ADAPT to the Hospitality and Tourism Industry in the Middle East

Common regional approaches are becoming very difficult, if not impossible. Countries in the Middle East are becoming ever more differentiated – even within the GCC – with very different levels of maturity, different focus areas and different challenges.

The lag in companies’ implementation of digitisation strategies in the region means that technological disruption is now starting to hit the hospitality and tourism sector hard.

Lower oil prices mean that diversification is moving at a full speed ahead, opening up enormous opportunities in the hospitality and tourism industry – but the risks facing investors are significant and hard to calculate.

The region’s geographic position and its success in positioning itself as a global hub for tourism means that there is an ever wider diversity – in culture, age and expectations – in the kind of visitors it caters to.

Asymmetry

Increasing wealth disparity and the erosion of the middle class

Around the world there is a growing disparity between a small wealthy elite and a growing cohort of citizens who are angry at or disappointed in their inability to enjoy the life they expected. The Middle East, as a region, has the highest share of inequality.

While the inequality is largely accounted for by differences across the region, even within countries – and even among citizens – there is growing wealth disparity that is nurturing social tensions. The greatest challenge is among the large number of young nationals that are unable to find a job. Over 30% of Saudis aged below 25, and over 50% of young Omanis are unemployed. In response, governments are trying to diversify the economy, nurture a job-creating private sector, realise targets to replace expat workers with nationals, improve local skills and provide access to affordable public services and housing.

The hospitality and tourism industry is at the heart of that diversification effort.

Globally, travel and tourism is the largest employment generating sector in the world. In the region, Dubai has shown the economic potential of tourism when policies are prioritised and stakeholders are well aligned. Although occupancy rates have come down from unsustainable high levels (upper 80%) to ones that match other global locations, the fast growth build-up to the Dubai Expo in 2020 will not create a bubble like the one in 2008/09. This is because Dubai has put a comprehensive framework in place around its iconic hotels and other hospitality assets, fortifying demand through largescale investment into business, leisure and MICE products.

Saudi Arabia now actively pursues the potential of hospitality and tourism to build private-sector momentum in and around the industry and create jobs. Religious tourism is already very strong. In addition to 1.8 million foreign and domestic Haj visitors, Saudi Arabia attracts around 6 million international Umrah visitors in 2016.

The aim is to increase this number to 15 million by 2020 and 30 million by 2030. The country also has a rich wealth of cultural and natural heritage assets, but few visitors stay to enjoy them or spend money in the country. In order to boost businesses and jobs by developing leisure tourism, as the National Transformation Plan envisions, there needs to be a clearer consensus around the country’s positioning as a tourist destination, there also needs to be alignment around policies and investment in order to build up a future-proof industry.

For investors and policy-makers in Saudi Arabia putting tourism at the heart of successful diversification, a clear focus on what tourism will look like in the future is required - not just piecemeal changes and opportunistic developments. Is the country going to focus on heritage tourism, on beach resorts or on leisure & entertainment assets? Will immigration and visa processes be transformed to encourage tourism or will the country remain difficult for visitors to enter? Will the focus be on international or domestic tourism? And will nationals be encouraged to develop a service mindset so they can be employed in large numbers across the tourism sector?

_Sources:

¹ _{General Authority for Statistics, Kingdom of Saudi Arabia}
² _{The Ministry of Hajj and Umrah}

Age

Demographic pressure on business, social institutions and economies

The world is facing twin demographic pressures. The population in most countries is ageing, but many fast-growing markets are dominated by a youth bulge that will play out over the next few decades.

The demographic shift in tourism is affected by the growing importance of silver tourism (the tourism of the elderly) as well as the more frequent travel of tourists from emerging countries, coupled with increasing mobility, which means that the tourism industry locally and globally will witness greater diversity. That shift is already shaking up more mature tourism markets. Dubai, for example, is attracting increasingly diverse groups of tourists, with a 41% increase in Chinese tourists in 2017. The industry is under pressure to find the right balance between traditional tourism concepts that attract families and older tourists, while also developing more experiential and differentiated concepts to attract young travellers and catering to first-time tourists from new regions.

The Gulf region itself is undergoing rapid change as governments attempt to cope with the challenges brought by a population where over 60% is below the age of 30. The young population, especially in key markets such as Saudi Arabia, is increasingly worried that they are losing the privileges of their parents’ generation – they want a good education, high-paying jobs, and access to cheap utilities, housing and healthcare. They are happy to use Twitter to express their discontent if they feel the government is not listening.

^{Source: Dubai Department of Tourism & Commerce Marketing (DTCM)}

For the regional hospitality, tourism and real estate industries, these demographic pressures bring a wide range of both opportunities and challenges. Saudi Arabia’s Crown Prince, Mohammad Bin Salman, has responded to young people’s call for more entertainment, sport and tourism, opening up huge potential in everything from theme parks to cinemas. But it will take careful and managed transformation to get the positioning right and avoid mixed messages. Does a Red Sea resort sit well with heritage and religious tourism? What is needed to appeal to family tourists? How will theme parks operate in Saudi Arabia?

Another important factor is that the tourism and leisure industry can serve as an enabler for job creation and diversification. For it to play that role, two foundations are needed. First, companies must be able to nurture a stable, service-minded workforce. In the short term, while growing the local talent base needed, that means attracting thousands of young expat workers and building affordable housing for them. But that can’t be a long-term solution – there has to be a concerted effort to change mind-sets in the region so that young nationals are happy to train and work in service industries at all levels. That still sounds unthinkable, but the combined pressures of asymmetry, age and disruption means there is no choice but to get the population working in sectors that will drive growth. That effort needs to start now.

The second foundation for building a healthy job-creating industry is the development of entrepreneurs and small businesses in the tourism and hospitality sector; something still limited across the region. This will require a broad range of initiatives, from supportive laws and regulations, to better funding, tax advantages and incubators.

Trust

Declining trust in institutions and technology

Lack of trust in institutions and technology is making it harder for governments and businesses to act globally, while accelerating the spread of new peer-to-peer and social media based institutions. In the Middle East, these same trends are exacerbated by the immaturity of institutions in young states and the dependence on individual leaders to get things done.

Where leaders are highly trusted, an atmosphere of confidence pushes the pace of change and encourages investment, while maintaining social peace and a high level of security. The challenge now is to build future-focused institutions that can help to guarantee continued progress as a new generation play an ever great role.

For the tourism and leisure industry, moving towards greater trust in a national vision and consensus is essential for continuity and growth. There is confidence that Dubai will remain open and transparent, since so many national interests have a stake in that vision.

Elsewhere it is less clear. Oman’s focus on low key luxury tourism is associated with Sultan Qaboos whose successor is not yet determined. Even more so, initiatives such as Saudi Arabia’s Neom or Red Sea project is associated with the Crown Prince and not part of a transparent national consensus on the future of the country’s tourism.