This is an interesting time in our industry. On the one hand, there are unprecedented amounts of money available for investment in this industry. On the other hand, the operations side of the industry is struggling to tread water in terms of maintaining operating margins and levels of profitability. In fact, bottom lines are still below 2000 levels of profitability and in our Outlook for the Industry, we are not projecting the industry to get back to those levels until 2008. Overall values have not changed dramatically in the past five years, however, bottom lines have shrunk and capitalization rates have had to come down and consequently so have return expectations.
Our conclusion is that we as an industry have been going sideways for the past five years. The obvious question, or at least a question might be, “Why?”
The Conference Board of Canada states that a significant malaise affecting the Canadian economy in general is a “lack of productivity”. Productivity is generally defined as “the amount of wealth generated by hour of labour worked.” According to the Fraser Institute, productivity growth has been flat this decade and approximately 1.5% annually over the past decade, ranking Canada 18th out of 24 industrialized countries. We would submit that the lodging industry in this country might be a good case study.
The Industry generated a bottom line of $11,100 per available room after property taxes, insurance, management/franchise fees and reserve for asset replacement in 2000. In 2005, this amount was at $9,400 and will not get back to 2000 levels until 2008. The impact of events such as 9/11 and SARS certainly have had an impact. Many like to point to the rapid escalation of the Canadian dollar compared to the US counterpart. All of the above and many other reasons are to blame. However, the geopolitical events have come and gone and we can’t move our hotels to low wage jurisdictions overseas, so we had better learn to cope. Nationally, supply growth has been less than 2.0% per annum from 2000 to 2005. This is not a supply issue.
Simply put, our expenses have been growing faster than our revenues. The industry has been trying to save its way into prosperity for over a decade. There is little room left on that avenue.
The answer must lie in better revenues to overcome the advance on the cost side. On the volume side, the corporate segment has been strong and in fact has carried the industry over the past five years. The leisure sector has been declining, and in particular US overnight leisure has been declining since 2001 and continues thus far in 2006 as per Statistics Canada cross border data. The good news is that overseas inbound travel has been growing strongly. Regardless, the US is our largest trading partner and our largest market. We need to reverse the trend of the past few years. We cannot afford to compete as a “value” destination, as we did when the dollar was 63 cents versus the greenback.
Research in the United States would suggest that Americans who have travelled to Canada recognize our country as a “Quality” destination. The problem may be that we are not getting our message (assuming it is the correct message) to enough people south of the border. If we are going to have a meaningful National Tourism Marketing budget for the CTC, lets get a meaningful budget. We think that $500 million focused on the US market would help reverse the decline in US visitors up from the roughly $25 million that CTC currently has for the US market. We would also argue that this would be a good investment on behalf of the Canadian population.
On the average rate side of the equation, we as an industry, persist in giving away our properties. There is a cost to put the facilities in place and to maintain them. There is value in the assets themselves and in the services the industry provides. Yet, we have difficulty in asking for a price that we require, to make economic sense out of the capital investment.
We often hear that Canadians are cheap and will not pay the rates the industry asks for. It is hard to believe that the only place Canadians travel to outside of Canada is cheap, all-inclusive destinations in the Caribbean and Mexico. Canadians may complain, but they will pay. They certainly do when they travel overseas.
In this country, we have trained the consumer to believe that we are cheap/inexpensive and that we will roll over on price if they complain. We need to train the consumer that you need to pay for quality and service. However, before we can do that we need to train staff that what they are selling has value and what that value is. Before we can train the staff we need to believe it ourselves.
David Larone, Director
PKF Consulting
