Croatia Records Recovery in Tourism Revenue, but Lower Profitability for Hotel Groups

Total tourist overnight stays in 2023 increased to 107.8 million or 2.8 percent compared to 2021, nearly reaching the pre-pandemic records set in 2019. Meanwhile, foreign tourism revenues reached a record 14.6 billion euros (19 percent of GDP without indirect effects) compared to 13.1 billion euros in 2022 and 10.5 billion euros achieved in 2019, according to the Croatian Employers’ Association in this week’s analysis.

Undoubtedly, the growth in revenue is significantly influenced by the average price jump of 14.3 percent during the peak of last year’s season from June to September, following a price increase of 13.3 percent in 2022, as well as a faster above-average growth in higher-priced hotel overnight stays(+7.4 percent in 2023 after +46.0 percent in 2022). Croatian tourism recorded the strongest recovery in the EU and is among the three best Mediterranean tourism powers compared to the pre-crisis year of 2019. This is attributed to good crisis management during the pandemic, above-average recovery of commercial flights to the destination, rapid return of sector investments to pre-pandemic levels, and entry into the Eurozone and Schengen, which improved the perception of Croatia as an attractive and safe tourist destination.

Positive trends continue in the first quarter of this year, with an 18 percent year-on-year increase in foreign tourist overnight stays and a 22.7 percent higher value of fiscalized invoices (+16 percent in retail), while inflation in the first quarter is nearly 10 percent higher compared to the first quarter of 2023. We are also witnessing a real wage growth of 9 percent annually, with significant increases in the public sector yet to be reflected in the statistics, as well as an acceleration in the growth of non-purpose consumer loans (nominally +12.5 percent annually), all benefiting the real growth of retail in the first quarter of about 10 percent annually.

However, the profitability of domestic hotel groups listed on the Zagreb Stock Exchange has significantly decreased. In 2023, the share of EBITDA operating profit in total revenue decreased by 4 percentage points compared to 2022 (from 31.1 percent to 27.2 percent). Compared to 2021, the EBITDA margin fell by 9 percentage points. In the context of rising prices of energy and raw materials and strong pressures on labor costs further generated by the record increase in the minimum wage, pressures on profitability and financial potential for investment in the tourism sector continue.

Despite fears of declining purchasing power, European tourism remains attractive, so it is not surprising that the travel sector from the Eurostoxx600 index recorded a growth of 7.2 percent (Eurostoxx600 +5.8 percent). Results this year could be even better as bookings in the EU only reached pre-pandemic levels last year, we are witnessing strong growth in corporate travel in the MICE segment, and the demand from Europeans for travel is relatively inelastic to the decline in real disposable income, as it constitutes a small share (below 3 percent) of the income of the average European.

Croatia has only 15 percent or effectively only 9.5 percent of beds in hotel accommodation (when non-commercial accommodation – weekend houses – is included in the denominator) compared to Greece, which has 71 percent of capacity in hotels, Italy with 43 percent of hotel beds, and Spain with 53 percent of hotel capacity.

The result is also relatively low tourist spending in Croatia of about 150 euros per day compared to spending in Italy and Spain, where tourists spend an average of about 250 euros per day. In France, guests spend more than 550 euros daily.

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For Accelerating Investments, Key Regulations and Concessions

Although strong growth in tourist demand in the EU supports expectations for continued growth in Croatian tourism revenue towards a level of 16 billion euros in 2024, the growth rate is unsustainable for several reasons. We already recorded stagnation in service exports (-0.2 percent annually) during the second half of last year, which, given the strong growth in IT service exports, indicates a real decline in tourism revenue.

Namely, the existing capacity structure, dominated by short-term rentals with the lowest share of hotel accommodation in total accommodation in the European Union and the Mediterranean, consumed by guests with lower, diminished purchasing power, poses limitations on further growth for Croatian tourism. This only emphasizes the HUP’s stance that in order to increase added value, investments should be rapidly and strongly directed towards organized accommodation to address the problem of the worst accommodation structure in the Mediterranean.

The Tourism Act for the first time addresses overtourism. It has been triggered by the burgeoning family and non-commercial accommodation for short-term rentals, which aggressively uses infrastructure and irreversibly undermines the competitiveness of the destination. For initiating a significant investment cycle in tourism, key regulations, an investment-attractive model for leasing tourist land, and especially the rapid operationalization of the Law on Unassessed Construction Land are essential.

A significant novelty in the Maritime Domain Act is the institute of ‘concession on demand’, but it is necessary to define open questions through subordinate legislation, particularly regarding land in the camping segment in the company’s core capital subsequently declared as maritime property, as well as conducting commercial activities on maritime property. It is essential to enable users to easily obtain a concession directly upon request for technologically or functionally inseparable units of beaches, tourist moorings, and tourist ports with hotels, camps, and tourist resorts. It is also necessary to precisely and fairly regulate the status of property that entered the regime of maritime property after the completion of transformation and privatization. Quality regulation of maritime property is a prerequisite for the development and raising the quality of Croatian tourism.

Croatian tourism will face a significant challenge of labor shortages in the coming years, and in this regard, it is necessary to further activate all domestic labor potential through further liberalization of the labor market legislative framework and expedite the processes of obtaining work permits for workers from ‘third’ countries. Last year, 46,000 work permits were issued to foreigners in tourism, and this year 50,000-55,000 are expected.