Making it in the tourism industry
New tourism statistics paint quite a rosy picture of an industry that is under sever strain.
The recession was bad news for most sectors, but the tourism industry was particularly hard hit as it depends on consumers spending what little money they have left.
Fortunately for many, the industry has had quite some time to reposition itself, including a stronger focus on the corporate market.
Nevertheless, the 15% increase in international tourist arrivals recorded last year did not necessarily produce the expected results.
Business Partners Limited Executive Director Gerrie van Biljon explains many small operators either entered the market or expanded their operations to cash in on the event.
“The net effect on bed nights from the Fifa Soccer World Cup was disappointing. I think people who entered the industry specifically for the tournament were disappointed,” he says.
Business Partners Limited is the founder and owner of the prestigious Sanlam / Business Partners Entrepreneur of the Year® competition and Van Biljon urges tourism operators to throw their hat into the award’s ring.
Where we stand
From an international and macro perspective, South Africa did exceptionally well and it significantly outperformed the international average growth in tourist arrivals of 6.7%.
At the same time the South African Tourism “20 Experiences in 10 Days” campaign is continuing to build on the momentum generated last year.
Tourism has also been earmarked as a major potential job creator so government focus on the sector and related spending should remain a priority.
For example, a new National Tourism Sector Strategy (NTSS) was launched at the end of March to help grow the industry.
“The vision of the NTSS is to position South Africa as one of the top 20 tourism destinations globally by 2020, and I believe our concerted and focused efforts as a sector will enable us to reach this goal,” Minister Marthinus van Schalkwyk said in a media statement.
“We all know that the tourism sector in South Africa, and its contribution to our gross domestic product, has grown tremendously in the last two decades. As a national department, and an industry, we believe we have not yet reached our full potential and the NTSS is intended to provide clear guidance on how to grow tourism’s absolute contribution to the economy.
The NTSS wants to double foreign arrivals to 15 million in the next nine years while increasing GDP contribution from R189 billion to R499 billion.
The strategy includes a number of incentives to reach it goals, including a strong focus on domestic tourism.
However, the current reality for smaller operators is somewhat different on the ground.
New domestic tourism statistics for 2010 show a fairly significant decrease in the amount of money spent by domestic tourists: R21.1 billion, down from R22.4 billion in 2009.
The good news is that the percentage of money spent on holiday as opposed to business travel or visiting friends and relatives increased to 31% of the total spend. This figure stood at 22% in 2009.
Nevertheless, the total amount of domestic tourism trips did not increase last year, meaning that it is unclear if the industry has turned the corner in the long term.
At the same time, consumers are still under considerable strain and the FNB / BER consumer confidence index showed its first noticeable decline in a year. The report says that consumers are increasingly worried about their personal financial positions.
Once again, this is a red light for the domestic tourism industry and SMEs operating in the sector.
“Occupancy rates among our clients are still under pressure. This has been the case to a large extent for the last 18 months,” Van Biljon says.
“Consumers are still reluctant to spend and operators are not expanding at the moment. There is a sense of scepticism in the industry and everyone is waiting for the status quo to change,” he explains.
“The available number of beds in South Africa tells us there is an oversupply in general. Obviously some operators will do better than others but competition is fierce.”
An entrepreneurial view
Van Biljon is quick to add that the sector is not a completely lame horse and that astute entrepreneurs will always be able to make money in tough times.
“We see that some operators are using their facilities in a different way to generate business. This includes hosting smaller corporate conferences for example.
“The corporate market still exists whereas the domestic tourism market is under severe strain…
We know that the industry will recover. The onus lies on you to still be in business when this happens.
“Before you enter the industry you have to ensure that your product is unique and that there is a market for it.”
Van Biljon adds that entrepreneurs should remember that tourism is a capital intensive industry and that detailed business plans are needed to succeed.
“If you want to sell beds you need to decide if want to do it as a hobby or as a business.
“If it is a business you need to look at economies of scale. In our experience the threshold is usually six or more rooms,” he says.
“One of the biggest challenges entrants usually face is the huge capital outlay needed. Then, you can only earn so much each month because there are a set number of beds that can be sold. As a result the return on investment is a relatively low percentage of the capital spent.”
He adds that the amount of money that can be borrowed has a ceiling if the business owner wants the business to be profitable: “The moment you are geared more than 50% you are doomed to failure. This is because all your income is used to service debt.”
Payday however, comes when that property is sold on. He explains that once the property has been paid off, it will only grow in value over time. Similarly, a going concern demands a premium, especially if it has been looked after.
“It is not a glamorous industry and it is tough with long and demanding hours. But, if you are the right entrepreneur there is money to be made,” Van Biljon says.