Luxury in Favor as Tourism Booms

According to AMDETUR, luxury tourism is the country’s largest area of opportunity. In Mexico, luxury hotels represent 24 percent of the total number of existing hotel rooms and over 10,700 rooms are being developed, equal to more than 54 percent of total tourism construction

In the last 10 years, the world’s middle class has grown exponentially. In 2009, the global middle class was 1.8 billion. That number jumped to around 3.3 billion in 2017, according to the Brookings Institute, a non-profit public-policy organization based in Washington, DC. The Institute estimates this figure will reach 4 billion by 2021 and 5 billion by 2027, representing 60 percent of the world’s population. With this increase in disposable income, the tourism industry is flourishing.

Mexico’s privileged location next to the US, its rich heritage and sunny climate has made the country a strong contender for global tourists in recent years. According to Pablo Azcárraga, President of the National Tourism Business Council (CNET), “the country has countless competitive advantages simply because of its location next to the world’s largest consumer market, the US, and the continuous growth of its internal market.” In 2016, Mexico received about 35 million tourists, an increase of 8.9 percent compared with 2015, according to SECTUR. Moreover, the country reached a historic peak in tourism expenditure, with a 10.4 percent increment from 2015 to 2016 and revenue of US$19.57 billion.

The burgeoning tourism landscape opens up space for hotel chains to strengthen their position. According to the World Tourism Organization (WTO), France attracts the most tourists and the US generates the most income from the tourism industry. Mexico occupies the eighth and 14th places for 2016, respectively. As a result, hotel chains see great potential in the country. Spanish tourism developer Barceló Hotel Group Mexico says the country plays a key role in its strategy. “Mexico is the most important country in our portfolio,” says Gustavo Jiménez, the group’s Director General. “Our hotels in Mexico are responsible for the company’s largest growth, revenue and profit, with our five-hotel, 2,700-room Riviera Maya resort being the biggest contributor.”

TAPPING INTO THE LUXURY SEGMENT

One of the most effective methods of generating revenues is through luxury resorts. The Integral System of Information on Tourism Markets (SIIMT) reported in 2014 that most hotel rooms in the country belonged to 4- and 5-Star brackets. In this context, “generating more income by room in luxury hotels is possible,” says Azcárraga.

The luxury sector has the highest growth levels in the industry. “More and more international brands continue to enter the country every year looking to capitalize on Mexico’s growing middle class, favorable demographics and expanding consumer credit,” says Jimmy Arakanji, Co-Founder and Co-CEO of Thor Urbana, the developer behind the eagerly anticipated Ritz-Carlton hotel in Mexico City. The number of 4- and 5-Star hotels in the country increased in 2017, according to The Forbes Travel Guide 2017 Star Award. The main players in the luxury sector featured on this list are The Ritz-Carlton, Esperanza, An Auberge Resort, Rosewood Resorts, The Resort at Pedregal, The Four Seasons Resorts and Belmond Resorts. Marriot International announced in April 2017 that it would open 14 new luxury and business hotels in the following 12 months. Mexico is the company’s second most profitable country in Latin America and the Caribbean.

The Mexican Council for Touristic Promotion (CPTM) considers, in its marketing intelligence plan, a premium segment of travelers earning over US$75,000 a year, setting the trend for choosing the most luxurious and exclusive hotels. The Premium Luxury market is growing, especially among US travelers that want to visit the beaches of Mexico. Customers increasingly seek to buy into a quality and exclusive experience at resorts with golf courses, spas and water activities. In this scenario, Jones Lang LaSalle Properties (JLL) finds that Los Cabos, Cancun, Riviera Maya and Riviera Nayarit are the main destinations for premium resorts in the country.

A GREATER MARKET CONSOLIDATION

Juan Carlos Reus Expansion Director Mexico and the Caribbean of NH Hotel Group says the key to success in meeting the increased market demand is simple: economies of scale. Independent hotels make up for about 70 percent of the Mexican market. But they lack the sales force and negotiation weight that larger hotel brands possess along with their wide network of suppliers, which allow them to trade at very profitable rates. This in turn is also perceived as more appealing for investors. As a result, when it comes to luxury resorts, the most prestigious hotel chains tend to prevail and this is especially true of the luxury resorts built in beach destinations like Cancun, Riviera Maya and Los Cabos.

Nevertheless, the Small Luxury Hotels of the World (SHL) 2017 trends report finds that boutique hotels are increasingly cropping up as an alternative to the more traditional brands, meeting the needs of a very specific market niche. Their perceived level of exclusivity, privacy and comfort attracts visitors who seek a selective lodging in establishments with fewer rooms, and who are seen as more select. Mexico’s Pueblos Mágicos have also cashed in on the boutique hotels boom, often combining spa facilities with a rich cultural and gastronomic offering.

MARKET CHALLENGES

Despite the boom the Mexican tourism sector has experienced, there are several challenges that may negatively affect the industry. On one hand, according to JLL’s 2017 Hotels Destination Report for Mexico, “while safety and security have become less of a concern in the last few years, security issues continue to challenge the country’s perception and place a damper on the economy.” Moreover, “investors expressed that security issues remain a source of concern for investment.”

The Mexican Association of Tourism Developers (AMDETUR) says Mexico’s luxury tourism segment has experienced annual growth rates of 7 percent. But JLL’s most recent Latin America Hotel Investor Sentiment Survey suggests that the government could increase its efforts for making the country safer to address investors’ concerns. In the midst of the boost the tourism infrastructure development is experiencing, the focus must also remain centered on promoting a sustainable growth.

“To drive investment, it is necessary to establish an attractive institutional framework on issues such as regulation, security, environment, and fiscal policy,” says Enrique de la Madrid, Minister of Tourism. Likewise, he suggests Mexican cultural and gastronomic wealth should be highlighted with complementary infrastructure thematic routes and water parks as a strategy to make the country even more appealing to potential visitors.

But with challenges come opportunities. The luxury tourism segment has high barriers to entry that requires larger investments in order to ensure exclusivity. In comparison to mid-market hotels, low barriers to entry often increase the risk of developing in this segment and also tend to be more vulnerable to rate fluctuations in the 4- and 5-star market according to PwC. Land scarcity also creates a strong barrier to entry for the luxury segment. “The luxury segment’s entry barrier is the fact that there are only a few unique locations where such hotels can be built,” says Borja Escalada, CEO at RLH Properties.

Although the country has many beautiful destinations, luxury hotels have more demanding requirements in terms of location and space required. The more unique and prime the land is, the higher the price which can make it unfeasible for some developers and could have much lower returns. The luxury segment will continue to grow in the upcoming years, attracting national and international players to compete for the country’s premier locations. This creates many opportunities for success, but for companies to take advantage of this trend changes must first be made.