Dubai adapts to shifting tourism market

16 April 2010

After a long period of high occupancy rates, the global financial crisis and an oversupply of premium accommodation has left the emirate needing a new strategy to bolster tourist numbers

The global economic downturn has brought more than a decade of impressive tourism growth in Dubai to a shuddering halt. According to Dubai Department of Tourism and Commerce Marketing (DTCM) spokesman, Eyad Abdulrahman, the emirate attracted 7.58 million visitors in 2009, representing an annual growth of just 1 per cent.

In numbers

  • 7.58 million - Visitors to Dubai in 2009
  • 1 per cent - Annual growth in numbers in 2009
  • 61,487 - Number of hotels and holiday apartment rooms in Dubai in 2009

Source: Dubai Department of Tourism and Commerce Marketing

Dubai has been forced to promote itself heavily to UAE and other GCC visitors to make up for a steep drop in corporate and leisure bookings from Europe and North America.

While Abdulrahman expects to see growth in 2010, DTCM’s figures show that the slowdown intensified in late 2009, with international visitor numbers falling 5.7 per cent in the final quarter, compared with a 1.3 per cent drop in overseas numbers during the first nine months of the year.

Flooded market

Central to Dubai’s dilemma is the continued recession in the West’s major tourist-generating markets - markets that previously accounted for 90 per cent of the emirate’s visitor base. And while the volume of international visitors has fallen, new hotel stock has flooded onto the market, intensifying pressure on room rates.

The number of hotel rooms in Dubai increased 22 per cent in 2009, rising from 50,457 rooms in 2008 to 61,487. With arrival figures down and more rooms to sell, hotels have turned to special offers and cut-price deals to try to bolster occupancy levels.

“Dubai has always had an impressive ability to market itself, using its position as a transit stop-off to attract visitors,” says Julian Kemp, associate director for consultancy firm CB Richard Ellis Hotels. “But occupancy rates fell from 77.2 per cent to 69.4 per cent last year. [Now], hotels are doing everything they can to boost occupancy levels.

“Before the recession, too many people got too greedy too quickly in the property business - not just in Dubai, but worldwide. Dubai had overbuilt and will now have to rethink that strategy, particularly with the downturn in Ireland and the UK, which generated 10.6 per cent of Dubai’s visitors last year.”

The global recession has exposed the central weakness of Dubai’s tourism development strategy, namely its high concentration of luxury five-star hotels and resorts, and shortage of mid-market and budget accommodation.

Dubai’s focus on premium business travel has kept average room rates artificially high, its average revenue per available room (RevPAR) was second in the Middle East only to that of Abu Dhabi last year. The last 18 months have seen a slump in individual business travel and in meetings, incentive and conference travel (Mice), and Dubai vulnerability has been laid bare.

Strategy refocus

“Dubai relied heavily on corporate traveller demand in the past, but up to 70 per cent of that demand was linked to business travellers involved in real estate,” says Hala Matar Choufany, managing director of HVS Dubai, a consultancy firm for the hospitality industry. “This segment has been hit hard, and the question facing hotels is how to replace that corporate market with leisure travellers.

“Dubai was the Middle East city hit hardest by the downturn in 2009. It saw a 30 per cent drop in room rates and a 10-15 per cent drop in occupancy levels. Project cancellations mean that some 17,000 new hotel rooms will now not happen,” Choufany adds.

“However, 55,000 new hotel rooms will be built in the Middle East in the next three to four years, of which 50 per cent will be in the UAE and 28 per cent in Dubai. [These] new hotel rooms pose a serious challenge: Dubai’s key tourism markets for corporate and leisure travel are Europe and the GCC. If these markets do not recover, how will Dubai fill these rooms?”

Hotel statistics average for 2009
 ADR ($)RevPar ($)
Abu Dhabi285202
Revpar = revenue per available room. ADR= average daily rate. Source: STR Global

Dubai sees tourism, shipping and trade as central pillars of its economy. In 2008, tourism generated 19 per cent of gross domestic product. A year earlier, DTCM had unveiled its Strategic Plan 2015 - a scheme to double the number of hotel guests to 15 million by 2015. It also aimed to increase the number of hotel rooms to 141,000.

In October 2008, with sheer demand creating average hotel occupancy levels of nearly 83 per cent, Dubai commanded average daily room (ADR) rates of $375. By 2009, however, the boom was well and truly over and Dubai saw the Middle East’s steepest decline in RevPAR, which dropped to an average of $163.31.

In September 2009, DTCM executive director for business tourism, Hamad Mohammed bin Mejren, confirmed that Dubai would have to “adjust” the Strategic Plan’s goals, as the economic crisis was “out of control”.

Average occupancy rates in Dubai fell from 77.2 per cent in 2008 to 69.4 per cent the following year. Industry observers say levels would have been significantly lower but for hotels’ cutthroat weekend offers that slashed prices for entertainment, food and beverages to boost bookings from locals and Gulf residents.

Prospects for the year ahead remain uncertain. US-headquartered STR Global reports that the downturn has continued into 2010, with hotels across the Middle East and Africa seeing occupancy levels decrease 2.3 per cent to average 54.8 per cent in January. Region-wide, ADR dipped 1.9 per cent to an average $170.20 and RevPAR dropped 4.1 per cent to $93.23.

DTCM has launched a drive to boost numbers of summer visitors that focuses on special promotions and package deals to target family visitors. In March, it announced an extended Kids Go Free promotion from May to October that aims to attract tourists over the summer, traditionally the quietest time of year for tourism in Dubai.

The scheme, which involves 80 partner hotels, offers free Emirates flights, meals, hotels and entry to key attractions for two children aged under 16, travelling with two paying adults.

But such initiatives provide only short-term solutions and many observers believe that the scale and reach of the downturn is a signal that Dubai needs to reassess its mid- to-long-term tourism development strategy.

“There is far too much five-star hotel stock in the Dubai market,” Kemp says. “It desperately needs a more diverse product that also offers budget and mid-market hotels.”

Hotel development pipeline* (rooms)
Abu Dhabi14,171
Saudi Arabia14,178
*at March 2010. Source: STR Global

Taleb Rifai, secretary-general of the Madrid-based UN World Tourism Organisation, hopes that tourist destinations across the world will use the global recession as an opportunity to reassess.

“In Dubai’s case,” Rifai tells MEED, “it needs to look at issues such as sustainability, the profile of tourists that it attracts and technology transfer. It needs to look at the changing profile of tourists as a result of the crisis.

“People are now travelling shorter distances and for shorter periods. They are demanding better value and have higher expectations of the experience on offer - they want more stimulation and diversity of choice. Dubai will benefit from looking at what products it can offer to create a more stimulating experience that will attract a wider segment of people.”

There are signs already that the market is starting to diversify. Since the downturn, Dubai has seen an influx of new budget and mid-market hotel brands, including Premier Inn, Holiday Inn Express, Ibis and easyHotel. These properties are competing within a new market segment, benchmarked at about $68 a night.

Rezidor Hotel Group’s mid-market brand Park Inn launched its first Middle East property on Yas Island in Abu Dhabi last year, charging from $115 a night. Rezidor is now pushing ahead with its second UAE Park Inn, which is due to open near Dubai International airport’s terminal two in 2012.

Hotel occupancy (percentage)
Abu Dhabi70.658.9
Source: STR Global 

Price options

“There is definitely demand for a more segmented market,” says Marko Hytonen, area vice-president of Belgium-headquartered Rezidor Hotel Group. “It doesn’t mean that Dubai will become the Costa Brava of the Middle East, but it is easier, today, to talk about bargain hotel brands too. There is demand for different price options.”

Dubai’s new emphasis on Arab and Asian tourists could also boost demand for accommodation that suit larger groups of travellers.
“GCC people tend to travel in large family groups, often with maids and drivers,” says Andreas Mattmuller, senior vice-president Middle East and Asia with Swiss chain Mövenpick Hotels & Resorts. “With these visitors, there is a real demand for residence-based accommodation, even for short stays.”

Mövenpick will open four new properties in Dubai this year, all of which were planned before the downturn. Nevertheless, Mattmuller believes there is “a real opportunity” in Dubai for hotels to focus on three-star properties costing $70-80 a room.

As for when recovery will come, opinion is divided. Based on Mövenpick’s forward bookings, Mattmuller sees signs of recovery in corporate, leisure and Mice demand from October.

Rezidor’s Hytonen hopes that growth in visitor numbers in the first quarter of 2010 show “that the market has stopped sliding”, at least.

But others are more pessimistic. Choufany worries that Dubai’s short-term focus on promotions could create more problems than it solves.

“Hotels in Jumeirah [Dubai’s beachfront area] were not hit too badly in 2009, due to high levels of pre-booked holidays from Germany, the UK and other markets that had already been paid for,” Choufany says. “But these same hotels have few, if any, pre-bookings for 2010.

“Dubai is cutting prices to boost numbers [but] the danger here is that with travel down worldwide, those visitors that take advantage of Dubai’s deals are mostly corporate travellers who had planned to come in any case.”

As the industry well knows, attempting to raise prices after a price war is a difficult task, and one that will only be made worse by the new supply entering Dubai’s market.

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