Deloitte: Domestic tourism companies expect higher cost growth than revenue

– It is certain that we are entering the tourist season with optimism. The situation is better than last year, but on the other hand, there are challenges and we must be very focused and cautious, especially with the awakening of competition which is stronger today than in the previous two years – said on Wednesday Bernard Zenzerović, director of the Association of Entrepreneurs in Hospitality of Croatia (UPUHH) at the presentation of the survey results on expectations and challenges in tourism, in collaboration with the Croatian Tourism Association (HUT) and Deloitte, whose financial consulting department conducted it.

Higher costs than revenue

The survey results showed that domestic tourism companies expect growth in overnight stays and revenue this season as well, with most estimating growth of up to 10 percent, but as many as 67 percent of companies expect cost growth to exceed revenue, which will negatively impact the profitability and investment potential of the sector. Along with rising costs, finding the necessary quality workforce was rated as the biggest challenge, given that most companies will need more seasonal employees this season.

The tourism sector is in a situation of declining profitability in an increasingly complex position, as significant investment in the quality of offerings, digitalization, and sustainability is necessary to increase competitiveness. These are key conclusions from the large survey ‘Croatian Tourism – Expectations and Challenges in 2023’, conducted by Deloitte’s financial consulting department during March.

Deloitte conducted a similar survey in the United Kingdom and the European Union, surveying 100 groups in the hospitality and tourism industry, and this year it was conducted for the first time in Croatia, in collaboration with the Association of Entrepreneurs in Hospitality of Croatia (UPUHH) and the Croatian Tourism Association (HUT). The survey covered companies managing a total of 297 facilities that collectively represent a portfolio of 31 percent of all hotels and camps in Croatia.

– There are two aspects that should be noted in this tourist season. The first relates to the extent to which guests will return to their pre-pandemic vacation booking routine, or whether this will happen earlier in the calendar year. The second aspect is the impact of rising interest rates on companies borrowing from commercial banks. From the survey, we learned that participants preferred HBOR and their own capital as financing options – said Francois Swanepoel, director in Deloitte’s financial consulting department.

Expected increase in energy prices

The survey also showed that 85 percent of tourism companies recorded an increase in bookings in March compared to the same period in 2022 (54 percent reported an increase of up to ten percent, and 31 percent reported an increase of over ten percent), while most of them expect an increase in overnight stays in 2023 based on the status of bookings and market announcements, with 51 percent expecting an increase of up to ten percent, and 28 percent expecting an increase in overnight stays of over ten percent. The growth in market demand will also translate into revenue, with 54 percent expecting revenue growth of up to ten percent for the entire season, while 36 percent expect revenue growth of more than ten percent.

Unfortunately, along with the expected increase in demand and revenue growth, the results of this tourist season will again be marked by rising costs, with 56 percent of companies expecting energy prices to rise the most, 28 percent seeing rising labor costs as the biggest challenge, and 15 percent expecting food and beverage prices to rise the most. As many as 44 percent of companies expect total costs to increase by five to ten percent compared to last year, while 41 percent expect total costs to rise by more than ten percent.

The survey again showed that one of the major challenges in the tourism sector is the procedure for hiring foreign workers, and this challenge will be particularly emphasized this year when the demand for qualified labor is increasing. Almost two-thirds of companies (64 percent) will need more employees than last year, and the two biggest challenges in filling positions are finding qualified candidates (for 44 percent of companies) and bureaucracy in their hiring (for 41 percent of companies).

– We are entering the third season in which the sector is trying to make up for the losses from 2020. Last year, despite record revenue figures, we only made up 80 percent of the losses from that most difficult pandemic year, and this year we expect the continuation of the recovery trend, but this process is slowing down due to significant inflationary pressures and accelerated cost growth compared to the pre-pandemic period. This slows down bringing investments to the level needed to maintain competitiveness against Mediterranean tourism rivals – added Zenzerović.

It is necessary to facilitate the import of labor

The results of the conducted survey show that almost a third of tourism companies, due to cost pressures, do not plan to increase capital investments in 2023, while 38 percent will invest less than their annual investments before the pandemic. Along with the squeezing of investments, companies are also affected by rising costs of financing investments due to increased interest rates on loans. Therefore, most companies see HBOR (44 percent) as the most attractive source of investment financing, only one-fifth (21 percent) plan to invest their own funds, while others see an opportunity to realize investments with the help of venture capital funds, pension funds, and banks.

As the main prerequisites for increasing investment, the surveyed companies state that it is necessary to facilitate and expedite the import of labor, reduce the tax burden, amend the Investment Promotion Act, adopt a quality Maritime Property and Ports Act, and enable the application of the Law on Unassessed Construction Land (tourist land) as well as generally improve the efficiency and transparency of bureaucracy.

The impression of our respondents is positive and expectations are optimistic. However, of course, entrepreneurs have recognized the problems and risks they will face in the next tourist season – said Silvija Juričić, manager in Deloitte’s Financial Consulting Department.