Summertime blues

The holiday season may be in full bloom, but the economic slowdown is likely to weigh heavily on the struggling holiday accommodation market. IBISWorld general manager ROBERT BRYANT explains.

By Robert Bryant

This article first appeared 8 October 2008

The holiday season may be in full bloom, but the economic slowdown is likely to weigh heavily on the struggling holiday accommodation market.

Operators in the Australian holiday accommodation industry must be throwing their hands up in despair.

Just as the Australian dollar has fallen 30% – thereby providing an extra incentive for Australian travellers to stay at home and for international travellers to head Down Under – the global financial turmoil has snapped wallets shut. Mortgagees will have stayed home these summer holidays, and that’s bad news for holiday accommodation providers.

Still, the participants in this industry are used to ups and downs. The industry has, over the last decade, shown a particular sensitivity to changes in global or regional and domestic economic growth, business and consumer sentiment and household disposable income.

Also important are high and increasing fuel prices, which increases travel costs, and strikes or financial collapses affecting airlines or travel agents. Wars, terrorist attacks, global health scares (such as SARS) and seasonal factors also affect some industry components.

Over the five years to 2008-09, real industry revenue is expected by IBISWorld to increase at an average annual rate of 1%, due to recent and expected continuing low growth in domestic tourism, associated with the substantially increasing fuel prices that are affecting overnight travel. This has shortened the length of stay and trip expenditure of travellers.

Also forecast subdued economic growth in 2008-09 is expected to affect business and consumer sentiment and, therefore, travel patterns and demand. Lower employment growth as revenue rises will generally improve profit margins, as will some industry consolidation. However, margins will remain tight as competition increases, particularly in 2008-09.

The next few years are unlikely to be much better. Increasing unemployment will lead to reductions in growth in household disposable income, which in turn will lead to lower length of stay and trip expenditure by domestic visitors. International visitor arrivals are also expected to grow only marginally. On-going significant competition and some industry consolidation will occur.

Overall, revenue growth in the five years to 2013-14 is expected to increase by 2.9%. From 2011-12 onwards, the forecast significant improvement in domestic economic growth, together with stronger growth in travel demand, is expected to lead to stronger growth in industry revenue, profit and employment.

Segments of this industry will benefit from growth in cheap domestic airfares that will increase interstate domestic holiday travel, but at the direct expense of intrastate travel. There will continue to be demand from high income households for short breaks in B&Bs in areas close to home and major metropolitan areas to minimise travel time and cost.

Key success factors for operators in the industry

• Attractive product presentation. Always monitor guest needs and provide facilities and service in line with market/guest demands and expectations. This ensures repeat guests and good word-of-mouth recommendations.
• Being part of a group buying, promotion and marketing scheme. Being involved in a number of joint promotions and other activities etc. to ensure most effective use of advertising and purchasing budgets.
• Having an effective performance monitoring system. Closely monitoring the financial and operational performance in all areas, to maintain good cash flows.
• Having a loyal customer base. Ensuring a high level of repeat and word-of-mouth custom by always ensuring good quality facilities and hospitality to guests.
• Access to multiskilled and flexible workforce. Flexible and multiskilled employees are required across many areas of operation to make most efficient use of labour.
• Establishment of export markets. For hostel owners ensuring a presence in suitable international promotional campaigns (literature etc) to assist in generating demand.
• Management of seasonal production. Having a strategy to deal with any seasonality in guest arrivals, across the year.
• Ensuring pricing policy is appropriate. Not competing solely on a price (tariff) basis, by offering quality service and hospitality to guest.

Products and service segmentation

Major market segments

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au