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Lisbon, the 20th of November 2018

BlueShift Insight Brief

How to interpret the first signs of tourism slowdown in Portugal – key insights for hotel companies

  1. The first signs of a slowdown in tourism in Portugal are worrying the sector:
  • After 5 years of exceptional growth (2012-17 Overnight stays +45%, Revenues +83%)…
  • …2018 shows the first signs of a slowdown in Overnight stays (-0.5%), although the favorable dynamics of the price factor allow for some growth in Revenues (+6.3%)…
  • Madeira (-3.8%), Center (-3.5%), and Algarve (-1.8%) were the most affected destinations in terms of Overnight stays.
  • Simultaneously, the unprecedented growth in supply for the coming years – a survey conducted in January 2018 by Publituris Hotelaria identified projects for around 140 new hotel units in the 2018-20 triennium. These potential openings correspond to a growth of approximately 16,500 hotel rooms (+16.6%), proportionally stronger in the regions of Algarve (+25.6%), Lisbon (+18.2%), Madeira (+17.6%), and North (+16.2%).
  • This enormous pipeline raises concerns among entrepreneurs about a potential slowdown scenario. Is this growth in supply unsustainable for the sector in a context of lower growth?
  1. It is necessary to better understand what is happening:
  • The statistical information provided by the Portuguese Statistics Board (INE) and the Tourism Board (Turismo de Portugal) does not fully consider the phenomenon of AirBNB-style short term rentals (“Alojamento Local”, or “AL”) since it does not include that format. Statistics may be biased due to a mix change effect that benefits these new formats, following international consumer trends. This becomes particularly evident when comparing the evolution of stays in AL with the evolution of the number of International Passengers Disembarked at Airports, and we observe that the latter variable does not show the same slowdown trend. Where do these tourists stay? Examples:
  • Total Portugal: Foreign Stays -1.4%, International Passengers +7.4%.
  • Lisbon Metropolitan Area: Foreign Stays -0.2%, International Passengers +11.5%.
  • North: Foreign Stays +0.6%, International Passengers +11.6%.
  • There are also several specific phenomena that had an exceptional impact in 2018, worsening the performance of some destinations. Examples:
  • Algarve and Madeira: bankruptcy of 3 airlines at the end of 2017 (Monarch, Air Berlin, Nikki), whose slots are already being taken over by other companies. In Algarve, these 3 airlines represented 10% of air capacity.
  • Center: the visit of the Pope to Fátima in 2017, which led to an exceptional growth of 15.2% in overnight stays, inversely reflected in 2018.
  • There is also the typical “overshooting” price effect in years of a changing cycle. Many rates practiced in 2018 (e.g., tour operation, groups) were set in 2017 when the expectation was another year of strong growth, contributing to aggravating a potential deceleration trend. The contracting done for 2019 should already reflect greater moderation, which will, in itself, help release demand.
  • But there are also factors that may have a more permanent nature. Examples:
  • Reopening of competing resort destinations in the Mediterranean basin: Turkey, Greece, Tunisia, etc. (more relevant impacts on Algarve, Madeira).
  • Impact of Brexit: pound devaluation, entry restrictions in the EU (weight of overnight stays in the UK market in Portugal 16%, Algarve 32%, Madeira 26%).
  • Exhaustion of Humberto Delgado Airport (Lisbon).
  • The aspects mentioned, of incomplete statistical information and the existence of exceptional exogenous effects in 2018, make it particularly difficult to assess, on the one hand, the real amplitude of the slowdown trend felt in the market, and on the other hand, the resilience of this trend for 2019 and the following years. But everything indicates that the structural slowdown will not be as strong as the statistics seem to suggest.
  1. Even a deceleration scenario is not a catastrophe:
  • BlueShift believes that the slowdown is inevitable but normal after an almost doubling of the sector’s revenue since 2012.
  • According to their analysis, the slowdown in demand and the growth in supply do not, by themselves, jeopardize the sector’s profitability. To demonstrate this, BlueShift developed a theoretical study modeling the evolution of demand and hotel supply for the 2018-20 triennium and its direct impact on the profitability of sector companies. Main assumptions:
  • An extreme scenario was considered, where demand stagnates in 2019 and 2020, and despite this change in the context, 75% of the planned new supply materializes on schedule.
  • In this scenario – not considering other factors – the deviation of demand to new units would impact the Occupancy Rate of current units by -6.6% (-4.3 pp), on average.
  • Due to the increased competition in the market, a drop in the Average Price corresponding to 45% of the reduction in the Occupancy Rate was assumed, i.e., -3%. A somewhat extreme scenario that occurred in 2009, in a context of international crisis with falling demand (not just stagnation).
  • The RevPAR – through the accumulation of both effects – would drop by -9.3%.
  • On average, a RevPAR decline of 9.3% would bring the sector’s profitability to levels almost equivalent to 2017 (52.9 vs. 54.8), which was considered an exceptional year.
  • However, the impact is not uniform across regions. Algarve could fall -13.3%, and A.M. Lisbon -10.4%.
  • BlueShift believes that the direct impact of new supply does not pose a significant problem for the sector’s profitability.
  1. The future of the sector is in the hands of entrepreneurs and managers:
  • The impact of the cycle change depends, before and to a large extent, on how companies prepared in years of growth and their ability to adapt to the new context.
  • BlueShift, therefore, relativizes the impact of the expected slowdown, even in a sudden demand slowdown scenario. However, it emphasizes the management capacity of each company as a determining factor in defending profitability in the new context.
  • Based on its experience in managing and consulting for hotels of various profiles, BlueShift highlights four critical success factors:
  1. Product Differentiation: Undifferentiated products are chosen based on location (which is a given) and price, making them highly vulnerable to price pressure in a scenario of lower demand. On the other hand, a hotel with a more differentiated concept has market power and can charge higher prices, even in a crisis scenario.
  2. Revenue Management: The ability to understand the business, forecast demand, and determine the right mix of channels and pricing to optimize revenue and results. When there are no suitable tools and methodologies in this area, the tendency is to focus on ensuring occupancy as early as possible but at the expense of price reduction, which destroys profitability.
  3. Commercial Effectiveness: Unlike a boom period where the hotel gets filled just by having the door open, in a stagnant scenario, competition is more intense, and the pressure on prices is higher. It is essential to diversify markets and channels, for example, avoiding excessive dependence on major tour operators in resort destinations.
  4. Cost Structure: In a cyclical industry, the structure must have the capacity to adjust to the cycle by making a significant portion of costs variable. According to the modeling done by BlueShift, and considering a financially healthy hotel, a 9% reduction in RevPAR, as estimated, would impact results in the same proportion in a company with a highly variable cost structure but could reach 30% in a company with a rigid structure and fixed costs.

None of these factors are instantaneous; they are built with specialized expertise and by investing resources in their planning and implementation. Companies that took advantage of the last five years to build their sustainable competitive factors will be better positioned to defend their profitability in a less favorable scenario. In contrast, companies that did not take advantage of the oxygen of the last five years to invest in updating and optimizing their product and management practices may face increased difficulties.

About BlueShift – Achievers Make the Change

Led by Francisco Nogueira de Sousa and Filipe Santiago, BlueShift – Achievers Make the Change positions itself in the market as a comprehensive and integrated solution for investors and operators in the sector. Organized into “Achievement Centers,” led by specialists with high expertise and competence in each area of the business, such as Operations, Revenue Management, Sales Management, Marketing, or Finance and Control, totaling twelve specialized units, BlueShift’s service portfolio includes integrated or partial management of hotels and restaurants, as well as consulting in all phases of the investment cycle. This ranges from concept development and feasibility studies to commercial, operational, or support services optimization.

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