Editor’s note: The following is part of a series of monthly articles from Horwath HTL that examine local business conditions in various hotel markets throughout the world. Installments run on or about the 20th of each month.
The current and forecasted data projections for Brazil’s economic performance tend to encourage all sorts of investment projects including reckless ones. But after looking at what the Brazil market has to offer, it’s hard not to be optimistic. All signs are positive, not only for the tourism industry but also as an investment destination:
• Brazil is the 10th largest economy of the world.
• According to Goldman Sachs, Brazil, Russia, India and China, will become the most relevant and dominant economies within the next few decades.
• The country has produced sustainable economic growth, with a controlled inflation and fiscal surplus during the last 10 years.
• Between 2002 and 2008, 20 million Brazilians migrated from the D and E classes (lower income inhabitants) to the C class (the new middle class). Now the C class represents more than 50% of the country’s population (97 million people).
• Among the BRIC countries, Brazil presents the lowest absolute values in terms of foreign direct investment. However, if taken proportionally relative to its GDP, its performance is much better and takes the lead.
• Brazil is sixth in the world ranking for tourism’s total contribution to the GDP (US$68 billion).
• Brazil will host two major world sporting events: FIFA World Cup 2014 and the 2016 Olympics in Rio de Janeiro.
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Mariano Carrizo
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This only partially proves the point. Even though Brazil’s economy is strong and is expected to grow substantially for a while, the delay effect that the economy (as a whole) has over the hotel industry in the region partly explains the long walk that remains to develop an adequate (both quantitatively and qualitatively) hotel offering.
Some more facts and figures, specifically about the tourism sector:
• In absolute terms, Brazil appears on top of the rankings regarding tourism’s employment, investments and direct contribution to the GDP. Still, Brazil’s ranking drops considerably if considered in relative terms the participation (percent share) of each of these items.
• International tourist arrivals still is an unfinished business for Brazilian tourism, with the numbers barely approaching Argentina’s 5.29 million visitors and far behind Mexico’s 22.14 million arrivals. Only 10 to 15% of Brazil’s hotel guests are foreign.
• Brazil has lacked in coherence and good information about its hotel offering strategy for decades. Until now, there have been no recognizable standards to classify hotels throughout the immense Brazilian territory. Only now the Ministry of Tourism launched the Brazilian System for the Qualification of Accommodation Options.
So how can we understand what is going on in the Brazilian hotel industry? To begin with, we need to look closely at the classic drivers of demand, supply and investment.
Demand: Home sweet home
Brazil’s hotel and tourism demand mainly is domestic. The highest percentage of international guests is found in 5-star city hotels (upscale, luxury and super-luxury). Even though Brazil received 5.1 million international visitors during 2010, a 6% increase compared to 2009, the truth is that most of the hotels make their living through the corporate and events segments, which has been boosted by the general economic activity of the country.
There is some sort of distorted image that places real estate tourism developments located in the northeast region of Brazil (Bahia, Alagoas, Rio Grande do Norte) as an international destination for many European tourists. In fact, there are some source markets (Porto Seguro and Italy, Natal and Portugal, etc.) that might show some participation of Europeans in their international visitors record. However, the Brazilian tourist still is the main guest in these resorts. Distance, lack of good publicity and poor airport infrastructure are some of the reasons that could explain this scenario. On the other hand, the same picture with different reasons could be drawn for economic and midscale (3-star and 4-star) hotels around the country.
Lastly, the current exchange rate (an over-appreciated Brazilian Real) benefits dollarized tourism products (the Caribbean, cruise ships) that tend to be more competitive than Brazilian vacation complexes.
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Supply: A family business
Hotel offerings in Brazil can be divided into three main groups: independent hotels, national chain-affiliated hotels and international chain-affiliated hotels. The number of chain-affiliated hotels (both national and international) is low in terms of establishments (approximately 8% of total), but the number of chain-affiliated rooms is much more relevant: 27% of the total rooms available in the country.
Since the 1990s, hotel chains are gaining space within Brazil’s hotel landscape. The international ones (Accor, the largest chain in Brazil with 146 hotels and more than 24,392 rooms) have achieved a significant penetration in the market through the tropicalization of the products (adapting international brand standards to local customs) and aggressive business plans that include franchised products in secondary and interior cities.
Meanwhile, national chain-affiliated hotels also have gained significant participation in the market (4% of the hotels, 12% of the total rooms available in the country), but they faced or are facing different problems, specifically how to grow professionally in operational and commercial terms. Most of these national chains originally were part of the group of independent hotels (92% of the hotels, 74% of the total rooms) and grew locally and regionally. Some of these chains are introducing more professional processes and investing in training.
As for their growth, not only are they spreading their brands in Brazil, but also they are starting to look outside (mainly to other South American countries) to follow Brazilians guests in preferred destinations such as Argentina, Chile and Uruguay.
Surfing the wave: Real-estate logic vs. hotel logic
A strong increase in demand and the general business conditions seem to compound a suitable scenario for an investment wave in the hotel industry. The truth is that many projects rely on the condo-hotel capital model to fund the development. Mixed-use projects (hotel, offices, residences, retail, etc.) became attractive options for individual and small investors seeking a stable and long-term income.
Even with these conditions, a shadow of doubt is rising over a new wave of hotel projects that have proliferated in many cities in Brazil and is caused by investors getting their fingers burned 15 years ago. There was an explosion of newly launched projects including various hotels, with perhaps the most famous example taking place in the city of São Paulo. From 1998 to 2004, the hotel supply grew significantly but without a corresponding increase in demand. The imbalance spurred a rate war, and the damage was long lasting.
What happened more than 10 years ago and what can happen in some specific markets nowadays in Brazil is that the real-estate logic might prevail over the hotel logic. This means that the “need to sell” promoted by the developers of the mixed-use project (real-estate logic) could leave aside the “need to exploit” that comes out of the hotel operation business. Hotel rooms were sold without in-depth analysis to corroborate if that city or area could sustain new bedrooms. The developers and constructors made a great deal, while investors took a haircut.
Stepping up to the plate
While the eyes of the world seem to be focused on Latin America and specifically on Brazil’s potential, the Brazilian government has projected 5% growth for the economy in 2012, a stable exchange rate and contained inflation (4.8%). Hotel projects are multiplying in different cities all over the country, though part of them will never get off the ground (lack of funding, lack of timing, lack of market). The game is rolling, as the country is running against the clock to host major sports events during the next five years.
To hit a homerun, it is essential to analyze current conditions and future potential for each one of the opportunities. To do so, it is necessary to distinguish which are good for hotel development versus which are good for real-estate development—and which are good for both. After all, chances and business are all about timing, especially in Brazil
Mariano Carrizo is projects director for Horwath HTL in Argentina. He can be reached at +54 11 4394 8091 or mcarrizo@horwathhtl.com.
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