The chicken or the egg dilemma
With changes in technology and consumer tastes many products including tourism have shortening life cycles leading to the need to continually innovate and adapt tourism destination product offerings. This is evident in the lodging industry, where online platforms such as AirBnB offer accommodation alternatives that are far less expensive than traditional hotel rooms.
With this change, a new flow of tourists has emerged. In Aruba, the share of visitors staying at other type of accommodations (other than hotels and timeshares that is) has increased significantly over the last 4 years, with 33.4 percent of visitors staying at other type of accommodations in 2015[1].
A resounding fear is that the new cheaper accommodation offerings will damage the tourism industry, the destination image and the economy by lowering the overall quality of accommodations, undercutting prices and not contributing to local taxes.
Induced by this thought, officials, policy makers and destination marketers in Aruba for example have adjusted their sails and have decided to cater towards the high-end tourist. However, even though it sounds straightforward, one can argue that the vision towards a five star destination is not attainable with the blink of an eye. “In designing a tourism sector strategy focused on the high-end, it is important to review carefully whether product and service quality is consistent with the “high end” classification” (IMF, 2014).
With this same train of thought, the discussions are often centred on the destination product and the demand. The confronted dilemma; what comes first supply or demand? The answer is not straightforward; tourism is a complex phenomenon.
Accommodation as part of the tourism system
Considering the controversial discussion about the new type of lodging alternatives available in the market. It is important to highlight that facilities such as accommodations are seen as supporting elements rather than elements that induce demand, ‘L’hôtel ne fait pas le tourisme’ is a well-known expression of K. Krapf, a pioneer in tourism research. Good accommodations and restaurant services do not guarantee successful tourism (Vanhove, 2005). However, we do want to acknowledge that the hotel industry is very important. In the Caribbean the hotel industry has approximately 231,278 rooms (STR, 2012). The last excludes more recent room additions and projects on the pipeline. In the case of Aruba the total number of rooms more than doubled from 2,776 to 5,625 since 1991 (Aruba Tourism Authority).
However, a destination assessment is necessary, where the destination’s tourism assets and available resources are assessed, these include: experiences, local character, skills, accommodation,transportation, and activities. This is important considering that accommodation is only a fraction of the overall tourism product.
Demand and economics
Important is to recognize that demand is not only driven by the product, but it is also driven by simple economics. There are multiple factors that drive demand, ranging from: prices, income levels, tastes or preferences to expectations.
In the case of Aruba, the Venezuelan market is the main driver for the increase in share of visitors staying at other type of accommodations. The current demand from this market is mainly pushed by the factors “income” and “proximity”. The economic and political situation in Venezuela has caused for inflation to soar, while wages struggle to keep up, this could lead to downward pressure on the purchase power of consumers (Outtrim, 2016). Therefore, this is likely to affect their choice of place of stay and even their purpose of visit.
Despite a different behavior from this market in the past, prices are now playing a more important role in their choice of stay. In 2005, Croes & Vanegas conducted a study on tourism demand on small island tourism economies like Aruba; the conclusion was that there was no significant effect of price on tourism demand. However, 11 years later we see a change in behavior relating specifically to this factor. This is because demand for tourism services either advances or changes. Such changes could be due to the emergence of the so-called “new tourists” (Poon, 1994 & 1993). The flow of tourism from the Venezuelan market is an example of demand driven by economic circumstances.
Supply and innovation
Besides economic drivers of demand, there are also product-related factors. The Organization of American States (OAS) stated in one of its publication that tourist demand is often spurred by innovation in the product offered.
The Inter-American Development Bank (2014) states for example that “the region have to work further on its unique characteristics to become a destination that is articulated intelligently in a way that fosters productivity and efficiency based on innovation, while persevering its local environment.” We can think of the adoption of Information and Communication Technologies (ICT) that is radically changing the way the traditional industry has been working. Technology is shaping the nature of contemporary tourism as we have seen with the introduction of AirBnB. “ICT major adoption in all parts of the industry is transforming tourism into an information and knowledge intensive sector, valid in a globalized economy. No player, large or small will refuse to implement ICT-based innovations if that means to remain competitive in today’s economic schema” (IDB, 2014). The last is even more important if the destination aims towards the affluent traveller who relies on digital for travel inspiration (Tnooz, 2014).
To inject innovation in the tourism sector, public and private involvement will be necessary, as other elements beyond tourism are important as well. For example availability of credit to spur tourism investment is key for economic growth, but also for the involvement of businesses in the tourism system. Tax systems that incentivize and support start-ups will inspire entrepreneurial spirit in the business community and will have multiple benefits for the tourism product as well.
To have a product that is up-to-par with the expectations from a “high-end” tourist, it will be necessary for the elements within the tourism system to be synchronised. With this, referring also to government policies across different disciplines.
Matching demand and supply
To cater towards a different tourist – the “high-end” (affluent) in the case of Aruba (and other Caribbean destinations) - it is important to understand what drives their demand.
Lets take a quick look into the behavior of the “high-end”: “Data reveals that affluent travelers have high expectations with respect to both personal recognition and service. Nine out of ten “enjoy being treated like a VIP” and four out of ten believe the destinations they visit “say a lot about who they are.” They are prepared to pay for quality, however, particularly when it comes to lodging accommodations (Luxury Travel Advisor, 2013). Notwithstanding their wealth Luxury Travel Advisor indicates that the affluent travelers are “aggressive shoppers”. The expectation that the affluent traveler would be a high spender is not equal for all elements of the tourism system. Seven out of ten (69 percent) consistently “try to get the best prices on the items they purchase,” and only three out of ten (27 percent) “expect the price they pay to reflect the best quality.” Hence, value-for-money is increasingly important for the affluent.
The above serves to show that the element of “lodging accommodation” within the tourism system plays an important role in attracting affluent travelers, but this element exclusively is not enough. The affluent traveler expects a bridge between elements in the tourism system that are coherent with high value and not sec a luxury accommodation facility.
In Lodging Magazine, the CEO of The Leading Hotels of the World was cited as follows; “They expect service that is infused with authenticity and local flavor. They are curious, they are explorers, and they expect hospitality brands to facilitate these deeper experiences within a destination.”
Solving the riddle of the chicken or the egg
The predicament whether the destination product should be in place to attract the desired kind of tourist is a complicated one. We have seen that the tourism product is a complex system that consists of different elements – simply said, it consists of products within a product. Tourists have different behavior towards the different elements. Each element within the system should be carefully assessed to match the demand and as such identify its maximum utility, while maintaining its sustainability.
To keep it simple for the purpose of this blog, we go back to basic economics. For a market economy to function, producers must supply the goods or services that consumers want. In economics 101, this is known as the theory of supply and demand.
Often two economic theories collide - the economic theory of Keynes arguing that “demand creates its own supply” while on the other hand we have Say’s law, which states “supply creates its own demand”. One can conclude that both theories hold a bit of truth. “It is indeed hard to decide what to supply when it’s unclear what people would demand if they had the money to do so” (Economists do it with model, 2011). It starts with a good assessment of the product and a good assessment of current demand to strike the right balance.
What we can conclude is that a product is a process and the creation of value happens gradually as we learn more of the specific market audience. Going back to the chicken or the egg dilemma, we can only solve this riddle with a simplistic answer for now, the chicken and the egg also undergo a process, regardless of which one come first, they will always meet each other.
What do you think comes first the chicken or the egg?
ABOUT THE AUTHOR: Lay Hing de Kort-Yee holds a Masters Degree in Finance and a Bachelors Degree in Marketing. She has been involved in various tourist and hotel related projects in both the private sector and semi-government tourist focused organization. She is the Founder and Chief Purpose Officer of the research consultancy firm Cornerstone Economics.
DISCLAIMER: THIS ARTICLE IS A CONTRIBUTION TO CORNERSTONE ECONOMICS BLOG. THIS ARTICLE IS A PROFESSIONAL ARTICLE AND IS BY NO MEANS ASSOCIATED WITH POLITICAL DISCUSSIONS. CORNERSTONE ECONOMICS RESERVE THE RIGHT TO MAKE ANY CHANGES IN TIME.
[1] Based on statistics of the Aruba Tourism Authority