Looking for the Froth


Economic News

22 Jul 2010
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With domestic tourists increasingly a focus of Malaysia's tourism promotion strategy, many in the industry are hoping for some bumper business from home-grown visitors this year. However, many of these guests will be on business, rather than leisure trips - a factor now exercising minds amongst the country's tourism professionals.

For some time now, the government too has been playing its part in pitching for Malaysia as a domestic holiday destination.

"The government is looking at ways to increase the number of domestic tourists this year," Ahmad Zahid Hamidi, the deputy tourism minister, said at the recent opening of the Negri Sembilan mega sales carnival. Backing this up with figures, he then went on to say that last year's campaign, tagged "Holiday in Malaysia", had generated an estimated RM5.4bn ($1.44bn). Hotel accommodation contributed 36% of this figure.

"We expect the amount to increase further with the present five-day shift for civil servants," he continued, suggesting that changes in work patterns to give more free time to public workers would further boost domestic tourism.

In Kuala Lumpur however, many of the Malaysian visitors are already civil servants in town on professional business. Indeed, domestic "tourists" are not something that hoteliers are counting on to stimulate their profits, since much of their business is corporate.

At the same time, the Asian tourism market in general has been trying to pull itself out of a number of recent setbacks.

The SARS pandemic that crippled the sector in 2003 was a pinch felt in Kuala Lumpur too. With growth in inventory matched by growth in occupancy, the sector had enjoyed a consistent level of profitability since the 1997 Asian financial crisis.

In 2003 however, the number of hotels in the city actually fell slightly as a result of the panic-driven squeeze; the drop from 180 properties to 177 was slight, but worrying. However, while the number of properties was down, the total number of rooms grew - showing that new properties still opened, but that the drop in business hit the bottom line of the less-profitable, causing some closures.

The following year saw the optimism back from investors and the growth in properties in rambunctious form. A leap of 37.9% put the total at 244 hotels in Kuala Lumpur by the end of 2004. The result was a 15.9% increase in the number of available rooms.

Average occupancy meanwhile has maintained a pretty even keel, as the number of guests has increased in line with the growth in inventory.

"There's a slight lag," explains Randy Shimabuku, general manager of the Regent Hotel, "which means we never seem to be enjoying the 'froth' of a booming sector... Margins are still ok, but however much the market grows, inventory catches up rapidly."

The result has been that the market players have tried to compete on price.

"Owners and managers were pushing for high occupancy," says Izkandar Melvin, general manager of Hotel Maya, a locally owned and branded property. "It is a symptom of having so many large properties... With rates so low, it is hard to bring them up again without compromising service, and so that's what we've seen in some of the large hotels."

With the market driven to these circumstances the result has been astonishing value for the consumers, whether corporate or leisure guests.

"When you look at the value that guests get with prices as they are, [Malaysia] is among the best value in the world for experiencing our brand," explains Stephen Cokkinias, general manager of the Ritz-Carlton. "Around the city though, the properties have 600-700 rooms. They have no choice other than to compete on price. We have sought to offer a more luxurious product and hence we can bring a higher level of service with only 250 rooms."

The idea comes as part of a global strategy from Ritz-Carlton to position its brand and offer complimentary products and services that offer a "lifestyle experience". This year in Kuala Lumpur, Ritz-Carlton is currently enjoying its highest ever occupancy rate, according to Cokkinias.

Indeed, the trend towards finding a niche and competing on product rather than price is becoming a feature of the market. Across town at Hotel Maya the strategy has also been to reduce the number of rooms and offer a more luxurious experience. Formerly the Radisson Park Plaza Hotel, the property owner decided to bring the management in-house.

"We cut the number of rooms from 280 to 207," explains Melvin, "of which 107 are suites and 100 are luxury rooms. Previously, the core business was corporate with only 9% leisure guests, now we expect to have 25% leisure, so the core will still be corporate."

The position of corporate business as the mainstay of the sector has likely been further strengthened following the opening of a world-class convention centre in Kuala Lumpur earlier this year.

"Something like this can bring in city-wide events, which means that for a period of time hotels are fully booked," explains Shimabuku. "Formula One is such an event, and so far this year we have seen the Organisation of the Islamic Conference and the many associated organisations that came with it, [which] meant that for a short period, even the larger hotels could get rack rates."

With more of these world-class events now possible with the addition of the convention centre, the hope is that the "froth" that Shimabuku identified will arrive to take the sector up a level. This will no doubt benefit all, including investors, who have backed the ever-increasing number of hotels and are now anxious to see some strong returns.

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