Sri Lanka’s large listed hotel chains have not reached their full earnings potential despite the post-war tourism boom due to online hotel-booking and review sites forcing them to lower margins to compete with smaller hotels on price.
In five years to 2015 total spending by tourists quadrupled to US$3 billion, but listed hotel companies are not matching this growth. During this period, total profits of 36 listed hotel companies grew at half this rate to US$51m. Two of the largest hotel chains, managed by listed conglomerates Aitken Spence and John Keells, have seen revenues increase by less than a third the rate of total tourism spending growth during this period. The industry is struggling with profitability declining eight percent during 2015 from a year earlier.
“We have growth but the yields may not be in the range of what we like to see. Yields are improving but they may not be significant enough,” says Dileep Mudadeniya.
Mudadeniya is Head of Brand Marketing for Cinnamon Hotels and Resorts as well as Vice President of listed conglomerate John Keells Group which manages a chain of five-star hotels under the Cinnamon brand.
National annual hotel occupancy rates have fallen from 77% in 2011 to 74% in 2014, official data shows, despite tourist arrivals doubling during this period and room capacity increasing 24%. The plausible explanation for this could be an informal sector, significant in size according to the Central Bank, which is attracting more guests.
Online booking sites have almost eliminated tour operators who in the past acted as the go-between linking guests abroad with hotels here. It was they alone who decided which hotels to fill. Big hotel companies had enough money to woo these operators based in different parts of the world, and thereby fill their hotel rooms. Smaller companies did not have the capacity to reach out to these markets. Advertising in international magazines was expensive too. But the digital disruption has over the last few years levelled the playing field.
Today, you don’t need a big budget for international marketing and advertising. Any hotel can register with an online hotel review and booking site like Trip Advisor, upload a picture and solicit bookings. The site keeps a 20-30% margin on the room rate and helps promote the hotel.
Large hotels chains are investing in digital technology to counter the disruption caused by online sites like Agoda and Trip Advisor which allow people to book hotel rooms online, write reviews and rate hotels based on their experiences. But deploying digital technology alone is not going to be enough.
Smaller unlisted hotel companies are taking a large share of the number of tourists arriving here. This is forcing established larger hotels to reduce prices to compete, eroding margins as they struggle to maintain high standards that are often compromised as a result. Rising costs of energy and staff training are eating into margins as well.
“The post war boom has seen a rapid rise in the inventory of hotels resulting in excess capacity in certain areas of the country. This in turn has led to unhealthy competition which is based on price per se, thereby challenging the long term profitability of the entire industry,” Aitken Spence Chairman Harry Jayawardena told shareholders in the company’s 2015/16 annual report. Aitken Spence operates a chain of five-star hotels in Sri Lanka under the Heritance and Thurya brands.
According to the 2015 Central Bank annual report Sri Lanka has little to offer tourists and is a low cost value-for-money destination compared with other destinations in the region. The established players, it claims, are struggling to get prices for their five-star establishments. The average tourist doesn’t spend more than ten days here but spends more – US$164 a day in 2015 up from US$94 in 2011 according to the Tourism Development Authority.
“Many price sensitive tourists are coming in and several new properties have come up offering less than US$20-US$40 a night, they don’t spend too much on accommodation but on experiences,” Mudadeniya says.
Experiences matter, and this is at the heart of why smaller hotels are threatening the larger chains.
Online review sites allow guests to share their experiences and rate a hotel based on these experiences. Several smaller hotels here have customer ratings on Trip Advisor on par or even better than most five-star hotels run by the larger listed chains because they deliver value-for-money experiences.
The Sri Lanka Tourism Development Authority has an official star rating system for the country’s hotels but, like elsewhere in the world, people don’t rely on these ratings. Online reviews and ratings generated by real people who have visited and experienced the properties carry more weight. Mudadeniya admits the formal star-rating system for hotels is fast becoming obsolete; people tend to trust experiences and recommendations of other people, he says.
Smaller hotels are less formal and staff engage guests by exuding a sunny side. This informality allows smaller hotels to be more flexible and solve problems faster, unlike the more formal larger hotels where staff are straight-jacketed with formalities. When it comes to the larger hotels boasting star-ratings and pricier services, guests are less forgiving of slipups.
“People always rate a hotel according to what is more important to them,” Mudadeniya says. “We should be flexible in our training so staff can adapt to any situation which smaller hotels may be better at doing than the larger established chains.”
The larger listed hotel chains Aitken Spence Hotels and John Keells Hotels are investing in new properties and upgrading existing ones. These investments could take longer than expected to bring returns if, because of the digital disruption, the chains have to compete on equal terms with smaller hotels on price.
Over the last few years, both these firms have invested heavily on building their own digital capabilities to counter the challenge from online booking and review sites. They’ve built dedicated teams and invested in digital technology to monitor guest reviews and ratings on sites like Trip Advisor. They respond to negative reviews by directly engaging the unhappy guest, making amends and generating a return visit. But often it stops there. Because of their rigidity, the niggling problems that lead to complaints are left ignored.
The large chains are also investing in search engine optimisation and data analytics tools to boost their online presence and attract direct visits and bookings on their own websites. Social media savvy teams boost their hotels’ presence on social media sites. John Keells organises bloggers conferences in a bid to woo opinion-makers in the online travel blogging space.
“People want to go to a smaller place where reviews are pretty good,” Mudadeniya says. “This is where technology hits you so you cannot ignore the digital challenges.”
But responding to the challenge with digital technology alone is not enough.
“We need to make sure our service standards are great so we can attract guests willing to pay the price for the value we offer,” he continues.
The large established hotel chains are competing on price not just with smaller hotels in Sri Lanka. Their competitors include other destinations in the region which offer much more in terms of quality of service and experiences for lower prices.
Aitken Spence’s Chairman Harry Jayawardena in his address to shareholders in the 2015/16 annual report says these destinations have developed enough scale to do so. He says that Sri Lanka cannot afford to compete on price and suggests that the government regulate the sector in order that hotel companies don’t price their way to the bottom.
Smaller hotels have smaller overheads and better control over their service deliverables and standards. Not all of them are cheap overnight stays for back packers. There are premium priced hideaway villas for honeymooners as well as hotels catering to the needs of middle-income families.
Large hotel chains don’t necessarily have a problem filling up their rooms. The problem is with pricing. They are being forced to lower prices to compete with the smaller hotels than can afford to offer lower rates and generate better online reviews.
Enforcing a formal rating system and introducing price controls is not the solution. There is demand for low-cost tourism. Sri Lanka seems to be attracting more tourists who spend less on accommodation and more on experiences like visiting cultural and historical sites, elephant rides, whale watching, surfing or learning to scuba dive.
The challenge for the large hotel chains is the inability to market Sri Lanka as a high-end tourism destination. For one thing, service standards, the food and ambience at many five star hotels are not great for the prices they would like to command. Secondly, overcrowding, poor planning and inadequate infrastructure at tourism hotspots are taking away the serendipity of the experience.
“Sri Lanka is not a mature tourism destination but things are improving,” Mudadeniya says. “The road and railway networks have improved and we have many authentic and diverse experiences to offer. Tourists are fascinated by the culture and the people. I believe when the country profile improves the rate ceiling will improve so that hotels can remain profitable.”