Sep 22, 2013

The All-inclusive:A Possible death spell on Egypt's tourism industry

I have been thinking a lot about the developments of the tourism industry in Egypt over the last decade (pre revolution.) My interest in learning more about the financials of this industry came after I was an advert in Europe, for an all-inclusive 1-week vacation in Egypt for around €500 Euros. Yes, 500. This included the flight too.  

I dug around the Ministry of Tourism's website until I was able to find some data on tourist arrivals, number of nights and revenues. The data is quite impressive, over 10 years we almost tripled number of arrivals and revenue. Nights spent by tourists had an even more impressive growth rate, almost 500% over 10 years. No wonder we were so impressed and dependant on the tourism market. The data says it all; tourism is our cash cow, our way out. Or so it seemed. 

Year
Tourist Arrivals (M)
Nights (M)
Nights/tourist
Revenue (B EGP)
2001
5.51
29.8
5.41
4.3
2002
4.65
32.7
7.03
3.4
2003
5.19
53.1
10.23
3.8
2004
6.04
81.7
13.51
5.475
2005
8.10
85.2
10.51
6.43
2006
8.61
89.3
10.37
7.235
2007
9.08
111.5
12.27
8.183
2008
11.09
129.2
11.65
10.827
2009
12.54
126.5
10.09
10.488
2010
14.70
147.4
10.03
11.591

I realized we should dig deeper. These published KPIs are not enough for us to understand the trajectory of tourism in Egypt. So I did some basic computations, nothing too fancy. I just wanted to know how much we were milking (as a country not a government) from each tourist coming to Egypt. Seems we have been doing a terrible business at milking our cash cow. See on average in 2001 a tourist spent EGP780 over 5 nights (then equal to around $200) in 2010, and after major investments in tourism, a tourist was spending EGP788 over 10 nights (then around $131). We were actually doing a terrible job extracting value from tourists. But why!

Year
Revenue/tourist (EGP)
Revenue /tourist /night (EGP)
2001
780.88
144.23
2002
731.42
104.09
2003
731.94
71.52
2004
905.83
67.04
2005
793.47
75.49
2006
840.52
81.02
2007
900.94
73.41
2008
976.21
83.78
2009
836.63
82.89
2010
788.50
78.64

In the early 2000s we almost peeked in the European market, and as any half-witted business student would tell you, you solve the problem by rebranding and repositioning your product. So to get more customers, our very smart tourism officials and greedy businessmen (that was sarcastic for the oblivious) decided that we would price Egypt down and go after poorer tourists. How do we target them? That was easy, dirt-cheap all-inclusive deals. This will bring more tourists and more tourists equal more revenue, they said. 

The problem they didn't think of, and the one we have to solve, is that the all-inclusive tourists are generally cheap. Also, the margins for hotels are usually tiny. See there are multiple stakeholders in this industry. The first is the tour operator, who just cares that the hotels give him real cheap deals so he can maximize his revenue. Everything else is irrelevant. The second stakeholder is the hotel owner. His only incentive is to reduce costs and try to get the cheap tourist to spend on items not included in the package. In order to do so he needs to encourage the tourist to stay on his premises and buy all his add-ons and souvenirs from the hotel. Finally there is the general tourism services industry, you know the bars, the restaurants and gift shops. Now these are the biggest losers, see the tourist gets most of his needs met at the hotel and the hotel is incentivizing to stay in. So all the third party services and touristic city might offer become less attractive. 

See the all-inclusive business makes hotel ownership not that incentivizing due to the low margins, the restaurant/bar ownership also is not attractive due to lack of customers. Only the tour operator gets to make serious money out of this. 

So even though Egypt might have magnificent monuments (the ones not stolen yet) and gorgeous sandy beaches and lots of value to offer tourists. We have adopted a strategy that would result in us attracting tourists with little cash to spend and an industry slowly chocking itself to death. This and future governments need to take serious steps to limit this all-inclusive business, we need a marketing approach that attracts tourist with high disposable income. Ones that will spend on local businesses and ensure that the downtowns of our touristy cities downturn into ghost towns while all the tourists are enjoying their gated resort.