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Sri Lanka tourism: new kid on the block

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SRI LANKA – Currently, tourism is the main buzz word in business and general circles, with all hotels reportedly doing very well with high occupancies.

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SRI LANKA – Currently, tourism is the main buzz word in business and general circles, with all hotels reportedly doing very well with high occupancies. However, to many who are not directly involved with the industry, there is considerable doubt and apprehension whether the industry is really doing as well as it is reported to be.

Hence, it might be worthwhile to analyze how the industry has really performed in the post war period and what trends appear to be emerging.

Year 2009: immediate post war
Everyone is quite aware of the fact that due to the long and protracted war, the tourism industry suffered the most. For close upon 15 years or more, it was a matter of survival, and the fact that no major bankruptcies were declared during this period in the hotel industry, speaks volumes for its resilience and tenacity.

Immediately after the ending of the conflict in May 2009, arrivals began increasing rapidly. The reduction of arrivals (YOY) up to June 2009 was wiped off by the dramatic improvement in the latter half, resulting in 2009 ending up slightly better than 2008.

Year 2010: first full year without conflict
The dramatic increase continued unabated during 2010 where arrivals reached an all time record of 654,476 arrivals, up from 447,892 in 2009, with a record breaking 46% YOY increase.

Due to the difficult times through which Sri Lanka Tourism went through, hotel rates were at highly-discounted levels, which at least helped bring in some occupancy and cash flow during the war years.

Given the lead time of forward contracting for rooms in bulk with tour operators, hoteliers could start increasing their rates in response to this new post war demand, only during the later part 2010. This was clearly reflected in the annual foreign exchange earnings from the tourism trade, which increased from US$349.6 million in 2009 to US$575.9 million in 2010, which was again a record 64.8% YOY increase.

Therefore, very clearly the growth was not only in occupancy and arrivals, but also there was extremely healthy growth in yields as well. This was obviously due to price corrections in the market as the industry came out from a “war scenario rate,” to a more free market, supply and demand situation. This is clearly borne out from the average spend per tourist night increasing from US$82 in 2009 to around US$87 in 2010. This is an often-used index to measure the tourist income.

There is still room for growth in yield in Sri Lanka, provided upgrades, standards, and infrastructure improvements keep pace with the rate increase.

This year, the average spent per tourist night is expected to increase to US$97 with an average stay of 8.5 days per tourist (ref: SLTDA) which would mean that Sri Lanka will move up into the “domain” of other Asian competitor countries such as of Thailand and Malaysia.

It is interesting to note that Sri Lanka is achieving similar yields per tourist night as that of Thailand and Malaysia, despite the lack of supplementary tourism offerings. Asian countries such as Thailand, Malaysia, and Singapore offer a diverse array of tourism supplementary products (restaurants, entertainment and theme parks, gaming, etc.), which complement the overall tourism earnings.

In Sri Lanka, however, the spend per tourist night is predominantly on hotel rooms and not necessarily augmented with supplementary earnings from other sources. From this hypothesis, one could surmise that Sri Lankan hotel rates are already not cheap, and are in fact, on par with hotel rates in the region.

This is confirmed from the analysis of 5-star hotel room rates, which shows that Sri Lanka’s 5-star hotel rates are actually already higher than in Bangkok and similar to Bali. Of course, the rates in Bangkok may be temporarily depressed due to the ongoing political unrest there.

However, one important factor is that on a direct one-to-one comparison with Sri Lankan hotels, it is common knowledge that hotel standards and quality are far superior in Thailand, Singapore, and Malaysia.

The conclusion, therefore, is that any further rate increases must be implemented with great caution and should be matched with higher service and product quality. The “space” to increase overall earnings is in the area of supplementary tourism product and service offerings and not necessarily from hotel.

Price control of hotel rates
While the market price was thus gradually correcting itself, the government stepped in and imposed a minimum rate structure for city hotels in 2009. There were mixed reactions to this intervention, with some industrialists saying that it helped raise the benchmark for a proper post-war hotel pricing structure. There were others who opposed it saying that the government should not step in with price mechanisms into an international market-driven industry. Whatever the opinions may have been, this new rate structure, reinforced by hotels themselves increasing their rates in some cases, fueled a steep growth in earnings in the short term.

Rate increases vs. quality and standards
However, there is a cautionary side to this. While certainly hoteliers are seeing strong revenue growth and increased profitability, after many years of barely maintaining the hotel plant and services, attention must be paid to the overall tourism product and service offering of Sri Lanka.

As indicated earlier, hotel plants were maintained at the basic level and very little upgrading and improvement was carried out, quite legitimately because of lack of funds. Hence, with a basically acceptable hotel plant, and good discounts offered during the last decade, Sri Lanka was seen as a value for money destination. This is borne out by the fact that even during the darkest of times, tourist arrivals to the country never dipped below 400,000.

Hence, now there is a scenario where in a short period of 20 months or so, Sri Lankan hotel pricing has increased by about 40%-60% over pre-2009 levels. But at the same time, the product offering has not dramatically improved.

Certainly some of the bigger hotel companies who have deep pockets have embarked on urgent upgrading and refurbishing programs to improve their product offering. In the summer of 2010, some 1,000 or so hotel rooms were refurbished, and this year a larger number (close to 2,000) of rooms will be temporarily out of stock for upgrading and refurbishing work during the period of April-November 2011.

Sri Lanka has closed upon 15,000 conventional hotel rooms currently and a good 70% or more of it requires substantial upgrading. Hence, it is in this scenario that such steep increases in rates must be cautiously viewed, where the increase must match a superior and improved product offering. If not, Sri Lanka will face a situation where there will be overpricing, resulting in customer expectations not being met.

To date, Sri Lanka has a very high percentage of good customer referrals, resulting in a repeat clientele of about 20%. Any marketer will confirm that in spite of all the new avenues of marketing that are now prevalent, good old customer referrals are still of paramount importance in marketing.

Therefore, if this consistent positive customer feedback of Sri Lanka is in any way damaged, due to expectations not being met, there could be far-reaching consequences on the long-term growth.

It is very important that this growth momentum of Sri Lanka tourism be sustained. Certainly one cannot expect the dizzy heights of 40% or more growth YOY to be sustained in the long term, which was in any case against a very low “conflict scenario base.” However, if carefully managed, Sri Lanka could settle down to a healthy 20% or so growth YOY.

This is based on the fact that the long-term forecasts indicate that the Asian region will lead world tourism growth (Ref: Pacific Area Tourism Association – PATA and World Tourism Organization – WTO). Sri Lanka, having being relatively a “closed” destination in the Asian region for over a decade, is now “the new kid on the block.”

However, even though the demand may be there for Sri Lanka, one must not forget that there is stiff competition from its Asian neighbors who are constantly coming out with new innovations and country promotions.

Therefore, it is very vital that there should be ongoing, consistent, and well-planned marketing programs backed by innovative promotional campaigns showcasing the many facets that Sri Lanka offers to the traveler. The original brand architecture for Sri Lanka tourism, viz. “authentic,” “diverse,” and “experience” should be maintained and nurtured.

The challenge of environmental sustainability is more complex. While certainly Sri Lanka needs to spur growth and develop infrastructure, at the same time it must be careful not to kill the proverbial “goose that lays the golden egg.”

Environmental fall out must be minimized as far as possible by containing development to specified large-scale tourism zones. Strict environmental guidelines must be applicable within these specified zones and ad-hoc development must be prevented.

To drive tourism arrivals to around 2 million and earnings to close upon US$2.5 billion annually, Sri Lanka tourism needs to build a large quantity of rooms, which will have a dramatic impact on all natural resources such as water, energy, and simultaneously generate larger quantities of waste. There will also be socioeconomic impacts, which have to be carefully managed.

In conclusion, therefore, certainly the tourism industry has great potential to become an important component of Sri Lanka’s economy in the future. However, there will be many challenges that have to be met and proper strategic planning and execution of such plans and projects in a timely and organized manner has to be ensured.

The author is a well-known senior tourism and management professional and a keen wildlife and elephant enthusiast. Until recently, he was CEO of Serendib Leisure and was also the President of the Tourist Hotels Association of Sri Lanka. He is now attached to the Ceylon Chamber of Commerce, Solutions Pvt., working on a hotel environment sustainability project.

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