30 October 2006

Awkwardly straddling low and high ends

By Eric Jansson
Published by Financial Times, 30 October 2006

With its grand pillars and ornate mouldings, the Hotel Riviera oozes the exclusivity and retro-mystique advertised by Croatia's official tourism marketing campaign. "The Mediterranean as it once was," proclaims the 30-second promotional clip played on a loop by CNN and other satellite television channels.

The outside of the Hotel Riviera lives up to the slogan. A stone-built flourish of Habsburg grandeur on the harbour's edge at Pula, an attractive coastal city known for its ancient Roman amphitheatre, the hotel was built in 1908.

It stands steps away from both the water and the impressive ruin. At €39 per night, a room here sounds like a great deal - and not just any room but, according to a receptionist, "the best room in the house".

Yet step inside and one soon discovers that the "best" room is just like all the others. During Yugoslav communist rule, the opulent hotel was gutted. Untold volumes of crystal and gilt were no doubt carted away, as demolition crews cleared the way for practical furniture and low-end tourists. What remains is essentially a dormitory disguised by a lavish exterior.

Despite the undoubted glory of Croatia's coast and islands, the country's tourism sector as a whole bears more resemblance to the poor Hotel Riviera than many would like to admit. Genuine luxury can be found, at a price, but visitors too frequently find mediocrity and worse.

Short-sighted state managers do not deserve all the blame. Characteristically, the Hotel Riviera's holding company, Arenaturist, is privatised and traded on the Zagreb Stock Exchange.

Croatia's critically important tourism sector as a whole swells with private capital. Investors understandably identify it asthe country's obvious growth sector, starting with the Adriatic seashore.
But while flush with cash and clients, leading tourism businesses are stymied by a genuine challenge - how, when starting from a low base, to adapt most profitably to the fast-changing structure of demand in an evolving global tourism market.

They must choose the right clients. Experience teaches that mid-level and low-end European tourists make reliable return visitors, even if yields are low. But increasingly, the high-end plays an important role.

Confusingly, a proliferation of offers from foreign low-price tour operators and discount air carriers blurs the line between rich and poor tourists, since many in the middle and below can now afford luxury and pampering, too. The temptation is to fudge it and choose both. But this summer, tourism operators received a warning that their effort to straddle both the low and high-ends is proving costly.

After a highly successful 2005, in which more than 10m foreign visitors stayed more than 50m nights in Croatia, spending some €6.4bn, early returns suggest that figures dipped this summer. A final tally at year-end may show that Croatia has experienced its first tourism recession since the war a decade ago.

Optimists say revenue may have continued to grow despite the drop in visitors, reflecting a useful trend towards luxury. But the spending shift would need to be large.

Return visitors, accustomed to shoulder-to-shoulder pedestrian traffic in Dubrovnik, said the walled city felt less packed this August, usually the busiest month. Hoteliers blame poor weather and the distraction of the World Cup.

A more likely reason for the slump is that many operators have adopted luxury prices without improving their offering. Torbjörn Bodin, general manager of the Regent Esplanade, a luxury hotel in Zagreb, says tourist numbers fell in Dubrovnik "because they raised prices hugely without adding value."

Discount airlines seem determined to top up flagging demand. Ryanair, the Irish no-frills carrier tomorrow launches flights from London Stansted to Pula - its first foray into Croatia. Easyjet entered the market earlier this year, opening routes from the UK to the coastal cities of Split and Rijeka. German and Norwegian discount carriers compete, too.

"Low-cost airlines and open skies policy are very significant. You have a lot of options around the world, and cost is an issue. Without low-cost airlines flying to Croatia, you can go cheaper to Thailand," says Mr Bodin.

Foreign hoteliers aim to fill the luxury gap on the coast. Hilton has opened a luxury hotel in Dubrovnik. Luxury operators Kempinski and Le Meridien are also preparing for openings along the coast, and a growing number of luxury boutique hotels also suggests a trend toward luxury and exclusivity.

Local hoteliers increasingly share the same goal. For example, Kristian Sustar, a senior executive at Maistra, a Croatian company that owns and manages 20 hotels and tourist villages with 31,917 beds, says refurbishment of the company's properties will cost €350m through 2009. He predicts that by 2010 hoteliers will book 65m overnights, up 30 per cent from 2005.

To accommodate such an influx successfully and to encourage repeat visits to this precious stretch of natural beauty on the Adriatic, capacity and quality must both grow sharply.

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