Tourism Investment: More than a Numbers Game

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Friday, May 27th, 2016
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Attention is turning once again to the potential of rising inbound tourism numbers to create development opportunities in Australia.

As apartment projects begin to dry up, developers looking for ‘the next big thing’ might be lured too easily into tourism without first understanding how to follow the real money and the importance of separating fact from fiction.

One of the more surprising features of our tourism marketing for Australia is that it tends to focus on things that can be done for free.  Apart from the cost of transporting yourself there, many of our more famous draw card activities don’t cost anything. Play in the surf at the Gold Coast? Free. Wander though rain forests in the World Heritage listed Daintree? Free. Selfies with the Sydney Opera House and Harbour Bridge in the background? Free.

I admit this is stretching a point but my reason for doing so is to emphasise that the word ‘industry’ when used for tourism should mean something that employs someone, which usually means an exchange of money.  The money isn’t changing hands on the beach at Surfers Paradise – it’s been exchanged elsewhere. 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.

The reason for being cautious is simply 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. There have also 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 such as the Sydney Olympics and the 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.

Here are some suggestions before you get carried away with the tourism sector’s notable reputation for only ever talking things up:

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 and the like). 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. 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 have been largely unaffected by the predicted impact of virtual travel (e.g. Skype replacing face to face meetings; online conferences replacing sales conventions; technology reducing the need for physical sightseeing and so on). But technology has been making its presence felt in other ways, such as the arrival of AirBNB, the awareness of and desire for new destinations, the rapid obsolescence of existing accommodation or transport infrastructure, the impact on traditional sales channels and so on. Then there are improvements to the speed and fuel economy of long haul travel, the rise of an Asian and subcontinent middle class with travel aspirations, and 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 tourist attractions, none of the top 10 include a commercial venture. All 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 hostels 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.

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