December
2004 - The latest results from the South African edition of the HotelBenchmark
Survey by Deloitte lead us to question whether local hoteliers can maintain
the recent growth in average room rates. Following a fall during 2001 and
2002 average room rates bounced back in 2003. This growth has continued
into 2004; however recent occupancy declines indicate that some of the
traditional international source markets might be deterred by the higher
price of accommodation.
To set the performance of South Africa's hotel industry into context,
two key issues need to be addressed. Firstly, the relative performance
of average room rates compared to other international destinations. Secondly,
the volatility of the South African Rand against the currencies of its
main source markets the UK, Europe and the USA.
After demand from the domestic market and from other African countries,
the UK represents South Africa's largest overseas inbound source market,
with 456,000 visitors travelling to the country in 2003. The number of
UK arrivals is around 40% greater than the number of visitors from Germany
(the second largest overseas source market) and over 60% larger than the
number of visitors from the USA. Given the exchange rate fluctuations between
the Rand and these countries' currencies some travellers have been left
with the unreasonable impression that South African hotels, especially
in the 5 star market, are becoming too expensive. In this article we put
South Africa's hotel performance into perspective.
Does South Africa continue to offer value for money?
During 2001 and 2002, average room rates in South African hotels fell
significantly in US dollar terms as the Rand weakened. During this time
word spread quickly of the country's considerable value for money. While
many international destinations suffered a decline in visitor arrivals
post the events of 9/11 and the global economic slow down, South Africa
was one of the few markets to record positive growth in tourist numbers.
In 2003 international visitor arrivals (excluding other African countries)
grew by 4.2%. Much of this growth was driven by a 5.3% increase in visitor
arrivals from Europe. Growing demand for accommodation helped hoteliers
increase average room rates, while a strengthening Rand improved prices
in US dollars. Recovering some of the rate loss incurred during 2001 and
2002.
Despite ongoing average room rate growth in almost all South African
hotel markets, accommodation remains competitively priced compared to other
international destinations. The following graph compares the distance travelled
from South Africa's largest source market, the UK, against the average
room rate achieved in key competitive long and short haul travel destinations.
Distance from UK vs. international destination's
average room rates
Year-to-October 2004
Source: HotelBenchmark Survey by Deloitte
Clearly, South Africa's most popular visited cities Cape Town, Durban
and Johannesburg, are notably less expensive than the long haul destinations
of Sydney, Hong Kong and Tokyo. Moreover, the average room rate achieved
in South African hotels is less than half that commanded in the key European
destinations of Paris and Rome. In terms of long haul travel, South Africa
offers a competitive alternative to the South American destinations of
Sao Paulo and Buenos Aires.
Despite South Africa's current price competitive position, occupancy
levels are falling. Moving forward, concern exists that declining occupancies
will threaten to place unwarranted pressure on average room rates. During
the first six months of 2004, South African Tourism reported the number
of international visitors from Europe has fallen by 2.5%. Given the relative
significance of the European market to South Africa, this decline has more
than likely, contributed to falls in accommodation demand.
What caused an increase in South Africa's hotel room rates?
The South African Rand has strengthened considerably against the currencies
of its major source markets over the past two years. The annualised exchange
rates of the Rand relative to the UK£, Euro and US$ is displayed
in the following table.
Currency exchange - US$ vs. Rand, Euro vs.
Rand and UK£ vs. Rand
2000 to year-to-October 2004
|
US$ vs Rand
|
Euro vs Rand
|
UK£ vs Rand
|
2000 |
6.98 |
6.41 |
10.54 |
2001 |
8.75 |
7.80 |
12.60 |
2002 |
10.34 |
9.79 |
15.56 |
2003 |
7.41 |
8.44 |
12.17 |
2004 |
6.53 |
8.02 |
11.87 |
Source: Financial Times
As the table clearly illustrates, each of the major inbound source markets
to South Africa are currently getting less Rand for their money. This has
begun to have an adverse effect on hotel performance as accommodation is
commonly perceived to be more expensive. For example, in 2001 the average
room rate achieved by hotels in South Africa was US$44 per room. Today
the same accommodation costs US$77, an increase of over 75%. In Rand terms
however the average room rate has increased by less than 30%. While accommodation
appears more expensive to South Africa's key inbound source markets, our
earlier global rate comparison demonstrates the country offers value for
money.
The following graph compares currency movements of the US dollar to
the Rand since January 2000 against average room rates (in US$). It can
be seen that as the US dollar appreciated against the Rand during 2001
and 2002 average room rates fell whilst the converse occurred in 2003 and
2004. Consequently occupancy started to fall as average room rates increased
and have remained in decline for virtually every month since February 2003.
South Africa's average room rate vs. exchange
rate
Source: HotelBenchmark Survey by Deloitte and Financial
Times
Year-to-date occupancy in all South African hotels has decreased by
1.4%, however, encouragingly average room rates have improved by 5.1% to
reach R499. These results forced revenue per available room (revPAR) to
move ahead by 3.5% in local currency and 20.4% in US dollars.
South Africa's 5 star hotels feel the squeeze
Not all South African hotel categories are performing at the same level.
The latest performance results reveal the country's 5 star hotel market
recorded a 4.1% fall in occupancy to 63.9% during the first ten months
of 2004. This decline, nearly three times the country average, has placed
pressure on average room rates which remain static at R893. It appears
that having spent almost 70% less on 5 star accommodation little over two
years ago, many source markets are reluctant to pay the current room rates
for the same product offering.
It is in Cape Town that 5 star hotel performance has really felt the
pinch. The addition of new supply in the form of the ArabellaSheraton has
resulted in a marked increase in the city's room night availability. Whilst
new accommodation sources in the form of upgraded bed and breakfasts are
also luring away traditional repeat visitors to the Cape. Additionally
a number of European travellers have decided to purchase their own holiday
homes in areas such as Camps Bay, thereby reducing their demand for hotel
accommodation.
Consequently 5 star hotels in Cape Town averaged just 56.4% occupancy
year-to-October 2004. The lowest of all markets tracked by the South African
edition of the HotelBenchmark Survey by Deloitte, this result marked a
fall of 13% against the same period last year. The increasingly competitive
Cape Town market has seen local hoteliers turn to discounting rates in
an attempt to increase market share. Accordingly, in local currency terms,
average room rates in Cape Town's 5 star market plummeted 15.2% to R1,161,
the first negative result in four years. In US dollar terms, average room
rates have stagnated at approximately US$177 potentially signifying a premature
end to the industry's recovery effort.
In local currency terms, the 5 star hotel market has also suffered in
Durban City, albeit not to the same extent recorded in Cape Town. Durban
hotel occupancy has fallen by 5% while rate declined marginally to rest
at R631 year-to-October 2004. Johannesburg's 5 star hotel market recorded
a slight improvement in performance, with average room rates increasing
by 5.6% to R831. The following graph illustrates these results.
South Africa's 5 star market hotel revPAR performance
Year-to-October 2004
Source: HotelBenchmark Survey by Deloitte
The outlook rests on resilience
Moving forward, ongoing discounting within South Africa's 5 star hotel
market threatens to generate a domino effect crushing the strong performing
3 and 4 star sectors. Should demand for hotel accommodation in South Africa
continue to soften in the short term, concern exists that hoteliers will
be distracted, impulsively discounting to try and secure market share.
South African hoteliers are in a strong position to fight to secure
rate integrity and firmly fix their position within the international market.
Particularly due to the optimistic outlook for the country's economic growth,
its re-established currency stability and South Africa's potential to increase
visitor arrivals, particularly from new source markets such as Asia. Despite
this, ongoing fluctuations in hotel prices might confuse prospective travellers
leading them to unreasonably question the value of the country's hotel
product. Accordingly, South Africa faces the risk of losing global market
share should holiday makers turn to alternative long haul locations, such
as South America, as a preferred holiday destination.
Notes: All analysis in Rand and US dollars
The HotelBenchmark Survey contains the largest independent source of
hotel performance data outside of North America and tracks the performance
of over 6,000 hotels and 1.2m rooms every month.
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