Graded hotels gain marginally over informal sector in 2016

By Chandeepa Wettasinghe
The graded hotel segment has been able to prune the relative growth of the informal and supplementary accommodation sector in 2016 according to Central Bank data, a situation which may continue to favour the graded sector in the future due to government intervention.
The graded segment’s market share of tourism accommodation increased slightly to 52.47 percent in 2016, up from 52.21 percent in 2015 backed by a slightly higher occupancy rate of 74.8 percent.
This brings to a halt the hotel industry’s sharp decline in market share, which stood at 72.14 percent in 2012.
The main reason for the decline in market share for the graded establishments over the past few years was the rise of online booking engines such as Booking.com, Airbnb and Couchsurfing, which allowed supplementary and informal sectors to reach potential customers easier, precipitating higher growth for them.
The Hotels Association of Sri Lanka Immediate Past President Hiran Cooray, who recently supported the supplementary and informal sectors by noting how the livelihoods of many Sri Lankans have improved due to their growth, said that he was unsure of why their growth was overtaken by hotels.

“All the information we had indicated that they (informal sector) were growing fast,” he said.
However, capacity constraints of the supplementary and informal sectors may have pushed tourists into graded establishments, which added a large number of rooms to reach a total 22,336 rooms in 2016, reversing the slowdown of hotel openings that was observed in 2015.
Although the number of hotels that opened in 2016 increased by just 28, the number of rooms added increased by 2,959, compared to 44 hotels and 1,299 rooms in 2015.
Just three hotels—the Aiken Spence Group’s RIU Ahungalla and Heritange Negombo, and the Shangri La Hambantota Resort—added 940 rooms, marking a year of large and medium-scale hotel openings, compared to the more small scale and boutique hotel openings in 2015.
The Hotels Association of Sri Lanka Past President Srilal Miththapala noted that the continued addition of large hotels in the future will contribute towards a stronger graded hotel sector.
“Most of the larger projects are nearing completion now and there will be larger growth in room numbers in the formal sector with these coming on stream,” he said. Cooray called this the ‘Garment Factory Syndrome’. “When the apparel sector was booming, there were more and more garment factories coming up. Similarly, now that people have seen the growth of the tourism industry, more and more hotels are coming. Some of the new hotels will do well and challenge established players. The others will wither off,” he said. The Pacific Asia Travel Association recently downgraded Sri Lanka’s tourism arrival forecasts to 3.7 million visitors by 2021. Even so, Sri Lanka will require a supply of over 60,000 rooms compared to around 40,000 rooms available now.
The addition of large hotels, the government’s plans to start marketing the country as a high-end destination and the intention of the authorities to tax and regulate the informal sector and the online booking engines that facilitate them, may indicate tough times ahead for the small-scale accommodation suppliers.
“As time goes on, governments will become savvy. They’ll look into why they are getting less revenue and operators will see that they can’t ignore local laws and they will come into line,” Cooray said. Some sections of the formal industry have continuously lobbied the government successfully to put pressure on the informal sector and online booking engines, although experts in the digital economy have noted that the electronic platforms might leave the country if pressured.
Some, such as Airbnb have agreed to collect taxes from the informal sector and channel them to the Treasury, like it has done in other countries following requests. Miththapala advocated the hotel industry to innovate and raise standards to grow. “I personally believe that we should not over regulate. After all this has opened up a whole new market segment albeit at the lower end of the scale. So instead the formal sector must add value, innovate and compete at another level instead of trying to stifle this market,” he said.