Managing the catch-22 of the depreciating rand and its impact on SA tourism

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Making the correlation between a weak rand and increased foreign tourist numbers:

In 2015, tourism in SA declined due to factors including visa processing capacity constraints, unabridged birth certificates and the Ebola virus among the many. In 2016, the rand took a knock in value and tourist arrival numbers improved, SA received over 10 million tourists, a 12.8% increase on 2015 numbers.

Aside from some relaxation in visa regulation requirements, the depreciation of the rand can be cited as a contributing factor to the increase in foreign tourists to SA.

“The challenge of the weaker rand is that it’s a short term but much-needed windfall for the industry. However, businesses’ strategies are geared to more long term sustainability thus will continue to market their product offerings accordingly,” says Charnel Kara, Tourism Specialist at FNB.

The catch-22 – Rand depreciation vs. running costs in tourism:

Hospitality related businesses usually hedge the rand against the foreign currencies at a particular level, thus, foreign tourists coming to SA benefit from a stronger currency against the rand at a particular point in time.

“Currency fluctuations are not under the businesses’ control. Business should still take cognisance of increased input and operational costs that may dilute any sort of benefit from the depreciated rand. These costs include hikes in food costs, fuel, administered price like electricity, gas and property rates – these are costs absorbed by business owners and are usually ahead of inflation, they also usually result in a negative effect on the bottom line,” says Kara.

Businesses innovation to solve the catch-22:

Hoteliers and tourism related businesses are mitigating costs by implementing, inter alia, green and energy saving concepts, innovative pricing and revenue management, low debt gearing levels, creative hotel/tour packages, loyalty cards, aggressive destination marketing and collaborations with relevant government departments.

Which businesses win and which lose from the depreciation of the rand?

Essentially, a weaker rand makes imported items and overseas travel more expensive for South African consumers. Businesses that may feel the negative effect of a weaker rand is those focused on the outbound travel market – South African travelling outside of SA. Those most likely to benefit are those in the Meetings, Incentives, Conferences, and Events (MICE) sectors – as it will be cheaper to host a conference in South Africa.

A market that ought to benefit from the weak rand is the luxury safari market. At first thought, the cost of a luxury safari holiday may seem like a dream. It is important to bear in mind that luxury safari lodges often offer rates that are fully inclusive of meals, accommodation, game drives, etc. In addition, neighbouring countries such as Botswana, Zimbabwe price their safari packages in US dollars, making South Africa a more attractive destination in terms of value for money.

What can business do to mitigate this?

Avoid hiking rates: Businesses should avoid hiking rates as it affects the performance of the industry as a whole, especially for over-geared businesses.

Price competitively: To benefit from the weak rand, businesses should price attractively. As an example, selling block or group bookings at a slightly lower rate than singular bookings, or perhaps charging less for longer stays. It is one way to ensure ‘bums in beds’ where there is potential to spend more on other offerings.

“Decreasing operational costs assists in improving a business’s bottom line. Managing costs balanced with achieving the right occupancy level at a competitive rate is where businesses will win and remain sustainable over the long term” concludes Kara.