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Slovenia does not need new hotels, but better management of existing properties – Translation of an article that appeared in Finance, Slovenia’s daily financial newspaper, on Tuesday 28th February 2017

Slovenia does not need new hotels, but better management of existing properties – Translation of an article that appeared in Finance, Slovenia’s daily financial newspaper, on Tuesday 28th February 2017

Slovenia does not need new hotels, but better management of existing properties
By Jacqueline Stuart

Minister of Economy Zdravko Počivalšek has announced that the government wishes to achieve growth of Slovenian tourism from 2.35 billion EUR to 4 billion EUR until 2021. To achieve that goal several measures needs to be taken, including investments in existing and new hotel capacities. The government will encourage brownfield and greenfield investments, among that the construction of 10 new hotels in Slovenia. We have carried out an analysis of the current supply.

Data shows that Slovenia is adequately served with hotels. The country benefits from one bed for every 60 tourist arrivals, better than both Hungary and Croatia. Slovenia has 1 hotel bed for every 46 residents, this is low compared to the other markets in the region, but is a reflection of the low level of domestic business travel in the country than an indicator of a lack of hotels.

Even on the Coast hotels are not fully booked

According to Eurostat, occupancy in hotels and similar establishments in Slovenia is just under EU average, at around 47%. However it varies enormously according to location.

Occupancy in health and spa municipalities is between 45 and 65%, these score well compared to most other areas, with no extreme seasonality. Spa resorts attract high spending Russian and Italian guests who tend to enjoy extended stays, this is quite different from other destinations in Slovenia which are characterized by tourists arriving by car for short breaks of less than 3 days. Seaside municipalities score very highly in the summer months with up to 85% occupancy, but drop down to less than 20% in the off season.

Ljubljana as Slovenia’s capital city should be less seasonal, but it suffers from the lack of domestic business travel in the country. Occupancy varies from 25% to around 75%. The city benefits from greater year on year growth than most other destinations in Slovenia. Other city municipalities fare worse, with less extreme seasonality but a high of less than 50%. Mountain municipalities also struggle from both low occupancy and extreme seasonality with a high of 60% and a low of less than 20%. Worst off are the other municipalities that benefit from neither cities nor tourist infrastructure. They score a high of only 35%, and a low of less than 20%. It is hard to imagine how anyone could run a profitable hospitality establishment with such numbers.

The occupancy rate is not everything

Seasonality is an issue for hotels not only because of profitability, but also because it makes it difficult for them to attract and retain good quality employees. There is not much that can be done about extreme seasonality, but good destination management can help. Sporting and cultural events out of season can attract guests.

There are three key metrics used in the hotel industry to measure performance; average occupancy, average daily rate achieved (ADR) and revenue per available room achieved (RevPAR). The RevPAR metric is a combination of occupancy and average daily rate.

Foreign inbound tourists generated about 6.6 million overnights in 2015 and domestic tourists 3.7 million. Hotels in Slovenia find it hard to achieve high average daily rates with such reliance on the domestic market, because the purchasing power in Slovenia is low.

There is simply not enough disposable income to allow all but a few hotels to charge a premium. The average daily rate achieved in all London hotels in 2015 was 166€. Achieving such a rate would be a dream for even the top 5-star hotels in Slovenia.

Better data means better profits

Hotels in this country have few tools to help with yield management, that would allow them to maximise ADR. It is not common to share booking information between hotels. If one Ljubljana hotel were to be aware that their nearest competitor was fully booked, they could raise the price of their available rooms on a given date. Only the international branded hotels, and City Hotel in Ljubljana and Lifeclass in Portorož contribute to the global STR trends benchmarking database. So most sales and marketing teams are working in the dark. Some just don’t have the skills to make the most of the market. It is not uncommon for some coastal hotels to sell all their rooms at very low prices to coach tour operators in the summer, thereby depriving them of the opportunity to achieve high rates from the individual travellers prevalent in those months.

New hotels do not bring new tourists

It would be far more helpful to Slovenia’s tourism to assist existing hotels to improve their yield, upgrade their offer and enhance the guest experience, than to encourage the construction of new hotels. There is no shortage of hotel accommodation in Slovenia. Developing any new building comes at a cost to the environment. New hotels cause loss of business to existing hotels. Increasing the supply puts downward pressure on rates and occupancy which means hotel owners have fewer resources to invest in their properties and improve their offer.

Furthermore, government initiatives to create new hotels rarely succeed. At S-Invest we work with various international hotel advisors, one hotel industry veteran reported that in 30 years of working all over the world he had never seen a successful, nor profitable, government owned development in the hospitality market. Hotels, like most businesses, are best left to the free market.

Hotels are valued as companies

According to the cost consultant EC Harris, it costs approximately 100,000€ per room to build a 4-star hotel in Slovenia. Some hotels cost much more, the Kempinski in Portorož is reputed to have cost 444,000€ per room. Hotels are valued as going concerns, not as real estate, and most hotels change hands in Slovenia at around 50,000€ per room. Why build a hotel at a cost of 100,000€ per room if the resultant value of the property will be only half the cost of development? There is a long history of such mistakes in the hotel business. Conrad Hilton acquired the Plaza Hotel in New York in 1943 for 7m USD. It had been constructed 36 years earlier at a cost of 12.5m USD.

Suggestions for better hotel management:

1) Tax breaks or grants for hotel owners who refurbish their properties

There are many hotels in Slovenia that would benefit from refurbishment. Tourists nowadays have high expectations. Threadbare carpets, poor lighting and dated furniture do nothing to enhance the experience of the guest, nor the achievable RevPAR.

2) Assistance for hotel owners that participate in STR Global trends

The government could sponsor training for hotel owners and key team members in order that they could learn about the benefits of transparency and information sharing. The more hotels that participate, the greater the knowledge that leads to potential for yield enhancement and increased occupancy.

3) Overhaul the categorisation system

The categorisation system in Slovenia does not function as it should. There are many hotels that do not merit the category they enjoy, these should be told to smarten up or risk being downgraded. Categorisation should be harmonised with other markets. The tourist board in Scotland introduces new initiatives constantly, in order to improve the guest experience. Bathroom lighting was one initiative, towel replacement another – enhanced breakfast choice another. One hotel manager in Ljubljana complained about being ordered by the authorities to place a sign in the sauna stating that guests with lice should not use it. He refused, and was fined. The authorities in charge should be hospitality professionals who know what guest service is about.

4) Obligatory CHIA certification for all students in Slovenia’s tourism schools

Many hospitality schools and colleges worldwide now make CHIA certification obligatory. This ensures that every graduate has a clear understanding of hotel analytics and benchmarking. Every hospitality school in Slovenia should immediately adopt CHIA certification as part of the curriculum.

5) Funds for destination management, particularly central booking systems

Most municipalities in Slovenia are too small to be able to fund any kind of destination management activities. This responsibility should be delegated to Slovenia’s tourist board. They need funds to be able to set up central reservation platforms in every main tourist destination. Such systems work very well in Austria. The organisation of sporting events too could help boost numbers out of season. The Soča river is a world famous rafting destination – more events could generate improvements in the low numbers seen in Bovec and surroundings. Bled is renowned for rowing, and twinned with Henley in the UK. More rowing and other events would shine the spotlight on the tiny gem that is Slovenia.