In the two decades since the fall of apartheid and the introduction of democratic rule, the South African tourism sector has been a major benefactor of the opening up of the economy and the country’s reintegration with the global community. Foreign arrivals have tripled over this period and the number of hosted meetings recognised by the International Congress and Convention Association has expanded nearly tenfold, from 12 in 1994 to 118 in 2013.
Recently dubbed “the new mining” by Thulani Nzima, CEO of South African Tourism (SA Tourism), the sector now matches the minerals sector – long considered the mainstay of the economy – in terms of its contribution towards GDP and employment. Tourism has emerged as an industry that receives substantial focus from government policy in recognition of its labour absorption and foreign income generation capacity.
Sector Contribution
According to the World Travel & Tourism Council (WTTC), tourism accounted for 9.5% (R323.3bn, $30.6bn) of South Africa’s GDP in 2013, with this forecast to rise to 9.8% by 2024. In terms of jobs, the sector was responsible for the direct employment of 645,000 people in 2013, making up 4.6% of the total workforce, while total sector employment, including jobs indirectly supported by tourism, reached 1.4m, roughly 10% of the workforce.
Tourism’s economic contribution is taking on added importance these days in light of the fact that its expansion has been outperforming the growth witnessed for the economy at large. As national GDP growth hovers around a modest 2%, and traditional employment vehicles like mining and manufacturing face their own set of challenges, tourism, for which the WTTC expects its total contribution to GDP to grow by 3.6% per annum to R473.8bn ($45bn) by 2024, can help fill the void.
Performance & Goals
International tourist arrivals reached 9.6m in 2013, a 7.1% increase from 2012. However, in his June 2014 state of the nation address, President Jacob Zuma announced that the country has set itself the ambitious target of attracting 15m visitors by 2017, equating to a revenue contribution of R125bn ($11.8bn) for that year. If this trajectory, requiring double-digit growth, is to be achieved, South Africa would be on pace to meet its secondary objective of becoming one of the world’s top-20 visited nations by 2020.
Plentiful Accommodation
In the prelude to the 2010 FIFA World Cup, both experienced and novice developers constructed a swath of new accommodation stock. However, a number of these developments were built in order to capitalise on short-term opportunities rather than long-term market fundamentals. Once the World Cup wrapped up, the period that followed coincided with challenging global and domestic conditions that reduced demand for travel and saw occupancy rates drop. Some smaller developers, lacking the balance sheets and portfolios to ride out the cycle, found themselves with distressed assets.
Figures for 2013 and projections for 2014 suggest that room revenues are again on the rise. In November 2013, Statistics South Africa (Stats SA) reported that total income for the tourism accommodation sector increased a healthy 10.5% year-on-year (y-o-y), indicating that the hospitality sector has largely recovered from the 2010 over-build. Forecasts suggest that occupancy rates should steadily improve; however, whether this is a temporary market correction or a permanent sustainable trend will depend on developers being more conservative in their expansion plans (see analysis).
In For The Long Haul
While both visitor numbers and earnings for the sector are on the rise, there are those who would argue that, considering the abundance of attractions South Africa has to offer, performance could be better. When measuring tourism’s direct dollar contribution to GDP, the WTTC ranks South Africa at 38th globally. Tourist receipts totalled $10.7bn in 2013, which, while impressive in an African context, lagged behind other regional leaders such as Mexico ($74.7bn), Malaysia ($22.4bn) and Turkey ($37.4bn).
South Africa is categorised as a predominantly long-haul destination, as flight times from its two main source markets (Europe and the US) exceed 12 and 20 hours, respectively. Along with countries such as Australia, South Africa is also sometimes described as an endof–the-line destination, alluding to the fact that it is not situated directly on route to another destination. However, in South Africa’s case, although it is technically at the furthest point in Africa, the country acts as the main aviation feeder hub for regional countries.
Irrespective of the term applied, South Africa does have a geographical disadvantage. Turkey has land connectivity and is a short flight from its main European source markets; Mexico borders the US; and, in the case of Malaysia, it is situated at the epicentre of Southeast Asia and is easily accessible by both India and China. By virtue of South Africa being at the southern tip of the continent, it also faces an accessibility disadvantage relative to both Morocco and Egypt, its closest continental competitors in terms of visitor numbers.
Bang For Buck
In addition to its geography-based challenges, South Africa is often also identified as a value-for-money destination, competing with tourist hot spots such as Thailand and Cuba for mainstream vacationers. “It is important to distinguish that a value-for-money proposition does not equate to being cheap,” Nzima told OBG. “While many tourism-dependent countries have been dropping their prices to attract visitors, we have been careful to maintain our pricing structure, which focuses on ensuring that we offer tourist experiences suitable for every budget.”
The Tourism Business Council of South Africa produces a quarterly Tourism Business Index that gauges the sentiment of various enterprises participating in the sector. In the second quarter of 2014 report, when ranking factors positively affecting the business climate, the weakened rand topped the table, referenced by 44% of respondents. Over the past four years, the rand has depreciated the most of any emerging market currency, making vacations in the country a more affordable proposition, especially when considering that long-haul holidays usually involve longer lengths of stay and therefore entail more days transacting in and benefitting from a favourable exchange rate.
However, as long-haul holidays tend to be planned for and booked well in advance, and involve proportionately costlier flight tickets purchased in one’s home currency, this lessens the shorter-term impact of a falling rand. Where the rand’s depreciation perhaps has the most influence is in providing a boost to domestic tourism, as nationals who would consider a holiday overseas might now opt to vacation at home instead.
Closed Skies
Although the weakened rand may benefit international visitors once they are in the country, the high cost of flights could discourage some potential tourists from going to South Africa. In the World Economic Forum’s Travel and Tourism Competitiveness Index (TTCI) for 2013, South Africa was evaluated as having high fuel prices (ranking 77th out of 140) and high airline ticket taxes and airport charges (105th), two factors that erode the affordability of travel there.
The African Union had in principle agreed to an open skies policy in 1999. Yet so far nothing has come to fruition on a regional level, limiting the available flights within the continent and keeping the cost of these flights quite high. However, there have been isolated instances of bilateral liberalisation, such as an agreement that took place between South Africa and Kenya in 2000, but despite evidence that these have led to marked increases in passenger traffic, they have been few and far between. “Unfortunately, the continent has so far struggled to implement an open skies agreement. Part of the issue is that many African nations lack reliable, efficient and competitive national carriers, and are therefore protectionist and fearful that open skies will lead to their national carrier not surviving,” said Nzima. Considering the challenges that come with being a long-haul destination, a growing African market stands out as the clearest solution to expanding the visitor base. While regional demand is growing, tapping it has been constrained by politically sensitive issues around intra-continental flight access and visa restrictions.
Visa Hassles
Passport holders from most Western countries are eligible for a no-cost, 90-day visa on arrival. However, most African and emerging markets visitors must obtain visas in advance, adding a barrier. In May 2014, Malusi Gigaba, the Minister of Home Affairs, introduced new immigration laws, several of which have been protested by the tourism industry.
One new provision stipulates that visitors requiring visas in advance must now provide biometric data including fingerprints. As a result, all applications will now have to be done in person at dedicated foreign missions. Another new provision calls for parents travelling with a child to produce a birth certificate along with the minor’s original passport. While understanding and appreciating the motivation behind this extra requirement – namely the combating of child trafficking – Mmatsatsi Ramawela, the chief executive of Tourism Business Council of South Africa (TBCSA), has issued a statement saying that the unintended consequences of this and other new regulations will have a damaging effect on the industry.
At the time of print, the TBCSA, along with other industry associations such as those representing airlines and travel agents, had requested a 12-month delay in the regulation’s enactment to allow time for a more thorough review. The Board of Airline Representatives of South Africa has warned that the country could lose an estimated 536,000 visitors, or roughly R6.8bn ($46.2m) in tourism revenue, from the new requirements. The Department of Tourism (DoT), for its part, has revealed that it is pursuing discussions with the Department of Home Affairs (DoHA) to arrive at a compromised solution. The regulation had originally been scheduled to enter into force in October 2014, but was postponed by the minister of home affairs, Malusi Gigaba, until June 2015 to avoid untimely disruptions during the December to Easter holidays.
Managing Reputation
Overall, as a tourist destination, South Africa ranked 64th globally and 3rd in Africa in the 2013 TTCI. The country is rated highly for its tourism assets, placing 17th and 56th, respectively, in the categories of natural resources and cultural attractions. Furthermore, the country was recognised for having “policy rules and regulations conducive to the sector’s development”, achieving a ranking of 29th. In terms of safety and security, however, the country ranked 117th, indicating the significant challenges that persist in these areas. With Brazil’s hosting of the 2014 FIFA World Cup now complete, many are looking back to assess how South Africa has fared four years after its hosting of the global mega-event.
However, it is ultimately difficult to quantify the legacy of some of the infrastructure built for the games. While some of the stadia are not being used to their full capacity, new and upgraded airports and roads have improved transportation connectivity, and a number of neighbourhoods in host cities have experienced economic revitalisation. Approximately 300,000 visitors were recorded to have come to South Africa for the purpose of attending the tournament. Certainly, the incremental spend these attendees provided did not compensate for the $3.9bn spent hosting the event, and those advocating that it was worthwhile point to the international branding the tournament generated.
For one thing, the country was exposed to a television audience of 3.2bn. According to a survey conducted by Stats SA, 92% of foreign tourists who visited South Africa for the event indicated that they would recommend South Africa as a destination to friends and family, while 96% indicated that they would visit the country again. Over the course of 2011 and 2012, rather than experiencing a post-tournament dip, overseas tourism arrivals grew 15.12% and 5.76%, respectively. While there is no way to directly attribute the growth in arrivals to World Cup-inspired reputational gains, considering that this period coincided with stagnant global travel growth – especially from traditional source markets – the exposure likely provided support.
Southern Swings
South Africa’s tourism authorities are quick to point out that despite the economic slowdowns in Europe and North America, visitor numbers from these areas are still on the rise, emphasising that these key source markets will remain crucial for South African tourism for the foreseeable future. In 2013 the UK continued to serve as the single largest provider of overseas foreign arrivals (442,523) followed by the US (348,696) and Germany. Overall, visitor numbers from EU member countries and North America grew by 7% and 6.1% for the year.
In 2013 China was positioned as the fourth-largest overseas market for the second year running. Arrivals grew 14.7% to reach 151,847 and sustain the momentum achieved in 2012 when visitor numbers expanded by a remarkable 55.9%. Growth from India, ranked as the 7th-largest source market, was a more moderate 5.5% in 2013 after having expanded 18.2% in 2012. Arrivals from Brazil, which grew by 45% in 2012, are also surging. Brazil now ranks as the top source market from Latin and South America and in 2012 made it into the list of top 10 global source markets for the first time. The collective performance from these three lucrative source markets could be interpreted as confirmation that South Africa’s membership in the BRICS alliance has been paying off on the tourism front. However, it could be that improved visitor numbers are not unique to South Africa.
As driven by their rising middle class, India and China have emerged as the world’s two fastest-growing outbound markets and have similarly evolved into exciting source markets for a number of other tourism destinations worldwide. PwC, in its 2013 Destination Africa publication, reports that Chinese visitors to South Africa spend around R15,000 ($1420) per trip, which was well in excess of the R9000 ($852) average. In addition to the financial appeal, a rewarding offshoot of Chinese, Indian and other Southern hemisphere tourists is that they tend to offset seasonality from European and North American tourists.
African Market
Short-haul and shorter length-ofstay African tourists fill in the lulls brought about by seasonality. Regional visits tend to be bookended by weekends throughout the course of the calendar year, rather than coinciding with less frequent national holiday periods. The primary holiday motivations for regional travellers are shopping and entertainment, rather than outdoor activity. Africans are also more willing to visit during South Africa’s quieter winter months. For those hailing from humid countries on the equator, travelling in the South African winter holds added appeal, as it provides respite from soaring temperatures at home.
Total arrivals from Africa grew by 4% y-o-y to reach just under 6.9m in 2013. However, because a large percentage of this total would have crossed via land from neighbouring countries for day trips to stock up on goods or in pursuit of work or to visit family, it is worthwhile to look at air arrivals in isolation. This segment, which grew proportionately faster at 12%, still has substantial catching up to do if it is to match the visitor numbers from nearby South African Development Community countries, who still make up nine of the 10 top African source markets. Despite their relatively small number, air arrivals from elsewhere in Africa are still a valuable segment, as they constitute higher spenders from resource-rich nations such as Nigeria, Angola and the Democratic Republic of Congo.
“What surprises some people when talking about African potential is that, not only is the base big, but that Africans are also proportionately big spenders,” Nzima said. Of the R1.6bn ($151.5m) that the Department of Tourism has been allocated to guide and promote the sector in the 2014/15 financial year, R300m ($28.4m) will be spent on expanding the country’s marketing presence throughout the continent. Four of SA Tourism’s five new promotional offices are scheduled to open in Africa, with the most recently launched branch in Lagos, Nigeria.
“As many African countries offer similar attractions, and even compete with us in providing safari experiences, beaches and sunshine, our African market materials are going to focus on different experiences than those we emphasise in promotional campaigns for Europe or North America, with an emphasis towards lifestyle tourism. We offer great nightlife, restaurants and shopping experiences for both luxury and basic needs,” Nzima told OBG.
Corporate Travel
A slower domestic economic picture is souring the outlook for corporate travel, which is usually one of the first expenses businesses look to reduce in lean times. The WTTC puts business spending on travel in 2013 as accounting for 35.5% of total, while South African property management group Broll estimates that 38% of room nights sold are to the corporate sector. Fortunately for South Africa, it also serves as the regional headquarters for top multinationals and plays a dominant role in the economic and political landscape of the region, factors that provide a steady source of overseas business and diplomatic visitors. The country is also represented strongly on the more recession-proof meetings, incentives, conferences and exhibition circuit (see analysis).
A Tale Of Three Cities
Johannesburg, often perceived as a purely business destination, has been a main benefactor of the growth in high-spending African arrivals. Catering not only to this emerging segment’s leisure pursuits in the form of shopping and entertainment, Johannesburg is also able to meet their educational and medical needs, two niche tourism segments that South Africa is seeking to further capitalise on. As an estimated 83% of international air arrivals land at Johannesburg’s OR Tambo International Airport, the city is aggressively looking to encourage transit visitors to book a layover stay, rallying the hotel, retail and entertainment industries to co-package their offerings to the rest of the continent.
Cape Town faces the opposite challenge. Not short of accolades as a leisure destination, the city is looking to expand its slice of the corporate and business market, and has done well to win its share of international conferences (see analysis). International media outlets such as the New York Times and the Guardian have recognised Cape Town as an attractive destination, with the former identifying the city as the most recommended place to visit in 2014 and the latter naming Cape Town as the top holiday destination for the same year. Travel directory and review website Trip Advisor, meanwhile, had Cape Town ranked as the best African destination for 2013.
Durban, arguably Cape Town’s main competitor for leisure-seekers, has also been receiving its share of international praise. CNN recently voted it one of the worlds’ most under-rated cities and the African Business Journal has dubbed it South Africa’s friendliest city.
Domestic Draw
The Kwazulu-Natal province, of which Durban is the capital, is the country’s most popular destination for domestic tourism, with around 30% of the market share. Its popularity is predicated on receiving visitors from nearby Gauteng – the country’s most populous province – coming by car for mountain and hiking retreats in the summer and warmer temperatures and coastal activity in the winter.
While difficult to accurately measure, as local tourists do not pass through border checkpoints and may stay with family and friends that they know instead of registered accommodation, it is estimated that at any given time three-quarters of all tourists in the country are nationals. Domestic travel spending generated 55.8% of all travel and tourism GDP in 2013, indicating that revenue per local tourist is substantially less than for their international counterparts.
Domestic tourism appears to be facing a decline, with a reduction in the number of trips recorded since 2011. Amidst a deteriorating consumer position of rising personal debt and slow credit growth, limited job creation, a weakening rand, and higher living costs across the board, South African households are finding themselves with less disposable income for excursions, especially non-essential ones.
Even at the best of economic times the single trip spend of a European visitor to South Africa equates to roughly two month’s earnings for a middle-income South African, pointing to a need to dramatically lower price points and introduce more affordable options if domestic travel is to become accessible for the average citizen. Despite four new low-cost carriers set to join the sector in 2014 (1time, Skywise, FlySafair and fastjet), domestic air travel continues to remain prohibitively expensive for most due to the associated airport fees and taxes. The travel industry has been very vocal in its desire to have Airports Company South Africa reduce tariffs following increases in excess of 30% introduced each year between 2010 and 2013 to pay off the R17bn ($1.6bn) spent on airport expansion in the build-up to the World Cup.
The government is looking to enhance options for this segment, however. Through a partnership with the state-run Industrial Development Corporation, the Department of Tourism has commissioned a feasibility study for a pilot budget resort chain aimed at an under-served market segment of those earning less than R5000 ($473) a month. In August 2013, a regionally focused tourism campaign was launched to encourage, through promotional offers, affordable short excursions to locations throughout the country.
Corporate Travel
A damper domestic economic picture is also souring the outlook for internal corporate travel, which is usually one of the first expenses businesses look to reduce in lean times. The WTTC puts business spending on travel in 2013 as accounting for 35.5% of total, while South African property management group Broll estimates that 38% of room nights sold are to the corporate sector. Fortunately for South Africa, it also serves as the regional headquarters for top multinationals and plays a dominant role in the economic and political landscape of the region, factors that provide a steady source of overseas business and diplomatic visitors. The country is also represented strongly on the more recession-proof meetings, incentives, conferences and exhibition circuit (see analysis).
Outlook
Most indicators point to a sector in solid shape, as traditional source markets sustain momentum, while the growth rate for visitors from emerging markets is in the double digits, albeit from a smaller base. Industry participants, be they hotels, travel agents, or the tourist attractions themselves, will need to adapt their offering in recognition of the fact that the international visitor profile is slowly but surely changing.
In order to encourage more domestic holiday makers, the government will need to support and incentivise the development of lower budget options for a wider range of travellers, both domestic and international. Boasting natural beauty, a rich culture and heritage, and friendly and hospitable people, South Africa has a wealth of tourism assets. However, problems occasionally arise that may prevent the sector from reaching its full potential, such as a lack of coordination among stakeholders and conflicting agendas between government departments. If visa restrictions, airport fees and other impediments can be resolved, barring unforeseen exogenous shocks, there is little to keep the country from its ambition of securing a position as one of the 20 most-visited nations in the world.
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