Refocused outlook for the Mexican tourism industry
 
Refocused outlook for the Mexican tourism industry
14 JULY 2020 7:44 AM

Mexico’s tourism industry is facing a perfect storm and a few key factors are affecting regularly robust tourism.

Mexico’s tourism industry is once again facing una tormenta perfecta: a perfect storm.

According to estimates by researchers at Anahuac University in Mexico City, Mexico’s tourism industry—
squeezed by the painful impacts of COVID-19—is losing over $180 million per day. Over one million tourism-related jobs are at risk of disappearing. Consequently, it is estimated that in 2020, Mexico’s GDP could decrease year over year by about 3.7% due to these tourism declines.

The key factors affecting tourism began to bubble up in 2019 and have only been exacerbated by the ramifications of the coronavirus pandemic. They include economic and socio-political challenges, a lack of federal government resources, airline and travel intermediary complications, and a shift in hospitality transactions to a buyer’s market.

¿Hay alguna buena noticia? Is there any good news? Yes, Mexico has overcome numerous challenges and crises before and come out stronger. Now is the time for the public and private sectors to collaborate, adapt to changes and do things differently.

Economic and socio-political despairs
In addition to the immediate impacts of COVID-19, Mexico continues to suffer from ongoing economic, political and social woes.

The federal government’s weak policies, coupled with the recent drop in oil prices, less confidence and an increase in crime, have resulted in capital flight and less favorable business conditions. Furthermore, hospitality supply and demand imbalances, international airline and cruise visitation cutbacks, and the resurgence of seaweed along Mexico’s Caribbean coastline are again hurting Mexico and its tourism industry.

Due to the federal government’s austerity measures, various states in Mexico are now faced with combatting violence, investing in infrastructure, providing fiscal breaks, and conducting tourism and investment promotional efforts, all with limited resources.

Indisputably, Mexico’s geographic proximity to the U.S. puts it in an enviable position compared to other Latin American countries to better tackle economic and tourism-related challenges.

The recently ratified U.S.-Mexico-Canada Agreement (USMCA), which commenced on 1 July, should bode well for many of Mexico’s key sector exports like manufacturing and agriculture. And the U.S. trade and supply chain restrictions with China should also help accelerate Mexico’s economic recovery and the eventual return of business tourism demand.

Additionally, beginning in 2020, the Mexican peso devalued about ~17% versus the dollar, while base interest rates decreased by about 2% during the same period. The weak currency and lower credit costs should help make Mexican products, services, and tourism more attractive. There is an urgent demand, however, for the Mexican government to inject liquidity and provide much-needed resources to its industries.

A lack of federal government resources
In addition to economic and socio-political woes, Mexico and its federal government continue to face heavy criticism for refusing to provide much-needed economic assistance during this crisis period to large businesses, including in the tourism industry, whether in the form of bailouts, financing programs or even tax breaks.

One of the strategic drivers for Mexico’s economic recovery is to invest in and support its tourism industry, which will create jobs, help alleviate poverty and provide social wellbeing in the medium-term..

Public-private sector collaboration, however, proves crucial. To achieve its goals, the current administration will need to improve national business conditions with incentives, subsidies and other fiscal relief programs.

The current administration’s elimination of the Mexico Tourism Promotion Council (CPTM), which not only promoted tourism but also combatted negative news, continues to be concerning, and Mexican tourism challenges have only been exacerbated during this ongoing pandemic.

Therefore, private sector stakeholders must unify and take initiative via a decentralized approach working with public authorities at the local, state and regional levels to invest in infrastructure, improve security conditions, provide vital economic support to small and medium-sized enterprises within the value chain and promote tourism activities.

Despite ongoing cost reductions and less appetite for sales and marketing expenses, the Mexican private sector cannot and should not rely on the federal government to invest in critical publicity and media relations to assist in its recovery efforts and position itself proactively for the typical start of high season in 4Q20, especially for international visitation. Grassroots sales and marketing tactics should help generate revenues and cash inflows to sustain operations and jumpstart the eventual road to recovery.

Airline and travel intermediary complications
Tourism in Mexico remains particularly challenged by reduced cross-border mobility and accessibility from main source markets in the U.S. and Canada.

Mexico has strategically pivoted in the meantime to its domestic market, which represents about 75% of its annual tourism demand, especially for drive-to business albeit at lower price points. However, local economic weakness, rising unemployment, purchasing power constraints and ongoing security concerns represent lingering hurdles to overcome.

Furthermore, detrimental effects of this global crisis are emerging via complications with local and regional airlines, including:

  • Mexico’s embattled Interjet, which is facing financial and legal problems;
  • Colombia’s Avianca and Chile’s LatAm, which both recently filed for bankruptcy; and,
  • Air Canada, which is pending to close the acquisition of tour operator Transat, reduced nearly 60% of its workforce and is suspending certain routes to Mexico.

Major travel intermediaries have been hit hard. Thomas Cook’s collapse in late 2019 hurt many Mexican resorts with collectibles in early 2020, and large tour operator TUI was also denounced last month in Mexico for owing money to many properties from previous guest stays during the first quarter of this year.

Nevertheless, this global crisis has generated interesting deals between travel companies. In January, Argentine travel agency Despegar planned to acquire Mexican intermediary Best Day for about $135 million, representing a ~17x 2019 EBITDA multiple before the pandemic. The deal still awaits regulatory approvals, and now unprecedented business impacts have occurred. Thus, Despegar just renegotiated the price downward to about $57 million (~8x multiple) with a potential extra $20 million over four years. While the deal’s completion remains uncertain, the 55%+ downward adjustment to value over the past 120 days is substantial and reflects the major economic effects of COVID-19.

A shift of hospitality transactions to a buyer’s market
On top of Mexico’s economic and socio-political despairs, lack of federal government resources and airline and travel intermediary complications, there also has been a shift of hospitality transactions to a buyer’s market.

Last year, I predicted that slow lodging transaction volumes would soon favor buyers, and a few recent strategic and opportunistic deals in the first half of the year demonstrate this, including:

  • Fernando Chico-Pardo’s family completed an approximately 27% share purchase in luxury hotel owner RLH Properties and assumed chairmanship of the board.
  • Jorge M. Perez’s family procured approximately 10% of Santa Fe Hotel Group, and he was also named to its board.
  • Hoteles City Express bought a hotel in Chihuahua and bought out a minority investor in its Reynosa hotel.
  • Capitali Grupo Hotelero is also very active with its acquisition of the Aloft in Guadalajara, Wyndham Garden hotel in Leon – both hotels were rebranded to its own HS Hotsson chain – and a recent investment in rebranding two hotels in Tampico.

Interesting deals are also happening among hospitality brands and operators, including brand and management conversions (including Hilton’s conversion of a hotel in Merida, Marriott’s management of a Cancun hotel that it will convert to an all-inclusive W Resort, and Marriott’s signing of a W in Playa del Carmen.).

New openings and signings include IHG’s first Avid-branded hotel in Zacatecas, Marriott’s debut of the Moxy brand into Mexico City, Dream Hotel Group’s signing of three condo-hotels in Tulum, and Posadas’ announcement it will re-enter Mazatlán with a Fiesta Americana hotel.

A refocused 2020: An outlook summary
In summary, all Mexican tourism industry players must keep one eye on the microscope and another on the telescope. We all face an immediate crisis, but there are addressable medium-term recovery goals.

Winston Churchill once said, "never let a good crisis go to waste." Let us see who benefitted next year, emerging with greater focus, and having successfully weathered this tormenta perfecta.

Jonathan Kracer is Managing Principal of SION CAPITAL LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American and Caribbean regions. Contact him at info@sioncapitalco.com.

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