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Have we reached peak hotel?

The hotel industry is saying trade is down at the same time as additional capacity continues to come on stream. Is the industry heading for a downturn?

Hayfield Manor Hotel, Cork.

Hayfield Manor Hotel, Cork.

 

Early indications for the current year from hotels and guesthouses across the country are that it will be a challenging one for the tourism industry to maintain the growth of recent years. According to the Irish Hotel’s Federation (IHF) latest member’s survey (July 2019), the domestic market is holding and US business levels are continuing to rise. However, the continental Europe market shows signs of softening, while business levels from the UK market are still falling. 

“There are parts of the industry that are performing well, though the rate of growth appears to be slowing. However, not every tourism business or part of the country is enjoying the same level of success. There are many areas where tourism remains very seasonal and hospitality businesses struggle to break even during off-peak periods. These businesses can ill afford to take another economic hit,” Michael Lennon, president of the Irish Hotels Federation says.

This is reflected by Ettienne van Vrede, chief executive of the Hayfield Group, “We are still performing very strongly overall, with US business doing very well in all our properties. However, there has been a decrease in our mainland Europe bookings, with an overall decrease in occupancy levels for the year to date. We are also seeing a very late booking pattern emerge in the last few months.

“With our occupancy down, there is definitely a decline in trade. There was less demand and confirmed business on the books for this year for some months out. We have fortunately managed to pick up last-minute business from our loyal domestic audience but the stats on our foreign visitors reflect a decrease,” he says.

There are a number of factors feeding into this – Brexit, the VAT rate, a loss of competitiveness and pricing.

Brexit

“Britain is Ireland’s biggest source for tourists and there’s a lot of concern, not just in terms of a weakened sterling but also a weakened UK economy. People are less inclined to travel. If there is a hard Brexit, Fáilte Ireland has estimated this would cost Ireland €390 million. We have very little control over the type of Brexit there will be but the mood music is that a hard Brexit is coming,” Eoghan O’Mara Walsh of the Irish Tourism Industry Confederation says.

There is another piece to this: “Since the Good Friday agreement, we were one of the sectors that was earmarked as an all-Ireland sector, so we are promoted as an island destination abroad. Therefore, a border would have huge ramifications on a number of fronts,” he adds.

Given this, the Government must take decisive action to mitigate the impact of Brexit and address the other serious challenges Ireland faces, with the high cost of doing business here, Michael Lennon says.

“The industry plays a vital role as an engine of growth and regional economic balance, supporting over 266,000 jobs throughout the country, 70 per cent of which are outside Dublin,” he says.

Additional funding of €8 million was allocated to the tourism agencies in 2019, specifically to respond to the impact of Brexit, a spokesperson for the Department of Tourism said.

“Tourism Ireland put in place a programme of marketing activity, post-Brexit research, and stakeholder information to ensure that potential visitors in relevant markets fully appreciate that it is ‘business as usual’ for Ireland and the Irish tourism industry. Tourism Ireland has also established a Tourism Taskforce on Brexit, which has met regularly to maintain liaison with the British, European and UK inbound trade and with the UK Tourism Alliance.

“As part of its Brexit preparations, Tourism Ireland also commissioned a wide-ranging review of the British market, independently chaired and led by a steering group of key representatives of the Irish and UK-based tourism industry. The review resulted in a new strategy to grow tourism from Britain. The strategy can be flexed under all Brexit scenarios.

“Fáilte Ireland is supporting tourism enterprises to respond to the impact of Brexit. The ‘Get Brexit Ready’ programme is helping businesses to assess the risk and respond to changes and will also assist the sector in diversifying into other markets. Fáilte Ireland’s work is focusing primarily on border counties and the south-east region, which have been most adversely affected by the drop in the value of sterling.”

More hotels

Aside from Brexit, is the prospect of more hotels coming on stream putting fear into those in the industry?

Not in the capital, Aebhric McGibney, Dublin Chamber’s director of public and international affairs, says.

“Go back five years and there was a massive undersupply of hotel accommodation in Dublin. Thankfully, this shortage has been addressed, with several new hotels coming on stream around the city. Several more are currently under construction or planned, so the outlook is positive in that regard. Increasing the supply of hotels should prove helpful in terms of prices. It’s important that there is value in the market to ensure that the city is able to attract a varied mix of visitors,” he says.

When the demand is there and the numbers coming into the marketplace is from a good mix of sources, including corporate, leisure, foreign, domestic and the golf market, we are in favour of extra hotels, Ettienne van Vrede says.

“However, there are a number of new hotels in the Cork market with planning approved for more and it will prove challenging when more rooms come on stream in Cork.

The Great Southern Hotel, Killarney.
The Great Southern Hotel, Killarney.

“Killarney has been very stable over the last number of years but in both markets it is naturally harder to compete when the volume of visitors is down. We are lucky to have such strong products in both areas and we are in favour of increasing hotel capacity once the business is there for all,” he says.

Pricing

In Dublin, the 3,000 to 4,000 more bedrooms coming on stream in the next couple of years is to be welcomed, Eoghan O’Mara Walsh says, as this will add competition and make prices more attractive for tourists.

However, some suggest the comparative product and service level to the price level offered in Ireland is still very good value.

“We are on a par with some of the best hotels in the world, which we should be very proud of and when you consider the quality of the experience in Ireland, the quality of the food, the guest experience, we compare very favourably. We should embrace being slightly more expensive, as we have finite resources in this small island and should market it as the exclusive and special destination that it is,” Ettienne van Vrede says.

VAT hike

“The VAT at 9 per cent proved effective, and it put the Irish tourism VAT rate at the same as other eurozone VAT rates, so if you look across Europe, any big tourist destination is at 9 per cent to 10 per cent. Our big fear was that we would be out of kilter with the rest of Europe and Paschal Donohoe estimated the hike was an additional tax burden of €466 million on the sector when it was brought in in January 2019,” O’Mara Walsh says.

“Throw in the cost of a bad Brexit and you’re talking about a serious wallop to tourism. This is Ireland’s largest indigenous industry and our biggest regional employer by far – look at newly opened Center Parcs, in Longford, with 1,000 permanent jobs in the region. In our pre-budget submission, we will be saying the VAT rate needs to be reviewed.”

Loss of competitiveness

“The recently published Crowe Ireland Annual Hotel Survey showed that many costs are increasing faster than the underlying growth in revenues. Some 62 per cent of IHF members, for example, have seen further increases in insurance costs over the last 12 months, in addition to substantial increases in recent years. Meanwhile, the VAT increase has led many hoteliers to take a more cautious approach to investment, with over half postponing or scaling back their plans. Tourism is an exceptionally competitive activity. We compete daily for business at both a domestic and international level and maintaining our competitiveness is absolutely vital to sustaining the growth of the industry, which supports jobs in every town and county,” Michael Lennon says.

In fact, prices are 13 per cent more than the EU average, O’Mara Walsh says.

“The cost of insurance is relentless – the average cost for 2019 was 28 per cent; the cost of commercial water is proposed to go up by 18 per cent; food and tobacco is 40 per cent above the EU average, according to the National Competitiveness Council; while the cost of credit is 65 per cent higher than the EU average. Business is seasonal and off season, hotels need to draw down credit terms and interest rates is that much higher. This is within the realm of Government to improve,” he says.

Despite all of this, Ireland is still considered to be a destination which provides value for money, the Department of Tourism said in response.

“Last year, almost 60 per cent of overseas holidaymakers said that Ireland was good value for money, with over a third also saying that their expectations were exceeded – a rise on previous years. It is important for the tourism industry to be as competitive as possible in a world of volatile exchange rates, rising operational costs for businesses and strong consumer preferences for value for money.

“For overseas tourists, the quality and value they get for their money is a major factor in their impression of a destination, and whether or not they would recommend it to their counterparts. To ensure Ireland can continue to welcome record numbers of tourists in the years to come, it is important that the industry strives to provide value for money in order for the country to compete as a world-leading visitor destination and is especially important in terms of maintaining Ireland’s good reputation overseas,” a spokesperson says.

Breakdown of business levels across markets compared to this time last year

Domestic market: 32 per cent of hotels and guesthouses are reporting an increase in visitor numbers from across Ireland compared to this time last year, with 32 per cent seeing no change and 36 per cent noting a decrease. 

Britain: Only 8 per cent are noting an increase in visitor numbers from Britain, with 19 per cent seeing no change, and 73 per cent seeing a decrease. 

Northern Ireland: 10 per cent of premises are noting an increase, with 28 per cent saying they have seen no change, while 62 per cent see a decrease.

United States: 38 per cent of premises are noting an increase; while 30 per cent have seen no change and 32 per cent note a decrease.     

Germany: 20 per cent of hotels and guesthouses are reporting an increase, with 46 per cent saying they have seen no change and 34 per cent seeing a decrease. 

France: 15 per cent of hotels and guesthouses are noting an increase, with 55 per cent saying they have seen no change and 30 per cent seeing a decrease.

(IHF member survey, July 2019)