Blind leading the blind – Tragic case of Colombo’s city hoteliers
The current dialogue over lifting minimum room rates in Sri Lanka explains why the tourism sector in Sri Lanka must fight the ‘enemies within’ to achieve expected growth.
The Colombo City Tourist Hoteliers Association (CCTHA) recently adopted, what they termed a resolution, against the government taking measures to remove the minimum room rate for hotels in Colombo – a regressive and archaic way of controlling prices.
In an article published in a weekly English newspaper, M. Shanthikumar, the President of of CCTHA implored the government, ‘let hoteliers survive and sustain their business with the support of the government’. Shanthikumar and many other city hotel operators in Colombo have an interesting definition of the phrase ‘government support’, a term that is widely used and abused in Sri Lanka. The way they expect ‘government support’ is by imposing price controls in the market to give them -in their opinion – a short-term competitive edge.
The problem, however, is that many city hoteliers in Sri Lanka’s commercial capital turn a blind eye to the harsh realities faced by their own industry. Alternative accommodation has already disrupted the way people perceive accommodation and vastly popular online platforms such as Airbnb have ‘democratized’ the industry by opening it up to every home owner in the world.
This seeming democratization of the industry has allowed accommodation service providers to evade the tax net quite easily. As a result, they are able to offer their services at a fraction of the cost visà-vis established hotel operators. This has allowed the informal sector to rapidly increase its market share by being more cost-effective to customers, much to the detriment of the formal sector. The formal sector, in every part of the world, grapples with severe challenges to remain afloat in the market.
Does this mean that the formal sector has come to a dead-end?
Not really! Nevertheless, it has come to a point where it has to review their business models and re-adjust their seats.
For instance, a persistent trend sees an increasing fraction of leisure travelers seeking “experiences” – who spend a larger fraction of their expenses on activities rather than on accommodation. This creates opportunity for formal sector hotels to specialize in what they offer such as full-service banquet facilities that may require significant operational and labour expenses year-round.
Another option might be outsourcing of staff-heavy operations, such as laundry, to more cost-effective suppliers. In essence, the objective is to minimize operational costs through greater efficiency and remain competitive on the pricing front.
The capital cost in building typical formal hotels in Sri Lanka is 25present higher than elsewhere in the region. However, there are niche chains that have mastered the art of reducing capital cost of building through innovative ways. Even some well-established hotel chains have espoused creativity and innovation and ventured into new areas.
Unfortunately, the future of many formal sector accommodation providers in Sri Lanka is bleak. They have opted to stay away from meaningful ways of re-inventing their models and expect the government to do the job for them – through price controls.
The City Hoteliers Association’s resolution, in this writer’s opinion, is symptomatic of this lethargic approach which has plagued every aspect of the country’s growth. As the representative body of the city hoteliers in Colombo, the organization is blindly leading its members towards an inescapable mire!
It is in this context that every industry stakeholder must support removal of the minimum room rate as it one step in the direction of creating a level playing field. It leaves room for creative and innovative hotel operators to compete with the informal sector and make the best of the opportunities presented by the growing numbers.
If the minimum room rates remain, the informal sector will keep cashing in on the current imbalance and draw more and more businesses from the formal sector. Accommodation sector statistics, across the world, bears testimony to the fact that the informal sector is cannibalizing the formal sector and the only way the formal sector can fight back the cannibalization effect is by being more competitive in terms of pricing.
Price control, therefore, will only discourage those handful of hotel operators in the country who are looking at meaningful and sustainable ways to thrive in the market. It will also drive tourists away, ‘drying up’ the Sri Lankan market and will make a debilitating impact on the government’s plans to transform the country into a Asian tourism hub. Therefore, if a group of operators are pushing for artificial price controls, it can only be perceived as an utterly selfish act that will bring disaster to the entire sector in and the long-run.