Mexico plans for long-term tourism growth

Two straight years of record growth in Mexico’s tourism sector have solidified its importance as a motor for economic growth. According to the Ministry of Tourism (Secretaría de Turismo, SECTUR), tourism contributes over 8.7% to Mexico’s GDP and employs 3.6m people directly, 57% of them women. It is also the fourth most important source of foreign currency.

Given its dynamic performance, the sector was recognised as a pillar for development. Government authorities are working to establish a foundation for long-term growth, and the results of their work are beginning to show. In 2014 Mexico reclaimed its spot among the top 10 tourist destinations in the world, according to the UN World Tourism Organisation, and advanced 14 positions in the World Economic Forum’s 2015 “Global Travel and Tourism Competitiveness” report, from 44th to 30th, out of 144 countries.

While the sector still faces a number of challenges, including limited connectivity, government efforts to boost the competitiveness of Mexico’s tourist destinations and increase promotional efforts should see greater diversification of both the tourist offering and source markets in the coming years. Meanwhile, rising demand for accommodation is driving growth in the hotel market and raising investor interest.

Sector Performance

The tourism sector exceeded growth expectations for 2014, registering a record number of international tourist arrivals at nearly 29.3m, a sharp increase of 21% on 2013, and over 5m domestic arrivals, according to Banco de Mexico. Of that total, some 13.4m arrived by air (up 10% from 2013) and 2.6m by land, while 13.3m were border crossings – defined as stays of at least one night at accommodations within 20 km of the border.

Revenues generated from international arrivals also reached a record – nearly $16.2bn – up an impressive 16.1% from 2013 and 27% from 2012. Revenues from arrivals by air, which make up 78.5% of the total generated by international visitors, were up 20.3%, surpassing $12.7bn. Growth in revenues was driven mainly by an increase in average spending by international tourists, which rose by 9.3% in 2014, reaching $950. The cruise segment also registered unprecedented growth, with 68% more arrivals in Pacific ports and 25% in Caribbean ports, resulting in a 29% national growth rate, according to Banco de Mexico.

Tourism indicators have grown significantly since 2005, with foreign arrivals and revenues increasing by 32.9% and 37.8%, respectively, from 2005 to 2014, and growth is expected to continue in the short term. Arrivals and revenues both increased by 8.5% yearon-year (y-o-y) from January to July 2015.

Source Markets

The US remains the top source market for tourists to Mexico, accounting for 56% of total visitors – nearly 7.2m in 2014 – up 10.6% y-o-y, driven in part by an unusually cold winter in the US. Canada maintained its spot as the second-biggest source market, accounting for 12% of arrivals, at nearly 1.7m, up 4.8% y-o-y. At 68%, the two members of the North American Free Trade Agreement make up the vast majority of tourists to Mexico.

Totalling nearly 1.05m visitors in 2014, Europe accounted for 13% of arrivals, following growth of 7.2%. The increase was driven primarily by higher arrivals from the UK, Italy and Germany, which increased 10.8%, 10.8% and 10.6%, respectively. Latin America and the Caribbean accounted for 13.4% of international arrivals in 2014, displaying significant growth of 12%, with arrivals from Colombia increasing by 25% to 328,200.

While Asian countries account for a small share of international arrivals (3%), the continent registered the highest growth, at 20% overall. Arrivals from China and South Korea increased by 25% and 26.7%, respectively, in 2014, reaching 75,700 and 75,100 visitors, while arrivals from Japan grew 10.4% to 107,400 Cancún and Mexico City remain the most attractive destinations for international tourists visiting Mexico, and accounted for nearly 5.8m and 2.9m arrivals by air, respectively. “Mexico City’s tourism industry has been growing at double the rate of Mexico’s economy due to good government policies making the city one of the most attractive tourist destinations in the country,” Jose Escalante, president of Velsimex fertiliser company, told OBG. Los Cabos and Puerto Vallarta followed Cancún and Mexico City in popularity, with almost 1.2m and 1m, respectively. Nonetheless, other destinations displayed notable growth in international arrivals, including León, which registered a y-o-y increase of 33.5%.

Domestic Market

According to SECTUR, the domestic market makes up more than 80% of consumption by tourists and is, therefore, a vital market. An expanding middle class and notable connectivity improvements have facilitated travel in recent years, enabling the segment to register important growth. The number of arrivals of national tourists to hotels in the 70 most popular tourist destinations in the country reached 48.9m in 2014, up 4.1% from 2013, and 18.7% since 2008 (41.2m), according to SECTUR.

A recent government move to schedule floating holidays on Mondays, enabling longer weekends, has provided an important boost to the segment. Domestic travel is highly seasonal, peaking during Holy Week (the week leading up to Easter Sunday), the summer months and the end of the year. Tourist destinations where the flow of international tourists is still limited have particularly benefitted from a growing domestic market. Outside the sun and sand segment, destinations with strong cultural, religious and gastronomic assets appeal to the national tourist and are particularly attractive for short holidays. According to the Mexico Tourism Board, Mexico City, Acapulco, Guadalajara and Veracruz are some of the preferred destinations for domestic tourists.

Promotional Efforts

The sector’s positive performance is due to a combination of factors, including increased promotional efforts and institutional support. Cesar Alfonso Rosete Vela, tourism leader at PwC Mexico, told OBG, “One of the factors that has greatly contributed to the growth of the tourism sector has been the promotional efforts by SECTUR and the Tourism Promotional Board, which have been working to position Mexico at the international level as a rich and diverse destination, and have sought to reach an increasing number of markets.”

Since 2013 SECTUR has run the promotional campaign “Live It To Believe It” at the international level. With an initial investment of $43m, the campaign features images of Mexico’s coastlines and Aztec heritage. In its first edition, the campaign showcased Mexico’s classic tourist destinations, including Mexico City, Vallarta-Nayarit, Los Cabos and Cancún-Riviera-Maya, while a later version, launched in November 2014, showcases destinations with more cultural appeal, including Oaxaca, Guanajuato and Chiapas.

SECTUR has also developed a US-specific campaign entitled “Mi Mexico”, which targets primarily Latinos in the US. According to SECTUR, promotional efforts are geared firstly at consolidating Mexico’s image in the main source markets – the US and Canada – and secondly at penetrating new emerging markets, in particular China and some countries in Latin America and Eastern Europe, where SECTUR is pursuing aggressive promotional campaigns. In order to specifically target the Chinese market, SECTUR announced in June 2015 the launch of a seal of approval for tourism service providers, known as “Close to China”. This promotional strategy will apply to hotels and travel agencies, and is ultimately aimed at boosting visitor numbers from China. Moreover, SECTUR is also working to simplify visa procedures for Chinese tourists.

Tourism Cabinet

The sector has also benefitted from improved inter-governmental policy planning. In an innovative move, President Enrique Peña Nieto established in August 2013 the Tourism Cabinet, a platform aimed at improving inter-governmental coordination, which incorporates the Ministry of Tourism, the National Trust Fund for Tourism Development (Fondo Nacional de Fomento al Turismo, FONATUR) and 11 other ministries, including the Ministry of Economy and the Ministry of Communication and Transport. The initiative seeks to improve policy development and coordination between the various federal entities directly and indirectly connected to the tourism sector. According to SECTUR, the Tourism Cabinet has been one of the most impactful measures on the sector, with the OECD recognising it as an innovative mechanism to strengthen the different areas of governance that the tourism sector encompasses.

Tourist Friendly

An equally important factor in the sector’s positive performance is the government’s recent efforts to improve the attractiveness of tourist destinations across the country, making them more tourist friendly and thus improving tourists’ experiences. Rodrigo Gallegos, director of climatic change and technology at the Mexican Institute for Competitiveness, told OBG, “Mexico City has increased its touristic attractiveness in recent years because the capital has been able to successfully recuperate public spaces, pedestrian streets, parks, plazas and boardwalks, among others, which now serve a vibrant and attractive social life for tourists to enjoy.” According to Gallegos, this same dynamism is now gathering momentum in Cancún, Los Cabos and Acapulco, where beaches are being better maintained, access ramps installed and services improved.

Service Oriented

Also aimed at increasing the attractiveness is SECTUR’s innovative pilot programme for the development of Mexico’s first “smart” tourist destination. The initiative, known as Mexican Model of Smart Destination, seeks to enhance the tourism experience by making destinations more accessible through digital infrastructure and facilitating interaction between visitors and the surroundings in a sustainable manner. The pilot project is set to be implemented first in Cozumel, Quintana Roo. The project, which as of May 2015 was at the evaluation stage, is supported by three different levels of government as well as the private sector.

To standardise and improve the quality of services across the country, authorities are also working to establish a national tourism certification system, which will integrate all certifications for the different areas of services offered to tourists, such as hotels and restaurants. This is coupled with efforts to increase training for sector professionals, under the national training system for the tourism sector.

Diversification

Meanwhile, efforts to diversify and strengthen the various segments within the sector are continuing. According to SECTUR, the agency aims to develop tourist destinations across different segments to help spread the benefits of the growing sector to more communities across the country in a sustainable manner. One initiative, known as “Pueblos Mágicos”, (magical towns), disperses public funds to projects that improve the attractiveness of towns with cultural and historical appeal. While the programme has been in operation since 2001, the current government is encouraging each of the magical towns to conduct a competitiveness study, with the aim of identifying the main tourist assets and designing a road map to help further develop those assets.

In 2015 SECTUR is allocating MXN500m ($33.7m) to the 83 magical towns as well as other priority destinations to help raise their competitiveness. Gallegos told OBG, “Although this is an excellent initiative, as it incentivises destinations to identify main challenges and create their own roadmap to overcome them, most of them lack a clear long-term goal, especially when compared to foreign competitors.”

Further efforts to diversify the tourist offer away from the sun and sand segment are expected to increase in the short term. According to SECTUR, the agency is working to develop the country’s cultural, nature, medical and gastronomic segments, and will be announcing specific campaigns and strategies to this end in the short term. With 33 world heritage sites, and a gastronomy declared by UNESCO to be an intangible heritage, Mexico’s tourist assets are diverse.

MICE

One segment that has been particularly dynamic is the market for meetings, incentives, conferences and exhibitions (MICE), which posted double-digit growth of 18% in 2014, generating some $20bn in direct revenues that year. Growth in the MICE segment s expected to continue in 2015, with SECTUR forecasting an expansion of 7% for the year, driven by an increase in the number of events in key industries in the wake of recent structural reforms. Recognising the segment’s potential, particularly for states that have traditionally been primarily sun and sand destinations, state authorities are increasingly developing strategies to raise their competitiveness and attract a bigger share of events (see analysis).

Investment

In the short term, the tourism sector is also set to benefit from increasing investment. The National Infrastructure Programme (Programa Nacional de Infraestructura, PNI) 2014-18 envisages combined public and private investment of MXN181.2bn ($12.2bn) (38.1% public and 61.9% private) for 83 tourism sector projects. In the sun and sand segment, the PNI has allocated MXN6bn ($403.8m) to projects to reverse beach erosion in 15 of the country’s iconic beaches, including Los Cabos, Mazatlán, Puerto Vallarta, Manzanillo, Ixtapa, Acapulco, Veracruz-Boca del Río, Cancún, Riviera Maya, Isla Mujeres and Cozumel. To increase the cultural appeal of some destinations, funds have also been allocated to rehabilitate historical centres in colonial cities such as Veracruz (MXN250m, $16.8m), Guanajuato (MXN120m, $8.1m), San Luis Potosi (MXN250m, $16.8m) and Chiapa de Corzo (MXN150m, $10.1m).

Public investment in the sector has traditionally been managed by FONATUR, and primarily funnelled to the beach resort segment in the many integrally planned centres (centros integralmente planeados, CIPs), seaside resort areas that combine hotels, apartments and commercial areas. Among the competitive advantages which FONATUR hopes will attract new visitors to these are the existence of a master plan and specific urban planning mechanisms, as well as the annual construction program it operates and the annual maintenance program run by its affiliates. The fund operates CIPs in Cancún, Los Cabos, Ixtapa, Loreto, Huatulco, Nayarit, Cozumel and Playa Espíritu. The PNI allocates MXN25.5bn ($1.72bn) to CIPs, 14% of the amount set for tourism projects.

Private Funds

The sector’s strong fundamentals are also attracting increasing amounts of private investment. In April 2015, Grupo Vidanta, a local developer of luxury resorts, announced plans to invest nearly MXN19bn ($1.28bn) in theme parks, expansions and new projects. The group already owns properties in Nuevo Vallarta, Acapulco, Riviera Maya, Los Cabos, Puerto Vallarta, Puerto Peñasco and Mazatlán.

A dynamic hotel industry is attracting a significant portion of the planned private investment for the sector, after registering six consecutive years of improving performance. The hotel industry’s total transaction volume increased from a low of $100m in 2009 to nearly $500m in 2014, according to consultancy firm Jones Lang LaSalle, and is expected to post growth of 10% in 2015 (see analysis).

Connectivity

Despite the sector’s impressive performance in recent years, it faces a number of challenges, including a perception of insecurity. While this had a particularly visible effect on cruise arrivals in the 2009-13 period, the sector’s recent performance seems to indicate that Mexico is successfully mitigating the perception of violence. The second most significant challenge is limited connectivity. Insufficient airport infrastructure has prevented an expansion in connectivity, while the increased number of arrivals over recent years has put tremendous pressure on existing infrastructure, in particular Mexico City’s Benito Juarez International Airport. With only two runways, separated by 305 metres preventing simultaneous use, the airport was declared saturated by the Civil Aeronautics General Directorate in 2014.

However, planned infrastructure projects are expected to increase connectivity significantly in the coming years. The PNI envisages investment of MXN3.6bn ($242.3m) in airport infrastructure during the period 2014-18. Moreover, the government announced in September 2014 the construction of a new international airport in Mexico City, to be built adjacent to the existing one. With an initial price tag of MXN120bn ($8.08bn), the new airport is the biggest infrastructure project undertaken in Mexico. Since the expansion announcement was made, the price has already gone up to MXN169bn ($11.4bn).

During the initial phase of the project, three runways will be constructed for simultaneous use, with an annual capacity of 50m passengers. Another three runways will be added during a second phase of the project. Once fully operational the new airport will quadruple the annual capacity of the existing one, from 30m to 120m passengers. The Airport of Cancún, the second-busiest airport in the country, is also set to undergo an expansion to the tune of MXN1bn ($67.3m) in the next five years. The project for the addition of a fourth terminal is scheduled to begin in 2015.

Within Mexico, a lack of flights between states other than Mexico City has meant that air travel in the country almost always entailed a connection through the capital city. However, this is changing. Rosete told OBG, “Low cost [airlines] are looking at this niche market as an opportunity, and trying to increase flights within Mexico, connecting secondary states to destinations like Cancún or others directly.” Land connectivity is also set to increase significantly, with the current government investing over MXN5bn ($336.5m) in transport projects across the country, which will facilitate travel for the domestic market.

Outlook

With connectivity improving and public and private investment increasing in the short term, the sector’s outlook is robust. According to forecasts by Anáhuac University and media website CNET, the tourism sector is expected to post growth of 9.4% in 2015, reaching 31.6m visitors, while revenues are expected to increase by 8% to $17.5bn. Economic recovery in the US and the appreciation of the US dollar bode well for an increase in arrivals from Mexico’s most important market, while SECTUR’s efforts to reach new markets should see a rise in arrivals from non-traditional markets. With overall economic growth still sluggish at 1.1% in 2013 and an estimated 2.4% in 2014, tourism will remain one of the counry’s most dynamic sectors, carrying the economy forward.

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The Report: Mexico 2015

Tourism chapter from The Report: Mexico 2015

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