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Australia : Hotel supply key to sustainability

Despite total tourist consumption contracting by 3.5% (real terms) in 2009, which is the largest fall since 3.9% in 2003 associated with SARS and the war in Iraq, Australia’s tourism industry managed to remain one of the most resilient. Now, as indicators begin to reveal improvements, an increase in hotel supply has been highlighted as a primary solution for making Australia more competitive and boosting demand. Population: 22 million Growth of GNP in 2009: -0.5% Hotel supply *: 6,124 hotels / 243 385 rooms Hotel industry results for 2009 (source Australian Bureau of Statistics) Occupancy Rate: 61.3% (-2.0 pts) Total revenue: $7.95 billion (8.15 in 2008) Conversion: 100 AUS$ = 70 euros Tourism Statistics 2009* Arrivals: 5.600,000 (stable) Nights: 54,000,000 (-2%) Primary international clientele-arrivals 2009 * New Zealand: 1,100,000 United Kingdom: 664,000 United States: 480,000 China: 366,000 Japan: 355,000

Australia proved to be one of the best performers in the international tou­rism market in 2009, despite the diffi­cult conditions in key source markets, with vi­sitors remaining stable. “This result is testament to the hard work of our industry and the resilience of the tourism sector, which is often affected by external shocks but conti­nues to bounce back relatively quickly,” stated Managing Director, Tourism Australia, Andrew McEvoy. “Despite the headwind of the Global Financial Crisis and the outbreak of the H1N1 virus, Australian tourism ma­naged to break even on international tourist numbers, defying the global downturn last year. These results show practical plans to les­sen the impact of global events on travel to Australia last year have worked to a point,” added McEvoy.Strong tourism resultsAccording to Tourism Australia, 5.6 million arrivals were recorded in 2009, unchanged re­lative to 2008. Even after a slight decrease, Europe remains the largest source region, fol­lowed by Northeast Asia. In terms of feeder markets, neighbour New Zealand is yet again number one, with over 1.1 million arrivals. The UK is second with almost 664,000, followed by the US (almost 480,000), China (over 366,000) and then Japan (over 355,000).Good growth in 2009 came from Malaysia, with a 24% increase over 2008, Indonesia at 15%, France 9%, Belgium 7% and the US 6%. Meanwhile Japan, Korea and Spain all re­corded significant decreases. The UK conti­nues to be Australia’s most valuable inbound tourism market, accounting for around 14% of Total Inbound Economic Value (TIEV), followed by China (10%), New Zealand (8%), the US (8%), and Japan (6%).Almost half of all visitors travelled to Australia for a holiday, while a further quarter visited friends or relatives. Less than 15% travelled for business or MICE-related. Recent figures for early 2010 however show business arrivals re­cording the strongest growth (up 16.2% in January) reaffirming global business confi­dence. Over the forecast period 2008 to 2018, 4% average annual growth in international ar­rivals is expected; 8.2 million visitors by 2018. The domestic market is forecast to remain flat over the forecast period.TIEV is forecast to increase at an annual ave­rage rate of 3.8%, reaching $35.9 billion in 2018, while domestic economic value should grow at an annual average rate of 0.7%, reaching $70.6 billion.Domestic market must improveDomestic tourism has not been so optimistic, but rather reserved. Although growth in popu­lation has allowed total trips to increase, albeit marginally, there have been falls in average number of trips per person, nights per person and nights per trip.Domestic tourism’s share of household consumption has declined, while spending on rival goods and services (including outbound tourism) has increased. This is quite concer­ning, as domestic tourism accounts for a signi­ficant share (75% to 80%) of the country’s tourism industry.In a year when the global economy contracted for the first time since World War II, it is no surprise that domestic tourism also suffered – overnight trips were down 7%, nights down 6% and business travel was most affected with a 9% decline in 2009 compared with 2008.Hence why, as part of the economic stimulus, the Australian Government invested more than $500 million in small business incentives and support to help the 93% of tourism busi­nesses in this category. “Domestic tourism is the bread and butter of the industry and Australians showed their support for local bu­sinesses by taking day trips and staying in chea­per accommodation,” said Australia’s Minister for Tourism, Minister Ferguson. “More than 111 businesses invested in the Tourism Australia “No Leave No Life” domestic mar­keting campaign to encourage Australians to use their 123 million days of accrued annual leave worth $33 billion and have a holiday at home.”According to Ferguson, tourism businesses were also smarter in managing their workforce, reducing costs by switching part of their work­force from full-time to part-time, resulting in an overall increase of 36,000 tourism jobs, re­taining their human capital through the down­turn for when the inevitable economic reco­very occurs. “The Australian Government’s action in stimulating the economy in 2009 as­sisted in counteracting the most extreme ef­fects of the financial crunch, injecting some liquidity into the economy that assisted in boosting leisure tourism,” CEO, Australian Hotels Association, Des Crowe told HTR. “There was a fall in business travel, meetings and conferences, but the government’s stimu­lus package assisted to a certain extent in main­taining some level of domestic leisure tourism. The hotel industry, through adapting innovati­vely to the extreme conditions, has therefore been able on the whole to maintain sustainable businesses, which sees them in good stead to capitalise on an expected upturn in 2010,” Crowe added.Lack in hotel supplyAlthough Australia is a mature hotel market, international chain hotel penetration rate is ra­ther modest. This is expected to gradually change however, as owners move to a more structured management style, with access to wider distribution channels.“It is a mature market and we have a rich blend of traditional city business hotels, boutique ho­tels, lodges, resorts and backpacker hostels. But the biggest factor with the Australian market is that 55%-60% of the hotel market is still inde­pendently owned and operated. This is why it is so fertile ground for a group such as Accor with its franchising and management expe­rience,” said Vice President, Accor Australia Simon McGrath.“Currently, we reflect a strong ‘asset right’ stra­tegy that sees our network almost evenly split between owned, managed and franchised ho­tels, but in recent years the growth has been principally via management and franchise contracts. For instance, last year we added 12 franchised hotels and with distribution and branding being such a key focus in these tough, competitive times, owners are realising that while they may want to keep their interest in their property they simply cannot reach their potential audience without the support of a group such as Accor.”“Room rates currently do not justify many new built hotels, so the likelihood is that the actual room stock will grow slowly and groups such as Accor will grow through new management and franchise contracts,” added McGrath.According to latest available data from Australian Bureau of Statistics (ABS), by year’s end September 2009, there were 6,124 hotel, motel and serviced apartment establishments (with 5 or more rooms), totalling 243,485 rooms; 235,320 at September 2008, and 232,377 in 2006. The three most popular states for international and domestic tourism make-up the bulk of the country’s accommodation supply. New South Wales, followed by Victoria and then Queensland, which also experienced the largest growth. Western Australia has also seen growth, as local government heavily en­courages new developments.Overall however, supply remains relatively low considering demand potential. In Western Australia for example, capital city Perth has seen just over 600 rooms injected into its bu­siness district over the last five years. According to ABS, this has translated to a 3% increase in rooms available over the period, while demand increased 16%.Cost of investment is the major issue, namely high land, construction and labour prices in relation to a rather low achievable ADR when compared to other major cities around the world. This poses a major challenge for deve­lopers seeking financial feasibility. Thus, the interim solution has been in lower costing in­vestments, such as budget and midscale pro­perties, or larger mixed-use developments where multiple revenue streams can be pur­sued, i.e. residential, retail and commercial. “There is generally less pure hotel develop­ments due to high development costs and ave­rage or below average ADR on a global scale,” verifies Managing Director, Wyndham Vacation Resorts Asia Pacific, Barry Robinson. “Wyndham is focusing its development on ex­panding the Wyndham Hotel group of brands in Australia through franchise and manage­ment agreements and developments to service both the hotel market and feed the vacation ownership pipeline. The company is focused on securing hotels and resorts in gateway cities and key tourist destinations. One of the unique advantages of Wyndham is to develop and/or operate mixed-use properties comprising both hotel inventory and vacation ownership apart­ments, which typically run with higher occu­pancy.”No doubt the recent downturn created greater barriers for financing new projects. “Over the past 12 months we saw most hotel develop­ment activities pause, as the wave of the global financial crisis washed over owners, banks and the market. Constellation already had new ho­tel products under construction, and brought these properties on line during this period,” remarked Managing Director Constellation Hotels, Jonathan Wooller.“The growth we are seeking is where business activity is growing most. This tends to be in key city, metropolitan locations. We track the movement and development of growth indus­tries, and situate our hotels in areas that service these industries and companies. These loca­tions currently align with resource regions,” added Wooller.Growth in new accommodation supply is ex­pected to remain rather low over the next year or so, keeping room prices high. This may dampen demand as consumers substitute cheaper options like staying with friends or re­latives, a holiday outside Australia or no holi­day at all. The strong growth in inbound tou­rism is exacerbating the issue.“The Australian market is relatively mature in terms of hotel categories however is in fact in need of ‘better’ products in order to compete effectively as a leisure and corporate destina­tion in the Asia Pacific region,” said Founder & CEO, Eight Hotels Australia, Paul Fischmann.“This can only occur with a concerted effort between hotel owners operators, tourism bo­dies, government and banks. A stronger em­phasis on the importance of hospitality as an industry for Australia is required in order for real growth to occur. The lack of new hotel supply in most major cities should see a room rate and profitability drive which should enable reinvestment in product and new develop­ments in the future.”Stable hotel performancesAs per ABS data, there were just over 54 mil­lion room nights registered in 2009 (hotel, mo­tels and serviced apartment establishments with 5 or more rooms), a slight decrease com­pared to 2008. Average occupancy rate stood at 61.3%, two percentage points less than the previous year, while takings reached over $7.95 billion, again a slight drop over the $8.15 billion at years end September 2008.“2009 was a volatile year for the Australian ho­tel market in general. We found that our occu­pancy and ADR significantly and speedily de­clined from record levels the year earlier in mid April 2009 and this lasted until mid September 2009. We noted very good sales pick-up occur­ring in early September 2009 and this resulted in some of the best trading we have expe­rienced through October 2009-March 2010. The effect was that RevPAR across the year remained steady and in some cases slightly in­creased due to the high occupancy in the early and late part of the year,” explains Fischmann.According to Fischmann, expectation over the next twelve months is that normality should return to the market, together with a slight in­crease in RevPAR. “We believe that the lack of new supply entering the market will continue to push room rates higher. However, the case in Melbourne may be slightly delayed in absor­bing some new stock in that market,” he said.Another obvious trend was that guest down­graded categories in order to cut back on ex­penses. Since international chains and larger groups are a lot more diversified in product offering, they were able to absorb a dramatic change in guest purchasing behaviour, namely with their concentration in mid and economy sectors. According to McGrath, performance would have been even better if the Australian dollar did not rise so strongly against major curren­cies such as the pound, euro and US dollar – working against inbound travel while stimula­ting outbound travel.“From mid-2008 the biggest shift was in cor­porate and MICE travel. The market dried up dramatically, especially the big corporate com­panies. Sometimes complete freezes were put on travel, and all but the most critical confe­rences were postponed or cancelled. That really continued until the final quarter of 2009, when companies really started pushing reve­nue-based conferences and sales trips. 2010 has seen some destinations push towards 2008 levels, but in other areas the recovery is still patchy.” “Interestingly, throughout this time, small bu­siness continued to travel, possibly because there were such attractive air and hotel deals, and possibly because they saw opportunities of growing market share in the downturn. That was one of the reasons why we were in­sulated from the downturn. Small business prefers mid-market or economy brands like Novotel, Mercure and Ibis, and it really helped us fill out the troughs that other companies experienced, especially those heavily exposed to the top end of the sector,” he added.Government prioritising growthTourism is fundamental to Australia’s eco­nomy. In 2007-08, it contributed over $40 billion to GDP, and directly employed around half a million people. With export earnings exceeding $23 billion, tourism is Australia’s largest services export. Total value added by Australia’s accommodation businesses alone is almost $4.8 billion, or 0.5% of GDP.Recognising the sector’s importance and value, Government has elevated the tourism portfo­lio to the Cabinet, ensuring it receives the reco­gnition it deserves. Indeed, government divi­sion, such as Tourism Australia, Department of Resources, Energy and Tourism, and Austrade are all extremely proactive in boos­ting growth and supporting new develop­ments. “The Federal Government has a tou­rism strategy in place which is examining investment and regulatory reform to remove impediments to investment and increase confi­dence and certainty for investors; State go­vernments are also looking at how to improve the investment environment for hotels, for example, in Sydney, New South Wales, Australia’s key tourism and business gateway, the government has just concluded a taskforce which looked at the planning and investment environment for the tourism and accommoda­tion sector,” continued Crowe. “This taskforce will make recommendations to the govern­ment as to how it can develop a strategic ap­proach to tourism supply in NSW and to iden­tify opportunities to attract new tourism investment and development for Sydney and NSW, including new hotel investment.”What’s seems to be for certain, is that the suc­cess of Australia’s tourism industry very much depends upon action on both supply and de­mand. New demand cannot be created if the country does not have the productive capacity to sustain it. Supply-side issues must be given a heightened importance in shaping the future of tourism to ensure Australia’s competitivenessHotel development: hotel groups are on the moveWith a clearly limited supply, but also a risky global invest­ment environment, new hotel developments in Australia should be few and selected in the short term. MKG spoke to leading hoteliers to see where most growth should occur.Paul Fischmann, Founder & CEO, Eight Hotels Australia"Boutique hotels in the value sector are where most growth and promise for the future lies. Individuality, and unique pro­perties backed up by centrali­sed and professional manage­ment services is predominantly what all market segments are leaning towards in terms of travel experience desired in both leisure and corporate. All major capital cities have room for supply of good product and we expect that Sydney, Perth and Brisbane will lead the development pipeline once the market recovers and lenders reduce barriers for in­vestment."Jonathan Wooler, Managing Director, Constellation Hotels Australia"I see most growth in the mid market segment, typically less affected in hard times, as people will drop down to that price bracket and people who are already comfortable with that sector will stay there. Development potential is evi­dent at the top end of the market in key cities such as Sydney and Brisbane as there has been limited development during the past few years. In regional tourism locations there are development oppor­tunities for global companies such as Wyndham as interna­tional brands are under-repre­sented in many locations."Simon McGrath, Vice President, Accor Australia"The only new-built develop­ments during much of the 2000s were in commercial and industrial areas outside city centres. This was particularly the case in Sydney and Melbourne, and even in Brisbane our only recent ma­jor hotel is in the rapidly growing airport district. Companies have tended to move out from high-rent city locations to industrial parks, which is why we opened new hotels in such areas as Sydney Olympic Park, Liverpool and Melbourne’s Caroline Springs. It’s building for future deve­lopment with business very much the focus."Barry Robinson, Managing Director, Wyndham Vacation Resorts Asia Pacific"I believe that the limited ser­vice apartment hotel concept will have the most growth, as these projects offer the highest return on capital, and are the easiest to finance. The Australian Hotel industry is largely dictated by the key cost elements. The labour cost alone is approximately 50% or all operating expenses in ho­tels and resorts." Tune Hotels: A new way to Budget in AustraliaNew concept Tune Hotels is rapidly changing the entire meaning of budget. With major expansion plans in Southeast Asia, India and recently the UK, Tune is also turning towards the Australian market. CEO Mark Lankester talks to HTR Magazine about the brand’s concept..By 2013, Tune Hotels Group should have 64 hotels in ope­rations.With AirAsia X currently flying to the Gold Coast, Melbourne and Perth, these cities would naturally be the initial targeted locations in Australia. However, we call them Tune Hotels, and not AirAsia Hotels, for good rea­son – it gives us an option of growing beyond AirAsia. Sydney is a destination with obvious appeal that is also on the radar for Australia.The Tune concept has already proven to resonate with a large segment of mo­dern travellers - price-conscious yet still demanding of clean, quality essentials in secure and stylish surroun­dings. Our rooms in our Malaysian and Balinese hotels, priced from the equivalent of less than AU$10 per night for a quality bed with ensuite hot Power Shower facilities; are centrally located, with full CCTV monitored security, and front glass doors which auto-lock by midnight and are accessible only by smart keys. Our guests comprise both va­lue-conscious leisure and cor­porate travellers.In addition, with Tune pay-as-you-use system of add-ons for air-conditioning, laundered towels and other energy-consuming amenities, we make the options that im­pact the environment available for a small fee, and should guests choose not to take these options, they immedia­tely save money as well as the earth’s resources. This facili­tates and directly incentivises guests to subscribe to less wasteful, more conscientious lifestyles. Consequently, the brand is gaining cachet among a wider audience of smart consumers for whom purcha­sing decisions are increasingly influenced by environmental concerns.In terms of development, it generally takes up to 12 months from buying land right up to building a hotel. Currently we accept bookings for nine hotels – seven in Malaysia and two in Bali. We would have had twice that number if not for the recent financial crisis and credit crunch. We will no doubt have to gear up, but we will also leverage on existing properties where we will be operating the hotels in franchisee partnerships with the property owners.”

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