Before the pandemic, tourism spending from overseas accounted for about a fifth of New Zealand goods and service exports, which is similar in size to the contribution from dairy exports.
But the closure of the borders and sudden disappearance of foreign visitor arrivals threw New Zealand’s tourism sector into disarray. Many would have floundered, had it not been for ongoing Government financial support.
By early this year, arrivals from offshore, led initially by Australians and ex-pat Kiwis, and then from traditional source markets in Europe and North America, had recovered to almost two-thirds of pre-Covid levels.
“Looking forward we expect domestic tourism in New Zealand will soften over the coming year. Ongoing increases in the cost of living and sharply higher interest rates are likely to force a reprioritisation in household spending and a rethink on what is considered by many to be a discretionary item.”
Those still spending on travel were being lured overseas.
“Kiwis now have choices, with many looking to reconnect with family and friends that live in foreign climes.”
The Westpac Economic Bulletin expects growth will continue to be driven by visitor arrivals from traditional source markets and increasingly China.
That should provide “easy pickings” for local tourism providers.
“But there is a limit to this. As time progresses and foreign visitor numbers approach pre-Covid levels, tourism firms will have to compete that much harder if they to grow market share and improve profitability.”
While the opening of the borders has been the dominant factor driving the recovery in foreign visitor arrivals over the past year, this has tended to mask the impact of other factors, such as technological change, evolving customer preferences and ongoing supply-side challenges.
The sector is dominated by small firms, on average with three employees.
“The fact that these firms often represent a lifestyle choice of their owners and are not as growth oriented as those with a stronger commercial focus suggest they may lack the peripheral vision needed to keep tabs on what is going on.”
Westpac found the sector is profitable and has the ability to invest. Data from the Annual Enterprise Survey suggests that accommodation and food services had an average return on equity of 17 per cent between 2013 and 2022. That is about 5 per cent higher than the average for all industries in New Zealand.
But most are big firms.
“The reality is that this a highly fragmented sector, dominated by small cash-strapped firms, many of whom struggle to keep their heads above water even in the good times.”
Tourism businesses needed to seize new opportunities by developing new ways of doing things themselves or buying other firms.
New Zealand tourism firms had a low propensity to innovate. According to Stats NZ, accommodation and food services spent an average of just $2.5m on average.
“That’s not much for a sub-sector that generates an income of about $16b annually.”
Accommodation and food services providers are not particularly innovative either; less than 50 per cent of firms develop or introduce new services, processes or work organisation method each year.
Covid-related lockdowns meant this percentage dropped further.
Clark said lifting sector productivity would be key and adoption of digital technology was essential.
Westpac’s recommendations
Obtain and analyse data: Expand analytical capabilities by investing in new digital technologies. That will allow firms to better detect changes in the operating environment. To that end, firms should be developing a superior ability to detect weak signals before they become big ones.
Create and leverage a tourism ecosystem: Build capability through mergers and acquisitions or by pursuing strategic alliances and joint ventures. Resulting economies of scale will provide the means to create new service offerings, while access to new technologies will encourage the development of services more personalised to tourist needs.
Engage with the customer on their terms: Make sure they are always in front of the customer, irrespective of when, where and how they might want to interact. Put simply, tourism firms need to ensure that they can deliver a purchasing experience wherever and whenever the customer wants to engage.
Eliminate barriers to innovation: Remove factors that limit the ability to mobilise the resources needed to develop new services. Key here is the ability to free up the time of management and shift focus away from immediate operational concerns. “Stretched for time and under-resourced, many do not have the capacity to look beyond the short term.”
