An analysis of 2016 and a forecast of 2017 by Austin Hickey, BDO Consulting department.
Early indications would suggest that 2016 was bumper year for Irish tourism, surpassing all previous records. It is anticipated that approximately 10.5 million people will have visited the island of Ireland during 2016, generating overseas tourism revenue of €5.4bn.
Having recently just published our second edition of the BDO Hotels, Restaurants and Bars Report 2016, what is very apparent from our discussions with key players across the industry is that the sector, by and large, has moved from a recovery phase to one of sustained growth. This upturn in performance is being experienced throughout Ireland, giving rise to high levels of operator confidence and expectations for continued strong growth during 2017.
While the tourism sector itself has played a key role in driving this recovery and improving performance, it is clear that a number of external factors have also played their part. There is strong recognition on the part of all operators who we spoke to that the strengthening of the global economy, favorable exchange rates and increased air and sea capacity have all had a very positive impact on tourism performance during 2016. Closer to home, improving consumer confidence and the retention of the reduced VAT rate are also credited as impacting positively on the sector.
With a general sense of positivity and optimism across the sector, is it a case of plain sailing for 2017 or should a somewhat cautionary approach be adopted?
Clearly the greatest and most immediate threat facing the entire hospitality sector is posed by Brexit. With UK visitors accounting for approximately 42% of our overseas visitors, any factors which result in a fall in the number of tourists from this market could have a very serious impact on business performance throughout the entire tourism sector, nationwide.
For the hotel sector, the recent gains that have been made both in hotel occupancy levels and room rates, are likely to be adversely affected by a fall-off in UK visitors. Compounding matters the improvements in Ireland’s international competitiveness which have been achieved and maintained as a result of the industry’s own actions, the reduced VAT rate and favorable exchange rates, could quickly be reversed due to the current volatility in Sterling and currency markets, arising from the Brexit decision. Value for money, remains a key consideration for many of our overseas visitors, in particular the British holidaymaker.
With some evidence to suggest price inflation across the entire hospitality sector, and notwithstanding the fact that Ireland still remains relatively competitive within an international context, one of the key challenges for the sector during 2017 will be to maintain a level of constraint when it comes to pricing and price increases.
One of the most effective ways to offset the adverse effects of a price increase is to ensure that our value proposition remains high. In this regard, it is somewhat comforting to see the high levels of capital investment taking place in hotels, restaurants and bars throughout Ireland. According to research carried out by the Irish Hotels Federation 89% of their members plan to invest in refurbishment and capital expenditure over the next 12 months.
Hotel capacity remains an issue, particularly in the Dublin market, where it is estimated that our capital city requires as a many as 5,000 new bedrooms to meet increasing demand. There is evidence to demonstrate that the current shortfall is limiting the potential to increase international market share across key market segments (coach tour, conference and incentive business) limiting the potential for tourism growth in the longer term and threaten the city’s competitiveness as a visitor destination.
While shortfalls in supply exist and demand remains high it is somewhat inevitable that hotel room rates will continue to rise, a welcome trend for hotel operators and investors alike, which in turn is likely to contribute to increasing levels of hotel transaction activity during 2017.
Fast-tracking the planning process for hotels and permitting higher density hotel developments are possible solutions to address short-falls in hotel capacity in the short to medium term.
Recipe for Success
The restaurant sector has also enjoyed strong performance throughout 2016, both in terms of the domestic and overseas visitor market. Over half of restaurants surveyed by Fáilte Ireland reported an increase in the number of tables taken up by tourists in 2016 compared to the corresponding period in 2015.
Skills and staff shortages remain an issue for the industry, while the increasing regulatory burden shows no signs of abating. Early evidence from the restaurant sector would point to a fall in spending by British visitors post Brexit, with this fall more pronounced in border counties. Despite this, optimism in the sector remains high. The success of the restaurant industry and key stakeholders in promoting Ireland as a destination for food lovers will undoubtedly contribute to the continued growth of this sector.
Maintaining the Momentum
Ireland’s tourism sector has achieved unprecedented growth during 2016 and the outlook for 2017 is positive. However, the uncertainty created as a result of Brexit poses a number of immediate issues and challenges for the hotel and restaurant sector which need to be addressed.
There would appear to be a distinct lack of strategic planning taking place on the part of many operators to examine and consider the likely implications of Brexit on their business. Now is the time for all business owners to take stock and to consider both the opportunities and threats facing their business as a result of Brexit. For some businesses drastic action may not be required, however, for others it may require fundamental changes in terms of how they manage and operate their business.
The Céad Míle Fáilte has been synonymous with Ireland’s tourist offering. Fáilte Ireland’s most recent Visitor Attitude Survey 2015 identifies that holidaymakers consider friendly, hospitable people to be the most important factor when choosing Ireland as a holiday destination. This is important for all of our source markets with more than nine out of ten claiming this is a key influencing factor. The prevalence of skills shortages and difficulties recruiting and retaining staff remain a key issue for the industry. Long-term policy measures must be introduced which can address this issue as a priority.
The introduction of the 9% tourism VAT rate has proved very effective at stimulating growth and activity in the tourism and hospitality sector and signaled the government’s commitment to the sector. The messages from government at the time of its introduction and in more recent times have been unequivocal – the 9% VAT rate will be retained for “as long as prices remain competitive”.
Perhaps the greatest challenge to the hotel and restaurant sector in 2017, is that which it has the greatest control over - to maintain a level of constraint. Any potential fall in visitors from the UK market can be mitigated by ensuring that Ireland’s value proposition remains high in this market, while the government is unlikely to adjust the 9% VAT rate for as long as the sector retains its competitiveness.
Assuming no external shocks and the adoption of the above, then we would expect continued growth during 2017.