2015 was an important year for Latin America’s image as a travel destination. Brazil coasted on the achievement of a successful World Cup, and consumers got the message from billboards, television and Instagram that Colombia is Realismo Mágico, that Mexico is The Place You Thought You Knew, and, courtesy of the 2015 Super Bowl, that All You Need is Ecuador. With Latin America present in the minds of consumers as a destination, economic recovery in many source markets and better-than-ever tourism infrastructure, the region seems primed to receive inbound tourists in 2016, even as the outlook clouds for domestic and outbound travel due to economic conditions.
Economic factors and prior investment in tourism in many countries will be the driving forces in tourism in Latin America in 2016 as they shift tourism flows, bipolarise the market and give second-tier destinations a chance to shine.
Exchange rates shift tourism flows
2015 was a year of economic challenges across Latin America and the outlook for 2016 is mixed for the major tourism markets. One contributor to the economic difficulties is weak exchange rates across the region, with implications for tourism flows in all directions, but being particularly problematic for outbound tourism from Latin American countries. 2016 will likely bring slower outbound trip growth and declines in some cases as international trips, especially to the US and Western Europe, become too expensive for many consumers.
Local Currency Per US$1, Percent Change (January 2015 - December 2015)
Source: Euromonitor International
The industry’s attention will thus come to focus more strongly on domestic travellers and inbound visitors from outside Latin America. Economic conditions will affect domestic and inbound tourists in different ways, ultimately driving spending patterns in opposite directions. Some would-be outbound travellers will instead opt for domestic trips to mitigate the effects of exchange rates on travel purchases. Still, facing economic uncertainty and, in some countries, inflation levels above government targets, domestic travellers – especially those that were deterred from travelling abroad by exchange rates – will become especially price sensitive. Slower domestic trip growth as well as a general trading-down on services to lower-cost options is expected.
Bipolarisation of travel demand
By contrast, inbound tourism flows will be a bright spot with regard to both the number of trips and average trip expenditure. A mega-event (the Rio de Janeiro Olympics) will once again draw the world’s attention not just to Brazil but to Latin America in general. Visitors from the US and Europe in particular will benefit from the same exchange rate movements that deter outbound tourists from Latin America, making trips to the region even more attractive and encouraging inbound travellers to splurge on certain elements of their travel experience.
As a result of these dynamics, travel companies will find more success at the budget and high ends of the spectrum in 2016, while those priced in the middle will struggle. The region has already seen the explosion of low-cost carriers, which are already immensely popular among domestic travellers but connect increasing numbers of international destinations. There will also be opportunity for companies positioned at the upper end of the price spectrum, those that target both high-end business travellers and luxury leisure tourists, who prioritise convenience and the quality of the travel experience over budget. Companies across travel categories from airlines to operators that find themselves in the middle of this spectrum, however, will need to be innovative to stand out.
There are many ways to achieve this kind of differentiation: economies of scale, for example, will become even more important on a local and regional level, as negotiating power with suppliers can be used to secure lower prices and win consumers. Global brands like Expedia or even the regional Decolar have this scale advantage already, but domestic players not seeking to consolidate with others in their space can leverage their detailed knowledge of the local markets to cater their products more precisely. Brazilian travel retailer CVC presented a strong example of this type of strategy in 2014, negotiating fixed exchange rate purchases from its suppliers to ease the effects of the real’s movement on travellers. Developing techniques to make travel more convenient and customised, such as improving online and mobile platforms, exploring new ways to engage travellers through social media and offering travellers more options, with the unbundling of services many airlines – including both low-cost carriers like Mexico’s Volaris and regular airlines like Avianca – have implemented, all represent other viable strategies for differentiation.
“Second-tier” destinations to benefit
Despite the economic climate, countries throughout the region have made heavy tourism infrastructure investments in recent years, ranging from the new Mariscal Sucre International Airport in Quito to hotel development by Marriot, which plans to open 60 hotels throughout Latin America and the Caribbean through 2018, and are developing ever greater connectivity to other continents courtesy of airlines ranging from Copa to VivaColombia. These projects have boosted air and land connectivity, raised the quality of tourist facilities and, in some cases, improved the overall business environment – all developed as part of increasingly sophisticated local and national tourism plans. It has never been easier to travel to, from and around Latin America.
Tourism Flow Growth Projections, 2015-2016
Source: Euromonitor International
These projects will certainly bring tourists to locations that already receive plenty of visits, including Ipanema, the Riviera Maya and Machu Picchu – but much of this investment has focused on drawing visits to non-traditional attractions, cities and countries that fall outside the traditional tourist routes. Ecuador’s strategy, a national priority since 2013, included a new airport in Quito, but also works hard to get tourists outside the capital by stressing the country’s “four worlds”, or unique geographical areas, ranging from the Galapagos to the Amazon. Rio de Janeiro will be the backdrop for the 2016 Olympics, but the country went to great lengths to spread the World Cup activity to cities throughout the country, creating an air travel network that remains in place to connect places often off the first-time tourist’s path.
The development and promotion of second-tier locations will benefit destinations and travel companies alike, giving residents more variety at home as they opt for domestic trips over international ones and encouraging inbound travellers to take longer or more frequent trips to include an extra city or visit an attraction that could not be fitted into a prior trip’s itinerary. Perhaps no country better demonstrates the success of this strategy than Mexico, which has worked hard to market its tourism offer as more than just all-inclusive beach resorts. In this respect, Mexico represents an example for other countries in the region.
Challenges, potential ahead
There is clear potential for tourism in 2016, but economic conditions will be a big determiner of whether this opportunity can be fully realised. It will be important for companies to adapt their strategies according to the heightened price sensitivity of outbound and domestic travellers. Conversely, the strong US dollar presents opportunity for those that cater to inbound visitors. Companies and destinations that can differentiate themselves on price, convenience and overall uniqueness of the experience they offer stand the best chance of capturing the potential of 2016.