Growth in Chinese inbound tourism, we are told, is set to take off - which has many investors and developers turning their attention to the tourism sector. But the trick in capitalizing on opportunities is to think strategically, follow the money and ignore the hype. Australian tourism marketing has a remarkable yet striking feature: it focusses significantly on things that tourists can do for free (with the exception of the cost of actually getting there). Walk on the beach at Surfers Paradise? Free. Gaze in wonder at the Daintree rainforest? Free. Selfies with the Sydney Opera House and Harbour Bridge in the background? Free.
OK, that’s pushing the point but the reason for doing so is that unless you can see a cash register or money exchange taking place, there’s little ‘industry’ in these parts of the tourism sector. Following the tourist dollar is the key to identifying opportunities, and that means developing a disciplined approach to distilling from tourism data the numbers that really matter.
A good reason for caution is that the tourism industry in Australia has, to date, been quite volatile. There have been periods of explosive inbound visitor growth accompanied by high levels of development and investment activity, and there have been periods of stagnation in visitor numbers, limited development and poor investment returns, including losses. Exchange rate fluctuations, changes in fuel prices and transport costs, terrorism events and major events (e.g. Sydney Olympics, 2018 Commonwealth Games) are all factors that are largely beyond the control of the industry but which have been highly influential in shaping its fortunes.
However, as the industry begins to mature and grow in professionalism and scale, and with the predicted growth potential from south East Asian, subcontinent and Chinese markets, combined with advances in long haul aviation, there are good reasons to be optimistic for the industry’s medium and long term outlook – provided you follow some rules.
The challenge is to identify which parts of this multifaceted industry offer the greatest opportunity for stable, predictable and positive returns on investment in the medium and longer term.
So how should you go about it?
- Separate the statistical hype from commercial reality. The tourism industry and tourism industry research is heavily influenced by promotional agendas. This has tended to overstate the commercial value of the industry for significant investors. Backpackers for example are of limited commercial value to many major enterprises (except perhaps transport and aviation) as they tend to find accommodation in low cost quarters owned by small or micro businesses, their dining and shopping habits are typically meagre, and they tend to frequent natural attractions that are largely free of charge (national parks, monuments, sightseeing etc.). Likewise, visitors who arrive with the main purpose of visiting friends or relatives have different motivations in terms of travel to, for example, the business traveller or high end leisure traveller. It is essential to ‘set the scene’ for significant investment in the industry by identifying and focussing on those segments of the market that offer opportunities for investment scale and commercial return.
- Analyse and interrogate the forecasts. Tourism forecasts tend to provide only big picture predictions of inbound and domestic travel. MacroPlan often delves behind the headline numbers to identify the composition of forecast travellers with a particular eye on those segments and source markets that offer the greatest commercial opportunity. Who are the ones arriving with the biggest wallets and where will they be spending their money?
- Analyse the mega trends. Global travel and tourism has been largely unaffected by the predicted impact of virtual travel (e.g. skype replacing face to face meetings; online replacing sales conventions; technology reducing the need for physical sightseeing etc.) but technology has been making its presence felt in other ways (the arrival of AirBNB; awareness of and desire for new destinations; rapid obsolescence of existing accommodation or transport infrastructure; impact on traditional sales channels etc.). Then there are improvements to the speed and fuel economy of long haul travel, the rise of an Asian and sub-continent middle class with travel aspirations, rising numbers of affluent retirees in developed nations – all factors which will impact the industry in Australia. What are the most widely agreed scenarios and how will they impact large scale commercial tourism industry ventures in Australia?
- Investigate the commercial performance of major industry assets. Significant investment in the tourism industry has included major accommodation venues or resorts, manufactured attractions (theme parks/zoos), Casinos, convention and entertainment centres and transport hubs (aviation and cruise ship facilities). It is an irony that of several web sites that list ‘Australia’s top 10 tourist attractions’, none of the top 10 include a commercial venture. All (other than the cost of actually getting there) are free. Investors and developers need to focus on commercial opportunities of significant scale and to understand the financial metrics of these businesses. There is more to tourism than building hotels near natural attractions. Understanding where the biggest and most dependable flows of high margin tourism dollars are channelled is one key to strategic investment in the sector.
- Assess the businesses against potential future performance/demand and supply scenarios. Some market sectors may be performing well in the current environment but offer few barriers to entry and may be prone to excess future supply relative to demand. Others have arrangements in place which limit new entrants and which may offer greater certainty of return over time. Be careful to rate the various opportunities in terms of their likely future performance and the extent to which they are insulated from unpredictable supply side changes.
These are just some suggestions but the bottom line is to avoid getting caught up in the inevitable tourism industry hype and to instead think strategically and follow the money. If you are interested in understanding this market in greater detail, please get in touch with your nearest MacroPlan office to find out how.