With the FIFA World Cup in full swing again, Brazilian hotels and guest houses are cashing in on the surge in visitors. The South American country’s hospitality sector learnt a great deal from the South African experience of four years back where considerable losses were incurred after heavy investments by hoteliers and guest house owners. Many of those small entrepreneurs have since closed up shop, but for those who hung in there, benefits are starting to emerge from the rebalancing of the market. Hotels, too, are starting to see the long-time overcapacity shrink to more normal levels. PwC’s South African Hospitality & Gaming Sector Leader, Nikki Forster, shares her latest research during this Power Lunch interview on CNBC Africa. – AH
ALEC HOGG:PwC has warned that Brazil needs to brace itself as they prepare for a challenging 2015, as demand levels for hotel rooms are likely to fall after the 2014 Fifa World Cup Soccer Tournament. How do they know this? Well, joining us is Nikki Forster from PwC. We’ve been there, haven’t we? We’ve been there and done that.
NIKKI FORSTER: We certainly have.
ALEC HOGG: Four years ago.
NIKKI FORSTER: Been there, done that, and had the event – absolutely.
ALEC HOGG: In the South African context, there were a lot of people who converted homes into B&B’s ahead of 2010, hoping they could enjoy part of the bonanza. A little bit earlier in the program, Christine Mundwa did a package for us, which said that the real beneficiaries of the World Cup were Fifa, who made R28bn profit from South Africa. Is that the reality, or are some of the hospitality companies happy they made those investments?
NIKKI FORSTER: It’s a very interesting scenario, actually. If you’d asked this question of the industry within the 12 months after the Fifa World cup four years ago, Fifa World Cup was a dirty word to them. A lot of people got quite badly hurt or had a very disappointing time versus where they expected to be. You referred particularly to the B&B’s and guesthouses. Many of those people actually did suffer and many of them subsequently actually closed their doors and went out of business. Some have survived and as a consequence of that, have actually now done quite well, but they’ve been through a very stormy period in between.
ALEC HOGG: That’s the market, isn’t it? You have these exceptions and everybody gets terribly excited about it, but the market comes back and reverts to the mean, as it seems to have happened here.
NIKKI FORSTER: Yes and in fact, South Africa’s situation was probably even worse. If you take yourself back two or three years from 2010, tourist arrivals to South Africa were really picking up. It was becoming a boom time, so everybody though ‘this is fantastic. We’ll build a hotel, a B&B, or a guesthouse’ not only on the back of the forthcoming Fifa World Cup, but on the back of this huge arrival in tourism. What happened? The world went into a global recession. People stopped travelling, so it was almost like a double whammy. You had the Fifa World Cup and a recession, so that when everybody went home from the World Cup, there was no one else coming because everybody couldn’t afford it. Everybody went home with hugely favourable impressions from South Africa – loved the place – but unfortunately, tough times were ahead.
ALEC HOGG: Yes, if you don’t have the money, you can’t come even if you want to.
NIKKI FORSTER: Yes.
ALEC HOGG: Where are we now? Has the shake-up ended in the sector?
NIKKI FORSTER: To a large extent – yes. What we haven’t seen much over the last four years, is a growth in the number of rooms available. The industry stabilised in that respect and eventually, the demand has come back, both from domestic travellers as well as from international travellers, so the demand is increasing again. Unfortunately, the supply stays relatively stable, so that now occupancies are rising. Rates can slowly increase and the industry’s in a much more favourable position.
ALEC HOGG: I guess that would explain why we’re seeing the hotel groups finally picking up their heads on the JSE. We see Marriott, for instance, coming into South Africa and acquiring Protea.
NIKKI FORSTER: Absolutely, and for them it’s a nice way into the African continent.
ALEC HOGG: It’s cheap at the price.
NIKKI FORSTER: Yes, you don’t have to build the properties. You just take them over.
ALEC HOGG: If you were a value investor – and I know we’re now looking back at…everyone boomed like crazy in 2010 and we’ve had the slide back. As a value investor, are we still bumping along the bottom at the trough?
NIKKI FORSTER: No, we’re not bumping along the bottom. We’re certainly climbing out, but we’re not in the heydays yet. We’re not quite there yet.
ALEC HOGG: So if you’re in Brazil now… Have they had a similar experience? Have they also gone gangbusters in their hospitality industry?
NIKKI FORSTER: No, it’s quite interesting. Brazil didn’t necessarily do what South Africa did. We’ve seen many parallels. We’ve seen hotel rates shoot up, in the run-up to the event. We’ve seen occupancies shoot up. If you look at occupancies in the major cities of Brazil, they’re over 100 percent times what they were a year ago, so the occupancies are there. The rates have gone up. What Brazil didn’t do was go out, and build so many hotels and convert so many guesthouses. In fact, their market has probably increased in terms of supply by only about one percent so they actually have fewer rooms to service for the same market. In fact, they can probably push up those prices and may get those higher occupancies, because they haven’t gone down the extra supply route.
ALEC HOGG: Are they pushing up the price, though?
NIKKI FORSTER: Yes. Definitely. Although it’s quite interesting…in the last week in the run-up, we’ve typically seen exactly what we saw in South Africa: prices coming down again.
ALEC HOGG: It’s interesting. The hotel industry is very good at playing the market. My own experience…I go to Davos every year – the World Economic Forum.
NIKKI FORSTER: Okay.
ALEC HOGG: The rates treble in that week, literally, they go threefold. We were just in Omaha recently for the Warren Buffett AGM where thirty-eight-thousand people go to that relatively small city. Arriving early, the room rate was $149.00. For the three nights over the AGM, it was $379.00, so it was nearly a trebling.
NIKKI FORSTER: Yes.
ALEC HOGG: It seems a bit of profit gouging and you almost think ‘next time, I don’t want to go’.
NIKKI FORSTER: It’s absolutely that, but sometimes – and this is not dissimilar to the airlines as well – the hotels book themselves out and charge high prices. Then the numbers drop off. You may remember, in the lead-up to the South Africa event four years ago, how much the Fifa arm had booked out – hundreds of thousands of rooms – and then subsequently, released them all back into the market. Then the hotels were trying to sell those rooms.
ALEC HOGG: That situation I suppose can certainly backfire, if you have a guesthouse and you were counting on it or having done all your renovations… If you look back on the people who really suffered, if you take the guesthouses as an example, how many of them have gone out of business in the last four years, in South Africa?
NIKKI FORSTER: It’s very difficult to know, because there’s really no reliable industry statistics for that sector but certainly, a number did.
ALEC HOGG: So if you’re part of that experience, you’re probably looking at Brazil and thinking ‘shame, they’re going to have a rough time, too’, but they’ve handled it better.
NIKKI FORSTER: I think they have. That’s where the gap in the market is – it’s in that lower sector affordability. I think there’s a number of big hotels already in Brazil, but that lower sector affordability area of accommodation is slightly more lacking in Brazil. I’ve heard some wonderful stories of people in the poorer areas in the favelas, converting their houses and taking in guests. There are some lovely stories coming out of Brazil.
ALEC HOGG: So you wouldn’t actually go into a shantytown in your homeland, but you might do it in Brazil. Before we go, Airbnb: has that had much of an impact in what we’re seeing in Brazil at the moment? When one looks in the United States, it’s all the rage.
NIKKI FORSTER: I haven’t seen it, but let’s watch the market, I think.
ALEC HOGG: Do you think that it could grab hold here in South Africa?
NIKKI FORSTER: It’s very hard to say. What you often find here in South Africa is that we follow the trends a few years down the line, so let’s revisit it in about a year’s time and see where we are.
ALEC HOGG: Nikki Forster is with PwC. Thank you for coming into the studio and giving us that update. She looks after the South African Hospitality and Gaming sector.
