As a travel destination, Canada has a great deal going for it. A glowing reputation for the Canada brand; favourable exchange rates driving visitation and enhancing purchasing power; the natural beauty, friendliness and safety of our destinations, resulting in a 7.5-per-cent spike in total international arrivals during 2015; considerable growth in domestic tourism (600,000 more pleasure trips according to the Conference Board of Canada); a greater propensity for outbound travel from U.S. consumers (arrivals up by 8.3 per cent from 2014) due to strong U.S. economic indicators; and a reluctance on the part of tourists to travel to other countries associated with unrest and terrorism.
In addition, the steady economic outlooks and consumer confidence indicators have led to a calmer new normal, in which cyclical spurts in growth of supply have moderated. With supply and demand in sync, hoteliers felt sufficiently confident in advancing ADRs by a solid 4.5 per cent, resulting in an overall RevPAR of 3.3 per cent — despite setbacks in regions hit hard by declining exports and falling oil and commodity prices. Of course, it helps when communities re-affirm the importance of developing and renewing commitments to tourism; and when the federal government relaxes visa requirements and tops up Destination Canada’s marketing budget by $50 million over two years (though it’s still less than it was in 2012).
The industry finally seems to be flourishing — a condition characterized by positive emotions and relationships, as well as a stronger sense of connection, purpose and accomplishment. It’s a condition, nevertheless, which has to be constantly cultivated and nurtured. In a world fraught with unexpected volatility, complacency is not an option — nor is maintaining the status quo.
In fact, with hotel profits constrained, there is still system-wide angst. Online travel agencies continue to insert themselves between hotels and customers. When booking fees and the transparency of rate comparisons are combined with higher costs for renovation and digital and marketing initiatives, expect industry consolidation and a slew of mergers and acquisitions, such as the Marriott/Starwood deal, to ratchet up. Throw into the mix home-sharing operators, such as Airbnb, which are rapidly gaining customer loyalty and market share through low-cost platforms, and you find hoteliers being forced to find new and better ways to connect with customers and guests, encourage direct booking, individualize services, increase visibility and create new value through better insight and advantageous innovation.
Continuing success and favourable operating conditions have never been a given. While there is little doubt the current outlook for revenue growth remains relatively positive, the profit picture seems prone to stagnation. Consider the research conducted by the U.S.-based Zacks Investment Services, which ranks the hotel industry in 164th place out of 260 evaluated, thereby giving it a near-term “neutral” assessment. So, what to do? In a nutshell, find ways to overcome strategic inertia — suggestions for which will flow from a more in-depth understanding of the economic, tourism and hotel operational conditions.
ECONOMIC CONTEXT
Hotels in Canada are benefitting from “staycations.” When a proposed $4,000 USD visit costs a family the equivalent of $5,200, the decision to abandon going south seems sensible, reconfirming the importance of domestic tourism. And, when a state-side family realizes a typical $4,000 USD holiday can be purchased for approximately $3,100 in Canada, the decision to head north seems like a no-brainer. While many travel decisions today are being made on the basis of currency exchange rates, there are demographic, psychological and motivational factors that can, and will, counter so-called rational behaviour. Consequently, smart hoteliers are taking time to better understand what constitutes “value.”
The Canadian dollar has been, and will continue to be, affected by the strength of the U.S. economy. While a slight rebound in crude oil prices has helped pull the loonie from its extreme lows, most economic forecasters suggest sluggish economic growth patterns (compounded by the impact of the Alberta wildfires on the energy sector) and the U.S. Federal Reserve policy prospects, will not alter the value of Canadian currency until the latter part of 2017. Hoteliers need to take advantage of this window of opportunity to create positive impressions, as the benefits of exchange rate discrepancies will eventually vanish.
Indeed, hospitality industry assessments by CBRE and Scotiabank point to a softening of prospects for 2016. Recent events such as terrorist attacks and Brexit concerns are bound to create a slowdown in economic growth, along with investor concern and shifts to safe-haven investments. While weakness is bound to be U.K. and E.U.-centered, the spillover effects from reduced trade and financial activity will effect business travel.
Consequently, Scotiabank is forecasting real GDP growth at a very modest 1.3 per cent during 2016, compared to world GDP growth, which is expected to hover around three per cent. With the resource sector continuing to falter, underperforming exports and business investments in a slump, economic and employment momentum is contingent on stronger exports to a more vibrant U.S. economy that itself could be thrown for a loop, given the uncertain outcomes associated with current political tensions and elections.
TRAVEL AND TOURISM
In terms of international arrivals, as a country-wide destination, Canada has dropped from eighth to 17th spot. Despite this — for which there are many explanations — the number of visitors continues to grow. In its December 2015 Tourism Snapshot report, Destination Canada reported arrivals increased 7.5 per cent year-over-year during the 2015, well above the global growth rate of 4.4 per cent recorded during the same period. Arrivals from Canada’s 10 major overseas markets, including the U.S., jumped 7.9 per cent compared to 2014. In terms of all four world regions, arrivals were up — the U.S. recorded an increase of 8.3 per cent (reaching close to 12.5 million, the best showing since the 2008/’09 financial crisis); visitors from Asia/Pacific increased by 7.7 per cent; Latin America accounted for a 13.3-per-cent increase; and Europe sent four per cent more visitors to Canada than the previous year. Based on transportation modes, arrivals by automobile increased 9.9 per cent, air 6.4 per cent and other modes 4.8 per cent. France, Australia, China, India and Brazil registered their highest level of visitation to Canada ever during 2015. While these statistics reveal considerable progress, only Ontario, Quebec, B.C. and Manitoba seem to have benefitted, as international arrivals declined both in the Atlantic and Prairie regions.
ACCOMMODATION INDUSTRY PERFORMANCE
Despite the varied results and benefits derived from international visitors, 2015 was generally a good year for hoteliers across the country. As CBRE reports, the industry finished the year with an average occupancy rate down 0.7 points to 63.6 per cent, though ADR advanced 4.7 per cent to $143.71, which translates into a 3.3-per-cent increase in RevPAR to $91.34 (see Exhibit 1 on p. 10).
In accordance with economic conditions, seasonality and destination appeal, occupancies in Western Canada fell 2.8 points to 62.3 per cent, with ADR rising 3.8 per cent to $148.17, resulting in RevPAR of $92.30 — down 0.6 per cent from 2014. In Alberta, the carnage was more palpable as occupancies fell 9.1 points to 58 per cent, ADR dropped 2.4 per cent to $140.03 and RevPAR was down by 15.6 per cent to $82.40. Alberta resorts seemed unaffected, with occupancies climbing 2.5 points to 62.3 per cent, ADR increasing by 8.4 per cent to $232.32 and RevPAR growing 12.8 per cent to $144.83.
Saskatchewan also fell victim to falling demand. Manitoba advanced slightly, while B.C. occupancies recorded an average increase of 2.2 points. ADR in that province advanced 8.8 per cent to $153.15 and RevPAR was up 12.6 per cent to $101.23. As the results from Greater Vancouver reveal, the area boomed. Occupancies rose 3.4 points to 76 per cent, ADR was pushed up 11.8 per cent to $62.91, resulting in RevPAR of $123.75. And again it was Whistler, one of Canada’s iconic resort areas, which performed well, with occupancies advancing 2.6 per cent to 62.2 per cent, ADR increasing by 10.4 per cent to $241.13 and RevPAR skyrocketing 15.2 per cent to $149.90.
Regionally, central Canada fared best with occupancies up 1.1 points to 65.5 per cent, ADR advanced 5.5 per cent to $141.77 and RevPAR was up 7.4 per cent to $92.86. One of the bright spots was Niagara Falls, with occupancies in that city climbing 2.8 points to 64.2 per cent, ADR was up an astounding 11.5 per cent to $157.28 and RevPAR jumped 16.6 per cent to $100.94. The Greater Toronto Area boasted occupancies of 70.8 per cent (up 0.5 per cent), ADR of $136.62 (up 5.8 per cent) and RevPAR at $105.04 — up 6.8 per cent. In Quebec, Greater Montreal enjoyed a 70.9 per cent occupancy rate, up 1.6 points, and an ADR of $153.53, up 5.8 per cent. RevPAR jumped 7.6 per cent to $90.39.
Performance in Atlantic Canada was steady. Occupancies rose 0.5 points to 58.7 per cent. ADR advanced 3.4 per cent to $127.25, resulting in RevPAR at $74.69, up 4.2 per cent. Newfoundland did not fare well, while Nova Scotia was more buoyant with occupancies climbing 2.1 points to 61.7 per cent, ADR grew 4.9 per cent to $127.84 resulting in RevPAR up 8.6 per cent to $78.85.
Taking into account property size (see Exhibit 2 on p.11), the larger the property, the higher the average occupancy and ADR. It’s interesting to note, however, how point change in occupancies did not differ considerably among property sizes. Resorts advanced the most in terms of occupancies, up 2.8 points to 59.1 per cent. While suite hotels enjoyed a 71 per cent occupancy rate, they only advanced 0.6 points. In reference to price levels, shifts in occupancy levels were not significantly different — though the rate of change in ADR was. For example, upscale properties were able to grow their ADR by 6.9 per cent to $223.44, compared to budget properties that advanced 4.4 per cent to $91.24.
In assessing the relative balance between supply and demand for hotel rooms (see Exhibit 3), between 2011 and 2014, demand outpaced supply. During 2015, demand grew 0.4 per cent to 244,424 room nights, while supply advanced 1.3 per cent to 384,315 rooms. Calculations for lodging demand throughout 2015 (see Exhibit 4 on p.12) reveal revenues from 89 million room nights totalled $12.8 billion (not including food, beverage and incidental revenues) — a healthy 4.9 per cent increase from 2014.
STRATEGIC PREPAREDNESS
Given that it has been eight years since the great recession, it’s finally time for hope, though perhaps not celebration. Hotels are full. Inflationary pressures are virtually non-existent. Domestic tourism is strong as the dollar is a barrier to exit. There has been, and will continue to be, an upsurge in arrivals from the U.S. and other international markets anxious to partake of the Canadian experience. Excess capacity has been soaked up. In some markets, RevPAR growth is in the double digits. The federal government is on side with the industry. A great deal of investment money is looking for a home, though increases in land prices and construction costs will keep a lid on (over) development of new properties. Cap rates are low. Sovereign funds are looking for safe investments and Brexit may drive capital to Canada. Nevertheless, we live in a volatile and disruptive world in which resilience is always a major challenge. It’s not enough to have a digital strategy or a recognizable brand. Both are important, but must be incorporated into overall business strategies that resonate with visitors — brand differentiation is no longer sufficient. Different types of visitors or guests want to be wowed not only by the hotel experience, but by the entire destination experience at all touchpoints executed with precision, otherwise business will flow elsewhere.
Senior executives are reinventing the art of strategic conversation because today people desire jobs that are meaningful. Getting everyone involved in identifying and considering potential threats, disruptions and opportunities over distinct time horizons is the sine qua non for strategic preparedness.
To keep guests and visitors from straying, hoteliers must also commit to, and build the capabilities for, innovation. Small projects — some in collaboration with others within your market— are important ways to test new technologies, market opportunities, business models and emerging talent. In other words, the new normal demands an intense focus on creating and capturing new value in ways that either disrupt the competition or enhance novelty, excitement, trust and loyalty in ways that matter. Flourishing — remaining vital and vibrant — is a constant work-in-progress.
Michael Haywood is president of The Haywood Group, a tourism/hospitality consultancy. He can be reached at [email protected]
Volume 28, Number 6
