Hotel Oversupply Means More Choice, Better Value

For many hoteliers in South Africa’s post-2010 FIFA World Cup environment, the party is not only over, but a throbbing hangover has settled in. An oversupply of hotels, many built in anticipation of last year’s international soccer tournament, has sent occupancies plummeting and is even leading to property closures.

But for agents and their clients, there is a positive side to this picture. Hotel expansion in anticipation of the World Cup has added a broad array of lodging choices in South Africa’s cities. And the competitive environment, which has been exacerbated by the recession, is driving prices down.

Challenges for hoteliers
“The outlook for hotels was really bright until World Cup, but now there is a sharp decline because of the overcapacity created to accommodate it,” said Henry Kartagener, president of Kartagener Associates International, a marketing representative for Legacy Hotels, Legend Lodges, Savanna Private Game Preserve and other South Africa hotels and resorts.

“In particular, Cape Town and Johannesburg are really suffering at the moment.”

Over the past three years, hotel room inventory rose by more than 30% in Johannesburg, 20% in Cape Town and 35% in Durban, according to PricewaterhouseCoopers’ recent South Africa Hospitality Outlook 2011-2015.

Hotels in all three cities enjoyed full houses during the World Cup matches. But, overall, average hotel occupancies in South Africa fell from 70% to 53% in 2010, reported PricewaterhouseCoopers (PwC).  PwC predicts a further slide in occupancy to 48% this year.

Impact of the recession
Exacerbating the situation this year is the recessionary world economy. South Africa had been relatively immune to the recession’s impact until recently, according to Ronnie Harris, U.S. marketing representative for Southern Sun, South Africa’s largest and oldest hotel group.

But this year South Africa the recession triggered a a drop in business travel. “The hotel industry is under enormous pressure right now, and closures are happening.”

Long-term benefits
Despite current challenges, the World Cup-building boom should ultimately benefit the country, said Kathryn Monaco, sales manager-North America for African Pride, a luxury hotel group that is part of South Africa-based Protea Hospitality.

“It’s a positive trend for the long-term, giving South Africa a fantastic hotel infrastructure that has created jobs and benefited the local economy,” she said.

Robert More of the upscale group More Hotels is also somewhat optimistic, although he acknowledged that it “could be a long, slow haul” before hotels once again see healthy occupancies.

Still, he said, “properties that offer something uniquely South African and pay homage to the area they are located in will buck the trend.” More’s properties range from game lodges to urban boutique hotels. “This is what the current traveler is looking for – experiential travel rather than the ultra-luxurious.”

Advantage: Buyer
For the traveler, South Africa’s hotel glut means unprecedented value, Kartagener said. “Prices are coming down as we speak.

“There is a lot of creative marketing going on, a lot of promotions, such as ‘stay two nights and get the third one free.’ South Africa may be one of the best values out there in long-haul travel,” he said.

City hotels: new choices, good deals
Urban hotels, more than game lodges and resorts, are in an extremely competitive environment right now.

Visitors to cities such as Johannesburg and Cape Town have an unprecedented array of new top-of-the line hotels to choose from, Monaco noted.

Rates and availability are especially good in Cape Town, according to Ian Anderson, international marketing director for Sun International, a major South Africa-based hotel company.

“With the current economic situation, demand has not increased in line with the increase in hotel rooms and this has led to lower occupancies across all hotels,” he said.

“The biggest problem is the effect on ADR [average daily rate] as all hotels compete fiercely for a piece of the shrinking pie.”

More luxury in Cape Town
In Cape Town, new luxury hotel choices include African Pride’s 15 On Orange and Crystal Towers.

Taj Hotels opened Taj Cape Town last year in two restored historic buildings overlooking St. George’s Cathedral and Company Gardens.

At Taj Cape Town, location and distinctive features have helped it perform well with leisure as well as corporate incentive travelers, even in this competitive environment, said Theo Cromhout, director of sales and marketing.

Taj Hotels is confident about South Africa’s long-term outlook and is exploring further growth, albeit cautiously, he said. “Taj is considering developments in Durban and Johannesburg, and also thinks a game lodge would be a good fit.

Hotel closures
In metro Johannesburg, the competitive hotel environment has led to several hotel closures, including the Lakes Hotel and Conference Centre and African Sun’s The Grace in Rosebank.

The Southern Sun Grayston Hotel in Sandton, an upscale Johannesburg suburb, is expected to close by the end of the year, according to reports in the South African business press.

Hotel closures in Cape Town include the opulent Hotel Le Vendome.

Game lodge update
Game lodges and other resort properties have been less impacted by slumping occupancies than hotels in urban areas, but they still face challenges.

“The occupancy at the game lodges is still not where they should be,” Kartagener said.

Safari lodges in the vicinity of Kruger National Park are faring best of all hotel segments in South Africa, according to More. “However, there is pressure on rates, so although they are busy, the revenues are much lower.”

Safari product expansion
Despite the challenges, More Hotels is expanding its safari product. “We have just bought a new lodge in the Madikwe Reserve, about four hours north of Johannesburg, bordering Botswana,” More said.

“That adds a safari experience that is easier to get to and is in a non-malarial area. It opens up an opportunity to promote family safaris, which is a growing market.

“We recently had Michelle Obama and her family stay with us, which was a real coup.”

Many lodges are developing amenities geared for multigenerational groups of travelers, Kartagener noted. “For example, Savanna Lodge has a new suite designed for families, which includes a private vehicle, guide and meals served in the suite.”

Kruger Park plans
The next development hot spot for safari properties appears to be within Kruger National Park, where two proposed hotels are currently under consideration, over the objections of some environmental groups.

One is a 240-room Radisson property, which would be the first international chain hotel within the park.

Among South Africa’s resort properties, newcomers include the 154-room Fairmont Zimbali Resort, which opened last year on the eastern coast outside of Durban with golf, a full-service spa, five swimming pools and other amenities.

International newcomers
Despite South Africa’s hotel challenges – or perhaps because of them – there appears to be growing interest among major international hotel companies in gaining a presence there.

The flags of Holiday Inn, Hyatt and Hilton and other international brands are long established in South Africa. Now Marriott International is jumping into the fray. Marriott recently announced plans to add struggling South African independent hotels to its Autograph Collection brand. No specific properties have been named.

International chains are less interested in developing new hotels in South Africa than in other African countries, said Harris of Southern Sun. “In South Africa, the opportunities are mostly for taking over existing hotels, along the lines of the Hilton Cape Town that opened last year.”

The prospect of more international chains on their turf draws mixed reactions from South African hoteliers. “It endorses the destination, but the appeal is primarily to the corporate traveler,” More said.

Monaco commented that “it means more competition for us. But if the big brands are here, it means more exposure for South Africa.”

One countertrend is the fact that leisure travelers increasingly want a hotel experience unique to the destination, according to both More and Harris said.

“Ten or 20 years ago there was a comfort level in traveling to Africa and finding a recognized hotel name. Today the traveler is more sophisticated and savvy – they want to experience something more African,” Harris said.

Southern Sun used to manage Holiday Inn properties in South Africa, but rebranded them as Southern Suns about six years ago, Harris said.