Number of hotel rooms in Sri Lanka – Too little or too many?

19 October 2015 06:30 pm Views - 11731

A few months after the ending of the war in 2009, Sri Lanka tourism and the government came up with a surprise target of achieving 2.5 million tourist arrivals by the year 2016. To this date, no one has any idea as to how this number was derived and for better or worse, this audacious goal has gained credibility as Sri Lanka’s tourism’s ‘Holy Grail’. In the last few years, this rather ambitious goal seems to be fast becoming a reality, not necessarily in 2016, but very close ‘there-abouts’. It has left many sceptics rather astonished, including this author. 

In the meantime, with tourism arrivals rising, and this target looming ahead, there was panic in the ranks about a shortage of hotel rooms to meet this influx. Consequently, large and small hotels have cropped up all over the country. However, there are conflicting reports of the exact number of rooms that will be required to meet these targets. These numbers have varied widely from a requirement of 35,000 rooms to 40,000 plus, and some even say we will need 50,000.
It is rather surprising therefore that no one has tried to clearly understand and forecast the exact demand for rooms in the future. 

Although, at first glance this may be a straight forward arithmetical calculation, there are some factors that impact this in a strong manner. 
Hence, the purpose of this discussion is to try and analyse what really could be the room requirement for Sri Lanka tourism and the difficulties in forecasting such information. 



Analysis
a. Basis of calculation
All professional hoteliers know that the basis of calculation of hotel performance is governed by the following.

•     No of rooms in stock
•     Occupancy percentage for the year
•     Average length of stay per guest

The underlining calculations based around these indices are in Figure 1. 
b. Assumptions

•     The calculations of rooms required is therefore dependent on occupancy, average length of stay per tourist and single to double ratio per room 
•     A base arrival figure of 2.5 million has been considered as constant and a single and double occupancy ratio of 1.8 guests per room is used (usual industry norm). 
•     Three different scenarios are considered for a sensitivity analysis, firstly varying the occupancy levels at 65 percent, 75 percent and 85 percent (75  percent being the occupancy recorded for the entire island in 2014), while keeping other parameters constant. 
•     Next the occupancy and other parameters are kept constant and the average stay per tourist is varied to eight, 10 and 12 days to ascertain the sensitivity of the average stay on the required number of rooms. 

Sensitivity to occupancy (See Table 1)
Analysis

•     It is quite interesting to note that the sensitivity to occupancy change affects the required room stock negatively.
•     When occupancy is reduced to 65 percent the required room stock increases to about 58,500, while when the occupancy is increased to 85 percent the room stock needed actually comes down to about 44,700.
• At first glance this may seem paradoxical, but the fact of the matter is that when occupancy increases, the number of rooms needed to generate those room nights decreases, since each room is utilized more frequently.
•  Thus, if hotels in Sri Lanka are operating at higher occupancy percentages, we will not need as many rooms if we were operating on lower occupancy percentages.

Sensitivity to average length of stay    
(See Table 2)
Analysis

•     A two-day reduction in the average stay, results in the required number of rooms reducing drastically from approximately 50,000 to 40,000, (approximately 10,000).
•     Similarly, a two-day increase in the average stay increases the room requirement to approximately 60,000, which is a 10,000 room stock increase. 
•     It is therefore, quite evident, that while occupancy has an impact on the room stock required, the average length of stay has a much greater impact on the room stock. 
•     Currently, the average stay per guest is around nine to 10 days. 
•    Professionals in the Sri Lankan hotel industry are aware that this is due to the long haul, long staying, leisure clients from Europe, making up a large part of the market. 
•     However, currently the market source mix is slowly changing, from the predominantly European long staying guests, to the shorter staying Asian markets. 
•     In fact there is a concerted effort by the Sri Lanka Tourism Promotion Bureau (SLTPB) to strongly promote the new Chinese and Indian markets.
•     Hence, there is bound to be a reduction in the average stay per visitor in the future, resulting in a lower room stock required to service these numbers.

Available room stock 
Currently, the Sri Lanka Tourism Development Authority (SLTDA) 2014 statistics indicate a total conventional room stock of 18,510, together with another 9,916 in the supplementary sector. This makes the total current room strength 28,426. 

It is important to note that this does not take into account the numerous ‘Mom and Pop’ BB unregistered establishments that have cropped up all over the island. Some analysts put this number at around 5,000, which if taken into account will then raise the current available room stock to close upon 33,000.
In the meantime, the SLTDA statistics indicate that there are another 11,645 rooms in the ‘pipeline’ from already approved and ongoing projects. (See Table 3)
This would mean that in the next one to two years our room stock will swell to close upon 45,000. From the foregoing analysis it is seen, that if the future market mix changes radically, and the average length of stay comes down to around eight days, then the required room stock will only be about 40,000.
This would mean that in this scenario, we could already have an excess of rooms to satisfy the demand!

If the islandwide occupancy increases to around 80-85 percent, then we would require only about 45,000 rooms.

This would again mean that we already may have the required room stock, and possibly further hotel development should be discouraged!


A more concerning scenario
Currently, given the high fixed cost base of hotel operations,  the focus of all hotel operators is to drive higher levels of occupancy, to maximize operating margins. On the other hand, the focus of the SLTPB seems to be to the drive shorter staying, Chinese, Asian and other markets and perhaps quite rightly so.
So the ‘mantra’ seems to be higher occupancy and Asian markets (= shorter stays).

(See Table 4) If another Scenario X is now considered therefore, with 85 percent occupancy and a reduced average stay of eight days, the required room stock tumbles down to only about 35,000 -36,000! 
Which then means that we already have more rooms than we need!!


Conclusion
This shows very clearly therefore, that we are still ‘groping around in the dark’ with our long range forecasting and planning.

•     There needs to be a very clear plan and strategy of what Sri Lanka’s future market mix will be in the future, to ensure that we get our room requirement number correct.
•     It is not enough to sit back and passively react and say that the Chinese and Indian markets are now overtaking the traditional European markets. 
•     Sri Lanka tourism has to decide what market mix is best for the country and plan its marketing and promotional strategy to drive and ensure that these market forecasts are achieved (to a great extent).
•     It is only then, that hotel developers can really assess what the exact demand for future hotel rooms will be. Otherwise large investments in hotel development could be affected in the long run, leading to price wars in the future. 

This analysis does not take into account any seasonality effect. It is a well-known fact that Sri Lanka is a very seasonal tourism destination and therefore, when such drastic occupancy shifts are experienced, there is great imbalance in the required rooms stock over time. 

Also it does not take into account the actual geographic dispersion of rooms in tourist areas. It may very well be that there may be an oversupply already in some areas, while there may be a short supply in other areas.