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Maximum with minimum mantra!

Jan 18, 2015 2:28:55 PM - www.ft.lk

 

  • City Hotels Association Chief says minimum room rate policy must be persisted with as industry, employees and country have benefited
  • Reveals city hotels have invested over Rs. 12 b in recent years for significant upgrades
  • Calls for monitoring mechanism to prevent malpractices
  • Insists occupancy can only be boosted by effective destination marketing
  • Hails Govt. of President Maithri and PM Ranil for due recognition by setting up a dedicated ministry
  • Extends support to new Minister Navin Dissanayake and Deputy Wasantha Senanayake

With a new dedicated Tourism Ministry in place, the debate over the minimum room rate has resurfaced, with the Colombo City Hotels Association cautioning against any change while emphasising on the need for a proper monitoring mechanism.
The City Hotels’ position comes on hot the heels of inbound tour operators making a fresh push for the abolition of minimum room rates. Letting market forces i.e. demand and supply to determine rates is the core of inbound operators’ argument, who have claimed that Colombo has been out-pricing itself and thereby losing competitiveness in comparison to some of other city destinations in Asia. The impact, according to inbound tour operators, is largely felt by business as well as MICE travel.

 

 
However, Colombo City Hotels President M. Shanthikumar differs. “It is the city hotels which have invested considerably post-war that should complain about adverse effects if any of minimum room rates. However, we reiterate our position that minimum rate has done more good, hence the policy should remain unchanged. The new Government could consider implementing a monitoring mechanism to ensure fuller benefits of the policy are reaped.”
The minimum room rates range from a high of $ 125 + taxes at five star hotels to $ 60 + taxes in a two-star hotel. Shanthikumar speaking on behalf of city hotels hailed the arrival of the new Government under President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe and pledged the City Hotels Association’s fullest support to new Tourism Minister Navin Dissanayake and Deputy Minister Wasantha Senanayake.

 

 
The City Hotels Chief expressed his appreciation to President Maithripala Sirisena for identifying tourism as a key contributor to Sri Lanka’s economy and once again for allocating a separate ministry to look into the affairs of tourism industry stakeholders.
In an interview with the Daily FT, Shanthikumar shared some key insights as well as strong points with regard to the minimum rate gazetted for Colombo hotels.
In contrast to the opinion of travel agents and inbound tour operators, the Colombo City Hotels Association was forceful in voicing its opinion and noted hotels in Sri Lanka were the highest investors in the tourism industry of the country and it was important that they received the required returns on their investments.

 

 
The association is of the firm belief that the minimum rate should be held firmly by the new Government without abolishing or diluting it as it gives a fair choice of hotel products available at different price points for the end consumer.
As per statistical data obtained from Colombo hotels as at end 2013, the Colombo city hotels have immensely benefited as a result of the minimum rate.  Shanthikumar said the topline revenues and profitability have seen a significant increase and the staff service charge has followed the same with the amount doubling and in some cases tripling.

 

 
Additionally, Government earnings have seen an increase from contribution such VAT, TDA and NBT. For example, room revenue of 5-stars have increased to Rs. 7.7 billion in 2013 from Rs. 2.7 billion prior to minimum room rate policy. For the lower end of star class category, the revenue has increased from Rs. 177 million to Rs. 546 million. These figures are excluding food and beverage income.
Shanthikumar also said out of an analysis of 20 hotels in Colombo ranging from 5-star to 2-star, the staff numbering 12,169 members has had an additional increase of approximately Rs. 10,000-15,000 per person per month in their service charge which is over and above their basic wage due to the minimum rate implemented.

 

 
Citing an example, the City Hotels Chief said a staff member who received a service charge of approximately Rs. 11,000 before the minimum rate came in to operation now receives over approximately Rs. 23,000 service charge per month above their basic wage.
He also explained that as per hotel operational analysis, an increase in room rates has over a 70% flow through to the bottom line against only a 40% flow through by food and beverage sales.  Hence, this has increased the profitability of the entire hotel sector in the City of Colombo.
This has also helped all city hotels to spend a large amount of money to renovate and bring hotels to true international standards. Estimated investment in renovation for hotels over the last couple of years amounts to over Rs. 12.45 billion approximately.

 

 
The City Hotels Association maintained that unlike the travel agent fraternity, the investment on building and maintenance of hotels is extremely high. “Being the highest investor in the tourism industry, it is critical the Government protects the hoteliers and assists them to reap the required returns on these investments,” Shanthikumar emphasised.
The association claimed that certain parties with vested interest had continued to lobby against the implementation of the minimum rate and had prevailed upon the then leadership of the Tourism Ministry, which came under the Ministry of Economic Development, not to bring in a monitoring mechanism so that they could benefit by negotiating for lower rates from hotels and keeping higher mark-ups for the benefit of a few.
Gazette Notification No. 1622/1 – 5 October 2009 under the Tourism Act No. 38 of 2005 Order under Section 53, subsequently amended in No. 1697/24 dated 17 March 2011, stipulates the minimum rate be applied for Colombo hotels.

 

 
“This has been violated in the recent past by certain hoteliers due to lack of monitoring by the Sri Lanka Tourism Board on the adherence of Colombo city hotels to the minimum rate gazette.  Some hoteliers had made several representations to the Sri Lanka Tourism Board to bring a monitoring mechanism, which have fallen on deaf ears,” City Hotels Chief Shanthikumar said.
Since the introduction of minimum rate in the city of Colombo, 5-star hotels started to sell per room per night at $ 125 plus taxes from a previously sold rate of $ 50 plus taxes. This has resulted in a phenomenal supply growth in accommodation starting from the growth of the informal sector to star class hotels in the city of Colombo.

 

 
Shanthikumar warned that a dilution of the minimum rate would have a negative impact on the informal sector and the smaller hoteliers of 1-star to 5-star star hotels would slowly but steadily begin to sell rooms at much cheaper prices, thereby eating into the business of the smaller hotels.
The City Hotels Association also cautioned that removal of minimum room rate policy would have a disastrous impact on small and medium hotels as well as their employees.
“The solution to increase occupancy is not by depriving the hotels of obtaining decent prices but for the Sri Lanka Tourism Board to adopt a more strategic approach to market and promote the destination and its key touristic locations as per their attractions in the relevant international market,” Shanthikumar pointed out.

 

 
He claimed that in the Meetings, Incentives, Conferences and Exhibitions (MICE) markets, the Sri Lanka Tourism Board has not marketed the country as an attractive venue for conference business.  “We propose that this too be done in a strategic manner capitalising on the potential of our closest neighbour India,” the City Hotels Chief added.
The Colombo City hotels are hopeful the Government will understand the benefit of holding the minimum rate in the City of Colombo and take note of its benefits.