Saturday, 8 September 2012

New Zealand Luxury Travel - The Effects of the Recession and the Boom Bust Cycle

The current recessionary environment sweeping the world has been notable for both its severity, and also its wide ranging scope. Travel, and in particular luxury tourism, is sentiment-driven consumption, and is therefore highly susceptible to the current recessionary mindset.

The decision to travel requires the means and the will. In a recessionary environment, both of these factors can be affected. The effects of a recession on the means are obvious: jobs are lost; investment portfolios are compromised and devalued. What is less obvious however is the effect of a recessionary mindset on the will to travel. Tourism is all about feeling good. People take luxury tours to enjoy themselves. Even though a recessionary environment might not affect the personal means of certain market segments, the general negative environment surrounding a recession is often enough to take away the feel-good factor, and therefore the will to proceed with a sentiment driven purchase.

The inbound New Zealand tourism industry is in a unique position in that our distance from almost all of our major markets makes travel to this country expensive. The cost of getting to New Zealand further encourages travelers to stay longer, thereby making their vacation even more comparatively expensive. Recognizing this paradigm, the New Zealand Tourism Industry has through the years focused on the value added segments of the tourism industry, including the luxury sector. This is an understandable position to take but does the inevitable high cost/value positioning of our tourism product make us more susceptible to recessionary down-turns? The answer to this question is complex. Our high cost/value tourism product feeds directly into a boom-bust cycle of demand. The higher cost aspect of our tourism makes us highly susceptible to the downturn of an economic cycle -the bust! Ironically however, while the distance to New Zealand underpins our high cost tourism product, it also makes the demand for the same high value product non-perishable. Put simply, a trip of this magnitude is anticipated so much that the desire to do it remains for many years even if current economic circumstances do not allow it. Any demand that is unfulfilled does not perish, but is simply deferred until circumstances improve, with a resulting deferred boom in the industry.

In summary then, the relatively isolated location of New Zealand makes it highly susceptible to a boom-bust tourism cycle. In a recessionary phase, the high comparative cost of our tourism product exacerbates a drop in demand. However the high comparative value of our luxury tourism product often results in that drop in demand being deferred until the recessionary cycle is over, with a resulting tourism boom.

It is critical for the success of tourism businesses to understand this boom-bust cycle, and use a planning horizon that covers both the boom and the bust parts of the economic cycle.

By : David Francis