or triple the investment to reach Mexico’s true potential.”

Mice Segment

The construction of new high-end hotels has driven an upsurge in meetings, incentives, conferences and exhibitions (MICE) tourism. Speaking in Monterrey in July 2016, Rafael Hernández, managing director of World Meetings Forum, said the MICE segment would reach a market value of $25bn for 2016, equivalent to some 1.5% of GDP.

“Over the last five years we have seen a strong growth in MICE tourism, and Mexico now has a number of world-class conference centres,” Castro told OBG. “However, only approximately 30 of Mexico’s 78 primary and secondary cities with such facilities host conferences and events on a regular basis. The private sector needs to work with the government to be more competitive in attracting and hosting events.”

The growth of the segment provides attractive opportunities to travel agencies working with business clients, but strong competition means they need to deepen their service offering. “There is increased demand for business tourism services that go beyond travel logistics and incorporate management solutions,” Gerardo Vera Prendes, director-general of travel agency Carlson Wagonlit Travel, told OBG. “The high demand for travel platforms with integrated security solutions underscores the importance companies place on the safety and cost concerns that can arise.”

Financing Growth

Beat Wille, country general manager of BCD Travel agrees, but sees new opportunities if financing for small businesses improves. “Competition in the business travel industry remains strong, pushing the sector to constantly innovate and increase the quality and technology of offered services,” he told OBG. “There is increased demand for business travel services from small and medium-sized enterprises (SMEs), but obstacles make companies request credit lines instead of using an established financial product. There is still a strong resistance to adopting a credit card, often driven by lack of information or historical background.” This sentiment was echoed by the OECD, whose report included the key recommendation that the sector work to increase direct finance options to tourism projects with the most potential and support better financing uptake by SMEs.

Technology

As well as providing small businesses with better access to finance, greater adoption of technology could help mine crucial data and allow strategic planning for the sector. “SECTUR has been investigating the possibilities of using big data in the tourism sector for about three years,” Marco Guzmán, deputy director of prospective analysis for SECTUR, told OBG. “In a pilot study with the Big Data Work Team of the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI), we studied Twitter data to see from which states Mexicans visiting Puebla and Guanajuato came from over the course of a long weekend; between February 1-3, 2014.” SECTUR compared the data with Puebla and Guanajuato’s state travel observatories, finding a strong correlation between the results. ”Up to now it has been difficult to map the movements of domestic tourists in the country. We hope that social media, such as Twitter, will help build a more accurate picture in the coming years,” said Guzmán. He added, “In December 2016 BBVA Bancomer and SECTUR presented a report entitled ‘Big Data and Tourism’ as a big data application that identifies trends and productivity in the country’s tourism destinations.” In fact, this is the first time this kind of analysis has been performed in Mexico, where the information from the financial sector is analysed and monitored digitally, said Guzmán.

INEGI is also working on projects to analyse opinions of services by Twitter users. This has been welcomed by the private sector, which has first-hand experience of the evolving nature of the market. “For the tourism industry, technological innovation is essential to maintain competitiveness and offer the ease of experience demanded by clients,” said Vera Prendes.

Promotion

Mexico has long levied a tourism tax on each visitor who spends more than a day in the country, which is usually included in the price of an airline ticket and is used to fund sector development. In October 2016 De La Madrid announced that this charge would be raised from MXN350 ($21) to up to MXN450 ($27).

The proceeds of the tax are divided between FONATUR, which receives 10%, the National Migration Institute, which gets 20% and the Mexican Tourism Promotion Council (Consejo de Promoción Turístico de México, CPTM) which receives the remaining 70%. The CPTM’s cut serves as a significant incentive to winning new tourists to Mexico, and the increase in the tax will go some way to offset budgetary cuts. For 2017 the council was allocated MXN602m ($36.6m), a 33% decrease on the figure from the previous year.

In recent years the CPTM has directed its efforts at opening new markets as well as deepening the main existing source markets. In late 2015 it launched the “Live it to Believe It” campaign focused on commuters in London’s public transport system. In 2016 a new campaign dubbed #MiMexico was launched targeting the 20% of the US population of Hispanic origin. The US continues to hold its dominant position as a source of tourists to Mexico – 70% of international visitors arriving by air in 2016 came from the US. However, new source markets remain relatively unexploited. “The US is such a big market that we have to focus our promotion efforts there,” said Trujillo. “But there are also major opportunities to bring in visitors from the Pacific Alliance countries – Chile, Peru and Colombia – as well as Brazilian tourists.” In 2016 the number of Colombian tourists arriving in Mexico increased by 7.5% to reach 390,000, placing it fourth in terms of arrivals by air. Mexico also has the potential to attract visitors from further afield, according to Castro. “At the moment 60% of flights landing in Cancún are charters. High-end tourists will not come to Mexico unless they have direct flights. While we have seen direct routes from Germany and Japan, we need to expand this offer and find a carrier for Russian tourists,” he said.

Security

The other main challenge for the CPTM is the image of security problems in Mexico. Although tourists are rarely targeted by organised crime, in several instances they have been caught in the crossfire. Acapulco, once a star Mexican resort, has been among the cities whose image has been most affected in recent years. Gerardo Herrera, a professor and researcher at the Iberoamericana University in Mexico City, told local press that occupancy rates in Acapulco had fallen from 90-95% to 75-80% during the high season. However, the city is set to receive a facelift in the coming years with over $1bn of investment planned. Approximately $30m will be spent on a new terminal for the city’s airport, $213m is earmarked for the construction of a tunnel from the airport to the beach zone, a medical tourism centre will be built, and the Pierre Mundo and Princess Mundo hotels will be the subject of major renovations.

It is hoped that further investment in tourism could signal a turnaround in the city’s fortunes. “Our goal is to return Acapulco to be the international jet set’s preferred destination,” De La Madrid said in a press conference in July 2016. “To resolve [Acapulco’s] social and security problems we have to make it a high-class tourism destination that will permit an improvement in the quality of life of its citizens.”

Outlook

The long-term plan to diversify Mexican tourism to new regions of the country, alongside the existing attractiveness of the main resort destinations, and the continued weakness of the peso, all mean that the industry’s growth looks set to outpace overall GDP in the coming years. Speaking at the 2017 National Tourism Forum in February 2017, Lourdes Berho, director-general of the CPTM, forecast that international tourist numbers will increase by 7.2% in 2017 to hit 37.4m, and that foreign currency earnings from the sector will reach $21.2bn.

Berho told delegates at the forum that by 2021 Mexico was targeting a total of 50m foreign tourists per year and a place in the top-five tourism destinations in the world. To reach these goals will require federal and regional governments to work with the private sector to develop a strategic plan for the diversification of the industry and to invest in its implementation.