Competitiveness Challenge for Tourism

Competitiveness, currently a fast-changing dynamic, presents a new set of challenges for Irish tourism businesses. While price is not the sole defining factor of Ireland’s competitiveness, value for money undoubtedly is a major determinant of competitiveness, says ITIC in its latest newsletter.

Any increase in price at a rate higher than in competitor destinations would damage Ireland’s competitiveness and its reputation as a "good value for money" destination – each of which would have lasting consequences beyond 2023. The experience of Ireland’s tourism price inflation outpacing that of competitor destinations during the Noughties, prior to global financial crash in 2008, resulted in a loss of market share over the course of the economic downturn and a prolonged seven to eight year recovery of international tourist volumes and values to the country.

2023 will see a slowing economy, if not recession, across Ireland’s source markets, while rising prices are being exacerbated by uncertainty surrounding supply side inputs and supply. Tourism businesses are facing a number of challenges in maintaining competitiveness in a market which will undoubtedly be more price and value conscious. Past experience has amply demonstrated that some market segments of tourists to Ireland have been especially critical of perceived poor value for money when compared to their place of origin and experiences in other destinations. British visitors, a high volume year round market for Ireland, historically have been the most critical of price and value for money, followed by selected segments of visitors from mainland Europe.

As businesses struggle with rising costs of inputs, uncertainty surrounds two critically important supports for the sector - the 9% VAT rate for hospitality and the Temporary Business Support Scheme (TBSS) -  which are due to end on February 28. Each of these has a critical bearing on pricing for the coming season, and withdrawal would severely damage Ireland’s competitiveness in the international marketplace. A recent report by economist Jim Power on the economic rationale for extending the 9% VAT rate suggests that the scheduled increase would cost 24,000 jobs and add 4.1% to inflation on accommodation and food services.

Already many hospitality and tourism businesses have struggled to hire the people they need and to fill longer term skills gaps. European research points to workers quitting their jobs in high numbers even as the economic picture darkens – exacerbating a high job vacancy rate and skills gap.
Failte Ireland surveys report that up to four out of five businesses have experienced difficulty in filling positions, with specific skills shortages identified. Staffing levels have yet to recover to pre-pandemic levels. Industry estimates suggest that close to 3,500 Ukrainians have found employment in the accommodation and hospitality sector.

The labour market in Ireland is expected to remain tight with the unemployment rate below 4.5%. The job market remains buoyant across almost all sectors, despite some lay-offs and a slowing of hiring in some sectors. 90% of employers are planning to hire staff in 2023, the highest level in six years according to a recent survey from Hays Ireland. The survey reports that 79% of employers are expecting to increase pay in 2023, with the average wage increase anticipated to be in the region of 5%, a figure which will be exceeded in some sectors. In addition, the ongoing housing crisis is impacting employers’ ability to recruit staff in many locations.

Businesses, in addition to facing an energy crisis and rising input costs and interest rates, are gearing up for wage inflation and new employment legislation, which will put pressure on prices and erode company earnings. The risks to tourism persist, and may be further exacerbated, in 2023, including:

It is expected that Ireland’s stock of visitor accommodation in 2023 will be sharply less than in 2019. The reduction in capacity arises from the Government’s reliance on tourist accommodation to house those seeking refuge, together with new legislation impacting short term rentals.

At present almost one quarter (23.5%) of the country’s tourist accommodation stock, including 17% of hotel bed capacity, is under contract to the Government to meet humanitarian needs. This represents a total of 42,000 beds in registered tourist accommodation premises, including almost 26,000 in hotels, being effectively withdrawn from the market.

The crunch point will occur in March/April when operators will determine the future of much of this capacity currently withdrawn from the tourism market. At time of writing, it is difficult to foresee an adequate supply of alternative accommodation coming on stream to meet the State’s need to provide shelter for those fleeing conflict. While hotels, guesthouses and B&Bs can play a part in providing humanitarian relief, almost exclusive reliance on the sector is not sustainable, nor is the accommodation suitable for long term housing needs.

If the level of tourism accommodation stock is unavailable next year, industry estimates it could cost the broader tourism economy up to €1 billion in lost earnings.