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Archived Research Submission To The Tourism Policy Review Group ITIC sets out a strategic vision and makes specific policy recommendations. I. BACKGROUND 1.1. In October 2002, the Irish Tourist Industry Confederation (ITIC) published its study ‘The Impact of Tourism on the Irish Economy – The Need for a Future Development Strategy’. ITIC would request that this study be treated as part of its formal submission to the Review Group; 1.2. The study set out to achieve three objectives:-
1.3. In consequence, ITIC welcomed the establishment of the Tourism Policy Review Group by the Minister for Arts, Sport and Tourism, Mr John O’Donoghue TD. 1.4. In this submission to the Review Group, ITIC sets out its strategic vision, identifies policy objectives, amplifies and expands upon the types of policy instruments that can be used to achieve those objectives and makes specific policy recommendations in a number of key areas. II. CURRENT ECONOMIC CONDITIONS 2.1. The work of the Review Group has been made more onerous and the outcome of its deliberations more important by the deterioration in both domestic economic conditions and in the international politico-economic environment in recent months. 2.2. Domestically, since the ITIC study was published last October, the Government has indicated that real Gross National Product managed to grow by a disappointing 1.8% last year. Nor is the outlook for the current year much brighter. Budget 2003 forecasts that real GNP in 2003 will expand by just 2.2%, well below the economy’s potential rate of expansion. 2.3. Internationally, the advent of war in Iraq is creating instability in all markets. This is particularly evident in tourism markets where potential tourists – particularly from the United States - are significantly less willing to travel overseas. 2.4. The ITIC study last October stated “economic forecasts for 2003 do not indicate a rebound to robust growth in the industrial world next year”. Since then the growth outlook has deteriorated quite sharply, particularly in Europe, as shown in Table 1
The failure of demand conditions in Ireland’s principal source markets to evince 2.5. Ireland’s rate of consumer price inflation continues to run at more than twice the average for the Euro area, as can be seen from Table 2. This will make it difficult for Irish tourism to hold its share of existing and new markets in 2003.
2.6. Moreover, in some tourism-related segments, rates of price increase continue to outstrip the national inflation rate. This is shown in Table 3.
The scale of the 11.7% increase in alcoholic drink and tobacco prices in the year to January 2003 is largely explained by the additional excise and VAT impositions in the Government’s Budget for 2003. The competitiveness of the tourism sector was further undermined by the raising of the lower rate of VAT from 12.5% to 13.5%, with the new rate taking effect from 1st January, 2003. 2.7. Finally, the Euro exchange rate has strengthened from US $0.93 at end-May 2002 to US $1.08 at end-February 2003, effectively raising Irish prices facing US tourists by 16.1% compared to last Spring. Against sterling, the Euro has risen from 0.64 to 0.68 over this period, adding a further 6.3% to costs facing British tourists to Ireland. 2.8. In summary, against a backdrop of weakening international demand, Ireland’s tourism industry has suffered a further severe erosion of price competitiveness since the start of the last tourist season. This loss of competitiveness is due to two factors. First, Irish prices have continued to rise faster than prices in the principal source markets for Irish tourists. Second, the depreciation of the US dollar and sterling against the Euro over the past nine months has raised Irish prices yet further for potential US and British visitors in terms of their domestic currencies. 2.9. Table 4 shows the effective rise in Irish prices facing visitors since Spring 2002.
III. TERMS OF REFERENCE: METHODOLOGICAL ISSUES 3.1. In broad terms, ITIC supports the terms of reference governing the work of the Review Group. ITIC believes that, in meeting the terms of reference, the Review Group will generate the information and analysis required to formulate a development strategy for the industry. 3.2. However, ITIC is concerned that the terms of reference, taken together, lack a strategic shape. ITIC believes that this can be remedied relatively easily with the following amendments. 3.3. PHASE 1: REVIEW OF TOURISM PERFORMANCE AND PROSPECTS As shown in Table 4, since the Spring of 2002, effective Irish prices have risen by almost 10% for British tourists and by close on 20% for US visitors.
3.4. PHASE 2 – STRATEGY FOR FUTURE SUSTAINABLE DEVELOPMENT
IV. ITIC’s STRATEGIC VISION 4.1. A VISION OF QUALITY Tourism is embedded in the fabric of the Irish economy. It cannot divorce its absolute level of costs and prices from those prevailing elsewhere in the economy. In addition, the national inflation rate in large measure determines the rates of increase in tourism costs and prices. Externally, Irish prices, denominated in foreign currencies, are subject to foreign exchange shocks over which neither the Irish Government nor the tourist industry can exert any control. The ITIC study of October 2002 showed definitively that, in terms of absolute prices and costs, Ireland is now an expensive country. In absolute price terms, it is the second most expensive country in the Eurozone and the fifth most expensive in the European Union. Every effort must be made to preclude a further deterioration in Ireland’s relative price position. Such efforts to contain future inflation should focus in particular on:-
The increases in the Irish price level in recent years, both in absolute and in relative terms, does not diminish opportunities for the successful development of Irish tourism in the years ahead. It does, however, fundamentally shift the focus of tourism strategy. The operating environment for Irish tourism has changed. As a result, the drivers of growth in the future have also changed. The future scope for engendering sustained large increases in traditional tourism products is limited. In this changed environment, the strategic focus must shift from price competitiveness to improving the product and quality offering to potential visitors. This shifts the central question in the tourism argument from “Is it inexpensive ?” to “Does it represent value for the price charged ?”. Strengthening industry competitiveness in the future thus depends crucially on quality. This embraces the quality of product choice, the quality of individual tourism products and the quality of service with which tourism products are delivered. The central thrust of this ITIC submission holds that improvements in the medium-term competitiveness of the tourism industry depend crucially on developing the industry’s capability, its product range and product quality. As indicated in the ITIC study of October 2002, the physical capacity of the industry has been greatly enlarged and extended by the scale of investment during the 1990s. The emphasis now should shift to leveraging up investments in human capital – business capability, management development, innovation, employee training – with the objective of building the product range, developing the product distribution system and raising quality standards. For it is to these created and refined factors of production that the industry must now look for success in the future. The motivation for this strategic shift is not altruistic. Tourism products that satisfy visitors product and quality wants more completely offer higher margins than traditional tourist products. In the medium-term, the shift to quality is the route to higher levels of industry profitability. Profitability is central to future industry success. In the absence of a return to adequate levels of profitability, the tourism industry would lose its dynamism and its ability to invest in the future. In contrast, enhanced profitability would provide:-
The essence of this approach can be expressed in strategic marketing terms thus:-
V. INTRODUCING QUALITY TOURISM – THE SUPPLY SIDE 5.1 INTRODUCTION The tourism industry comprises a loose and fragmented coalition of businesses with varying degrees of dependence on tourism spending. However, a common feature of most tourism enterprises is that they are small business, often operated by owner managers. Since such enterprises form the backbone of the tourism industry, proposals for the strategic development of tourism must focus particularly on raising their productivity and quality of performance. 5.2 RAISING MANAGEMENT CAPABILITY The most direct route to improving the business performance of tourism SMEs is to build management capability at enterprise level. Better management yields direct gains in enterprise productivity and profitability through a more efficient allocation of the resources of the business. It also encourages a more imaginative approach to product innovation, staff training and financial management. Against this background, ITIC proposes two positive policy initiatives:-
5.3 RAISING SERVICE QUALITY Enterprise productivity and profitability would be raised, and service quality to customers enhanced, if employees in the industry received more training. By its nature, delivering employee training to SMEs is difficult. In the first instance, it requires a clear commitment by management to the provision of additional employee training. Building management capability is the best method of ensuring a greater awareness amongst management of the benefits conferred by additional employee training. But more extensive training of the tourism workforce also requires an improved training delivery system. In particular, it is important that initiatives aimed at raising training activity do not disrupt the normal business operations of tourism enterprises. At the same time, there is an urgent need to ensure a continuing inflow of new entrants from the education system into the tourism workforce. Against this background, ITIC proposes that:-
Product innovation in all its forms is a function of management capability. Developing the skills, strength and imagination of management in the sector is thus a necessary precondition to leveraging up the quality of the tourism product range. In essence, the calibre of management and the entrepreneurial impulse are the wellsprings of product innovation, product development and the pioneering of more complex value added products. The state can create the conditions in which management skills can be augmented and entrepreneurial talent can flourish, but it cannot substitute for them. Innovation and business creativity is essentially a matter for enterprises themselves. However, in the case of tourism SMEs, scale imposes physical limits on the capacity of individual enterprises to innovate new products. In these circumstances, the scope for product development can be greatly advanced by co-operation amongst enterprises. The state can be of assistance in creating and supporting the structures within which such co-operation can take place. Earlier, ITIC has noted two examples of policy innovations which could activate such co-operation:-
In this context, the role of the Regional Tourism Authorities in the tourism development process needs to be changed fundamentally, re-defined and enhanced. In the future , the regional tourism development process must become an active agent of tourism development, assuming responsibility for:-
In terms of redefining the instrumentation of regional tourism development, the experience of the industrial development agencies may yield useful lessons. ITIC believes, however, that, as examples, there are two major potential tourism innovations in which direct involvement by the state is a necessary condition for success. First, ITIC strongly believes that the development of a major International Conference Centre in Dublin is an essential addition to the national tourism product portfolio. Against this background, ITIC recommends that:-
Second, the establishment of a Product Marketing Group by Bord Failte and RELSA ten years ago to promote English language tourism in Ireland has met with major success. The scope now exists to build further on this initiative, using both private and public sector resources. English Language schools have already forged partnerships with some third-level institutions as course providers and sources of students. There are now opportunities to build new high value added products based on integrating the existing high quality English Language product with a range of business disciplines using third-level colleges in the regions as the delivery mechanism. In an international business context, Ireland possesses a singular advantage in speaking English. The revolution in computer electronics and Information Technology has ensured that English is now unrivalled as the international business language. There is an extensive international demand for English language courses coupled with business and professional applications. There is now a pending over-supply of third-level educational infrastructure. Hence, there exists a new high value market segment with very large potential for long-stay foreign visiting students coupled with the available educational infrastructure to accommodate them. ITIC requests that the Review Group provide an initial assessment of the potential for innovating these new educational tourism products. VI. INTRODUCING QUALITY TOURISM – THE DEMAND SIDE 6.1. INTRODUCTION The strategic marketing analysis conducted in Section 4.2 made clear the imperative that tourism development must focus on creating more value in its products and in its service quality. Only in this way can the industry escape in the medium-term from dependence on price sensitive markets where its ability to compete is weak. However, the drive towards a higher stage of tourism development will not evolve automatically. While many of the recommendations made on the supply side – building management capability, enhanced employee training, encouraging co-operation between tourism enterprises – would prepare the ground for product development, they will not, of themselves, deliver marketable products. Determining which products for which markets requires a series of marketing research exercises. By definition, it is impossible to prejudge the outcomes in advance. However, ITIC is strongly of the view that the Review Group must map out a clear programme of market research aimed at determining the product/market matrices that should be targeted by tourism in the future. In furtherance of this objective, ITIC identifies below the core areas on which research data is required. 6.2. ASSESSING POTENTIAL CONSUMER DEMAND Most current consumer research on Irish tourism focuses on tourist satisfaction ratings. In other words, it assesses the satisfaction ratings of tourists who have already visited Ireland. In current circumstances of declining customer satisfaction ratings, there is a need to update in-depth research on potential tourists in the principal source markets in order to determine their reasons for choosing to come to Ireland, or, even more importantly, the reasons why they ultimately decided against an Irish holiday. The use of focus groups in the principal source markets can play an important role in identifying deficiencies both in the national tourism product and in the individual components of the product range. This would provide a relatively inexpensive way of defining the barriers to taking holidays in Ireland and the gaps that require to be filled by the innovation of new products. Responsibility for this task should be assigned to Tourism Ireland. Assessing potential consumer demand in this way is a necessary precondition to refashioning product development strategy, for it is imperative that any revisions of product development strategy be market-led. 6.3. MARKET-LED PRODUCT DEVELOPMENT Product development is the key to the formulation of a successful new strategy for the medium-term development of Irish tourism. Its importance cannot be overstated. More specifically, market-led product development offers a defence against deteriorating price/cost competitiveness, since product differentiation would allow Ireland to escape from price-sensitive commodity tourism markets in which it is least able to compete. It should also be recognized at the outset that product development is not wholly within the hands of the industry itself. The development of existing and new products based on Ireland’s scenery, landscape, countryside, food and culture cannot be undertaken by the industry alone. It requires the active support and participation of a range of other interests from landowners to local authorities, from Inland Waterways to the Office of Public Works. These interests must not only be recognized, they must be accommodated in a form of structured partnership which allows for sustainable product development. This requires in the first instance that the National Tourism Development Authority defines as its first task the formulation of a Product Development Plan. As an earnest of its intention to prioritize product development, ITIC further recommends that it establishes a dedicated Product Development Unit within the new Authority. ITIC sees four necessary steps in reshaping product development strategy:- (i) CONDUCT AN AUDIT OF EXISTING PRODUCTS Using grants disbursed under the Operational Programmes for Tourism 1989-1993 and 1994-1999, conduct an audit to assess the size and range of the existing tourism product base. Such an audit would also indicate the effectiveness of grants support in specific markets and niches. (ii) REPACKAGE THE EXISTING PRODUCT RANGE In many tourism product segments, Ireland does not suffer from an insufficiency of products, but from a scarcity of marketable products of acceptable quality, delivered with professionalism. In many cases, the raw product material already exists, it simply has not been processed into marketable form. This requires the development of product ‘wrappers’, binding together and integrating an array of existing products (Examples might include “Visit Ireland’s Five Most Historic Sites’; ‘Play Ireland’s Five Great Links Courses’; ‘Walk the Shannon for a Week’). The repackaging and ‘wrapping’ of existing products into marketable products offers two advantages over the innovation of new products. First, it requires much less physical product investment and lower business risk. Second, it provides a clear focus for product marketing campaigns in the future. (iii) STRENGTHEN THE PRODUCT DISTRIBUTION CHAIN At present, there is a deficiency in the number and range of tourism products that tour operators and agents can present to potential foreign visitors. Many tourism products are not even entering the distribution chain as they are not deemed to be sufficiently well prepared, organized, or professional to be marketed to the trade. Again, these are existing products that, with additional professional input, could reach the required standard of quality to enter the distribution chain. (iv) INNOVATE NEW PRODUCTS Innovation must be distinguished from invention. The innovation process centres on developing new applications for already existing materials. The innovation of new tourism products should therefore focus on developing more complex and sophisticated products from the existing product base, on product innovation and on sales and marketing innovations such as cross-selling. 6.4. ACCESSING POTENTIAL CONSUMER DEMAND The advent of Information Technology and the increasing use of the Internet as a means of purchasing airline and ferry tickets and of reserving accommodation has made IT a key instrument in marketing tourism. The quality of the national marketing effort on the web and the internet needs to be evaluated in a benchmarking exercise against other similar tourist destinations such as Scotland. At the same time, technical assistance should be provided by Tourism Ireland to encourage and facilitate those offering generic and specific tourism products to develop a quality presence on the internet and the web. VII. IMPROVING ACCESS TRANSPORT ITIC recognizes the contribution of low access fares to the rapid expansion of Irish tourism during the 1990s. In broad terms, tourism traffic follows the available routes. For this reason, ITIC believes that the opening up of new low fare routes to Ireland would substantially benefit the expansion of tourism in the future. In principle, ITIC believes that the Irish/US bilateral is a barrier to tourism growth. ITIC recommends that the Review Group examine the impact of the bilateral on future traffic growth. If convincing evidence is adduced that the bilateral constitutes a barrier to future tourism development, ITIC urges the Review Group to call for its removal. More strenuous efforts should also be made to encourage ‘own car’ tourism, where visitors bring their own cars to Ireland. Such tourists are particularly valuable since they generate higher yields, stay longer and travel more through the regions than other tourists. Visitors renting cars in Ireland produce similar high yields. VIII. TOURISM’S INFRASTRUCTURAL NEEDS The ITIC study ‘Spatial Spread of Tourism and Extending the Season’, published in January 2001 pointed out:-
Against this background, and notwithstanding current pressures on budgetary resources, ITIC strongly emphasizes to Government the absolute need to complete the road development programme for national primary routes in accordance with the timetable set out in the National Development Plan 2000-2006. Failure to complete targeted primary route developments on time would not only cause a serious deterioration in the quality of the Irish tourism product through increased time losses and congestion costs, but, by curtailing access to the regions, it would also jeopardize future regional tourism growth. At the same time, it should be recognized that many overseas tourists use public transportation in travelling around Ireland. The declining quality of Irish public transport, particularly evident on the inter-urban rail system, has now reached a point where, for many, it is detracting from the overall quality of an Irish holiday. IX. TOURISM’S ROLE IN REGIONAL DISPERSION As an industry, tourism is both geographically dispersed and concentrated. It is geographically dispersed in that many of the country’s leading tourism centres are located in the West and South West regions. It is concentrated in that some 60% of all registered tourist accommodation is located in the five counties where earnings from tourism are highest – Dublin, Cork, Kerry, Clare and Galway. The top three tourism centres – Dublin, Galway and Killarney together account for 30% of all registered tourist accommodation. The existence of such key tourism centres is a feature of the tourism industry worldwide. To date, public policies aimed at inducing a wider spatial spread of tourism have been ineffective. Under the Operational Programme for Tourism 1994-1999, the proportion of total tourism revenues accruing to the top five tourism counties actually increased from 65% to 70%. ITIC is committed to increasing the spatial spread of tourism nationally and to the opening up of new tourism destinations within the regions. However, ITIC recognizes that the spatial re-balancing of tourism is a difficult and complex task that can only be pursued effectively over the medium- to long-term. It therefore recommends:-
X. TOURISM’S SUPPORT FOR ENVIRONMENTAL PROTECTION An unspoiled and unpolluted natural environment is one of Ireland’s greatest tourism assets. More than virtually any other industry, tourism supports the protection and preservation of the natural environment, since environmental degradation directly diminishes the quality of the national tourism product. ITIC supports the strict enforcement of environmental legislation and the development of public authority/industry partnerships at local level to preserve the natural environment. Already, ITIC has managed the ‘People and Place’ programme, part of the Pilot Initiative on Tourism and the Environment. This programme sought to mobilize industry and local support and assume collective responsibility for the protection and enhancement of Irish tourism’s central attributes – the friendliness of the people and the unspoiled character of the natural environment. The ‘People and Place’ initiative demonstrated that both the industry and local communities clearly appreciated the importance of these key attributes and were prepared to play a part, individually and collectively, in their enhancement. In consequence, ITIC recommends that the NTDA put in place a permanent mechanism within which the tourism industry, local communities and the state can together work to ensure public awareness of, and support for, environmental protection measures. XI. IMPROVING THE SEASONAL SPREAD OF TOURISM An ITIC 2001 study found that the seasonal spread of tourism greatly improved during the 1990s. Just one quarter of revenue is now earned in the peak July/August season. The remaining three-quarters of revenue now accrues outside this peak season. Much of the success in achieving a more even seasonal spread of tourism is explained by increased short-stay holidays – primarily in Dublin – higher numbers Visiting Friends and Relatives (VFRs) and more business travellers. For the future, ITIC recommends:-
XII. THE ROLE OF THE STATE AND STATE AGENCIES IN DEVELOPMENT 12.1 THE ROLE OF THE STATE The scale of the tourism industry’s continuing contribution to national economic development, evidenced in the ITIC study of October 2002, gives the state a vested interest in securing the industry’s future. If the industry falters, the state loses. The thrust of this submission has focused on fashioning a medium-term development strategy for the tourism industry. However, the evolution of the industry in the medium-term cannot wholly be divorced from its performance in the short-term. In the limiting case, industry collapse in the short term would preclude its development in the medium-term. In broad terms, ITIC sees the state’s central role as creating the conditions, in terms of both economic policy and performance, within which the tourism industry can flourish. In ITIC’s view, the state can best secure the industry’s long-term future by concentrating its short-term efforts on the introduction of measures aimed at curbing inflation at home and by promoting Ireland as a tourist destination abroad. (i) CURBING INFLATION On the production side, tourism is deeply embedded in the Irish economy. The resources it uses are Irish resources. It is for this reason that its contribution to national economic development is so pronounced. However, the extent of its integration into the Irish economy also causes it to mirror cost and price trends prevailing in the economy. Yet, while its costs, prices and taxes are determined by prevailing trends at home, it is an internationally-traded service industry, which must compete for business in foreign markets. When Irish costs and prices are rising faster than in competing tourism destinations, the competitiveness of the Irish tourism product suffers. As a result, the attractiveness of Ireland as a tourism destination is diminished relative to alternative destinations. In turn, profitability is eroded, making it progressively more difficult to retain capital and labour in the industry while severely diminishing the resources and the incentive to undertake new product developments. The industry can exert no control over national trends in costs and prices. Action to control national inflation is a matter for government. In this regard, it must be said that recent Government actions have been unhelpful to tourism. The industry’s cost base has been raised significantly as a result of the raising of the VAT rate applicable to the industry from 12.5% to 13.5%, the budgetary increases in excise duties and reductions in capital allowances and the sanctioning of increases in local authority charges. The industry’s cost base has also been leveraged upwards by rapidly rising insurance costs. Not only are general increases in insurance costs raising industry costs, but they are placing in jeopardy many of the activity holiday areas such as equestrian holidays which offer firm prospects for future tourism product development. To date, Government has relied on competition policy to effect market-driven reductions in areas such as insurance costs. There are few visible signs that this strategy has yielded concrete results. Against this background, ITIC strongly recommends that:-
(ii) PROMOTING IRELAND ABROAD International tourism finds itself particularly exposed to external threats in the current volatile global environment. In these circumstances, it is particularly important that the state maintains its investment in the overseas promotion of Irish tourism. Tourism industry commitments to overseas marketing have risen rapidly in recent years and reached an estimated Euro 135 million in 2001.The state’s backing for the overseas tourism promotion effort is significantly smaller than the industry’s investment, being estimated at Euro 50 million in 2001. In the light of current circumstances, ITIC believes it essential that the Government at least maintain the real level of state resources committed to destination marketing in overseas tourism markets. 12.2 THE ROLE OF STATE AGENCIES IN TOURISM DEVELOPMENT Following the establishment of Failte Ireland, there is an urgent need to review the roles and responsibilities of the state agencies involved in supporting the sector, particularly with respect to marketing and research. Each of these is examined in turn. (i) MARKETING In the marketing sphere, an urgent review of operating procedures and responsibilities for Destination Marketing and Product Marketing is required. This review should clarify:-
(ii) RESEARCH In the research area, a new research unit should be established within Failte Ireland which would allow for direct participation by industry representatives. The new research unit should both undertake research itself and commission research from industry experts, including third-level education institutions. The research programme should be geared towards providing enterprises in the industry with up to date analyses of industry trends, consumer attitudes and new product innovations. 12.3 THE DEPARTMENT OF TOURISM AND TOURISM ORGANIZATION At present, there is a proliferation of state organizations engaged, in whole or in part, in tourism, particularly at sub-regional levels. This is leading to duplication, the blurring of responsibilities and waste. There is a need for a streamlining and rationalization of such organizations, with objectives, lines of responsibility and reporting set out clearly. At sub-regional level, organizations should only be retained where they can demonstrate a clear raison d’etre and adequate skilled personnel to achieve objectives. At departmental level, there is a need for the Department of Arts, Sport and Tourism to co-ordinate the activities of those departments that make significant investments in both tourism products and tourism promotion. The Department of Arts, Sport and Tourism also needs to co-ordinate the tourism marketing expenditure of the array of state organizations engaged in its financing. At present, organizations providing funds for tourism marketing include local authorities, state agencies and a number of Government departments.
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