Demographic Changes: A Catalyst for New Models in the Global Tourism IndustryPublished: July 14, 2010 in Knowledge@Wharton
For years, the tourism industry grew almost effortlessly, and it continues to be a leading economic sector, contributing 10% to global GDP. However, companies have discovered that they can no longer guarantee that customers will come knocking on their doors; they must go out and find them. Indeed, tough economic conditions have awakened the industry to the fact that it needs to anticipate customers' needs, reinvent its business model, and refocus on providing services to today's more informed and demanding customers -- all of whom want each trip to provide an authentic travel experience.
"We want to forget 2009, which was terrible, and realize that in coming years we'll be facing a decline in average revenue per available [hotel] room. Yet we have to be aware that tourism has an enormous future," stated Jean-Claude Baumgarten, president and chief executive of the World Travel & Tourism Council, an organization that promotes global travel and tourism. Baumgarten made his comments as part of a panel discussion during the Wharton Global Alumni Forum in Madrid. There is good reason for his outlook given that industry experts anticipate the arrival of two billion new middle-class consumers in the coming years. Such an influx means the tourism sector must "modernize and prepare for this challenge, which will require cooperation between the public sector and private initiative," Baumgarten said during the discussion, which was moderated by Wharton marketing professor Jehoshua Eliashberg.
Panelist Sebastián Escarrer, vice-president of Sol Meliá, the Spanish hotel chain, also mentioned demographic factors. "Changes in the population and the way it is aging are transforming the tourism industry," he stated. For example, Spanish society has evolved into two sorts of customers: those who have a lot of money but little time to travel, and those who have less money but more time to travel. The right approach to reach both of these market niches is product segmentation.
Sol Meliá is working with various tour operators to prepare specific products that target the older segment of travelers -- couples in their fifties and sixties, widows and others. "In addition to demographic factors, travelers have changing needs. These days, they don't just want to relax on a beach; they want more value and an educational experience. The component of individualism is important, and expectations are completely different for an immigrant, for example, than for a family whose structure is no longer traditional," said Escarrer
Taleb Rifai, secretary general of the World Tourism Organization in Cairo, emphasized the enormous growth in the tourism industry and its impact. "Until the mid-1960s, most people traveled within a radius of only 100 kilometers, while nowadays, with the transformation of infrastructures and transportation, companies are offering travelers various means for getting around." Rifai described tourism as a "powerful" industry: "It is amazing how quickly it has recovered from the worst crisis that has faced the sector in the past 16 years." The volume of international tourist traffic dropped by 4% in 2008 and by 6% in 2009, "but we are beginning to glimpse signs of recovery, with an upturn of 7% this year." The reason for that, Rifai said, is that "travel is [now considered] part of the [ordinary] basket of [consumer] purchases. It's not just in developed countries; it is part of the global culture."
Jeanine Pires, president of Embratur, the Brazilian government agency responsible for promoting travel in international markets, noted that in Brazil, 24 million people rose from the ranks of the poor between 2003 and 2008. Today, these people are part of the middle class and for them, travel is one of their priorities. In Brazil -- which recently only attracted tourists rather than produced them -- there is now a dichotomy between those who have greater buying power and are quite accustomed to traveling, and those who are using travel services for the first time.
According to the data, four million Brazilians traveled abroad in 2009. Of these, 32% went to Europe, 22% to the United States and the rest to Latin America. Along with India, Russia and China (the other BRIC nations), Brazil is one of the emerging countries that is attracting the most attention in the global tourism industry. Indeed, Escarrer noted that "millions of consumers [of travel services] will emerge from those countries, which means an enormous opportunity. But you have to know how to capture these markets and adapt to their new needs and requirements."
Negative Effects of Fragmentation
Tourists, the so-called "manna" of the industry, will not be in scarce supply in coming years. But while the future seems secure, the industry has to meet its obligations and prepare to respond to these new consumers. One of the challenges yet to be resolved is concentration in the sector. "The tourism industry is very fragmented," said Antonio Vázquez Romero, president and chief executive of Iberia, the flagship Spanish air carrier. "There are only a few players who have a significant market share, and the airlines are no exception to that."
IATA, the international air transportation organization, includes some 400 airlines, while the International Civil Aviation Organization (OACI) has 1,460 members. Within this context of fragmentation, demographic changes impose the need for establishing different rules in different markets as well as a policy of "open skies for the interchange of capital among these companies," Vázquez noted. "There needs to be consolidation of the market, and we have to define one playing field for everyone because the rules are different from one country to another."
Technology will have a fundamental role in this process of change, said Baumgartner, both for public administrators and the private sector. Innovation also will be critical in defining the future of the sector, he added. "You have to think of specific things [to offer consumers], such as increased flexibility, for example, so that a customer could confirm his reservation via a message on his wireless phone or people could get their visas automatically when they reserve a ticket." Escarrer agreed, adding, "Productivity will continue to increase in this world thanks to innovation. Currently, two out of every three consumers reserve their trips over the Internet, and the question is to see how each company is adapting to this new reality."
Governments must also change their view of tourism. "The real challenge is political, since administrations don't take the tourism sector very seriously," said Rifai. "Perhaps it's a result of the industry's rapid growth rate," suggesting that governments may not be "aware of the number of jobs that the sector generates, or it is because tourism is linked to recreation and entertainment. Yes, this industry is fragmented, but the worst thing is that people don't talk about the sector or see it as one whole, except for those groups that are within the sector itself. We have to make this perceptual change because collaboration with the public sector is indispensable, and there are many countries whose incomes depend entirely on tourism." Pires agreed, noting that upcoming major sports events, such as the World Cup of 2014 and the Olympics in 2016, are an opportunity for Brazil to leverage the importance of tourism as an emerging sector.
According to Vázquez, the political challenge with regards to airlines comes because the industry is directly tied to security, customer rights and the environment. "Our connection with the customer is an emotional one; either there is love or there is hatred [between us].... It is the airlines that have the actual relationship with consumers, not the airport administrators. But it is wrong that only consumers are protected, and that airlines have to compensate consumers for [any harm caused by] conditions that are beyond the airlines' control, such as snow" and the resulting flight delays or cancellations.
In calling for an end to excessive decentralization -- which he said hurts the sector -- Vázquez noted that "there isn't any centralization of functions. There is no specific person held responsible for the entire tourism industry, and this makes negotiations a lot harder." He repeated his call for the consolidation of the sector. "This is not a solution but it is a part of one. In a merger, there are some things that you have to solve by yourself, and other things that are solved from outside, but this much is clear: Concentration would help establish the foundations for making the sector profitable in the future."
Coming to the Rescue of Spain
In the case of Spain, what needs to be fixed in the tourism sector? According to Escarrer, the problems are quite widespread. "We need a public-private partnership and, in addition, decentralization of the sorts of skills related to tourism." Currently, those skills are in the hands of the "autonomous communities" -- the territorial divisions into which Spain is divided -- and that presents an additional problem. "The funding available for helping us is not a negligible amount, but what we have asked from Exceltur [an organization headed by Escarrer, which brings together 26 big companies in the sector] isn't money but leadership and coordination among the various ministries, and between the central government and the 'autonomous communities,'" he added.
Vázquez argued that excess infrastructure is another problem worth addressing. "We have gotten loans and money too easily, and now we have more kilometers of railroad lines and airports than many countries in the world, but we need a lot of money to maintain them. The authorities know that the problem exists but the question is how to solve it." Unfortunately in Spain, he added, "there isn't any concentration of responsibility in the tourism sector, since it is divided into various portfolios," including the ministries of industry, development and environment.