Kenya's tourism industry diversifies amidst setbacks

KenyaTourism
Overview
View in online reader
Text size +Recommend
Kenya has one of the biggest and most diverse tourism industries in East Africa,
with offerings in a range of niches including the meetings, incentives,
conferences and events (MICE) segment and safari ecotourism. However, in
recent years challenges have arisen for the sector that have negatively affected
the countrys economy, including two high profile terrorist attacks. Following the
attacks, a raft of security advisories were issued from countries that traditionally
make up a large percentage of Kenyas target market for tourism, putting
pressure on visitor numbers and hospitality revenues. In response, the
government and a number of private investors are taking steps to improve
security and re-establish Kenya as a safe, attractive destination for visitors.
While the short-term forecast is concerning given the role tourism plays in
revenues, foreign exchange and employment for Kenyas economy, the mediumterm and long-term outlook is more encouraging. The recent challenges have
spurred operators to explore new revenue streams, including business tourism
and domestic tourism.
Performance
In many ways, the drivers of long-term demand in Kenyas tourism sector,
including supply diversity, infrastructure quality and destination accessibility,
remain extremely attractive and are among the strongest, not just regionally, but
across the whole continent of Africa. However, exogenous pressures, including
the global financial crisis and the terrorist attacks on both the Westgate Mall in
2013 and, more recently, on Garissa University in April 2015, have had a
substantial impact on the country. Tourism earnings, visitor numbers, hotel
occupancy rates and hotel stay unit nights have all been negatively affected over
the past few years. Right now our members are deeply affected by the security
situation. The travel advisory has really affected tourist numbers, Jackie
Odudoh, HR manager of the Kenya Association of Tour Operators, told OBG.
Trade is down across the board. Indeed, as a 2015 report published by the
Kenya National Bureau of Statistics indicates, Kenyas total annual tourism
earnings dropped by 7.4% in 2014 to KSh87.1bn ($958.1m). The report also
shows that earnings have been decreasing steadily by around 2% each year
since 2011, when they peaked at KSh97.9bn ($1.1bn).
The sector is a big contributor to Kenyas overall economy, meaning that the
affects of the industry downturn are being clearly felt in terms of the countrys

overall economic output. According to the Economic Impact 2015 report for
Kenya by the World Travel and Tourism Council (WTTC), the tourism sectors total
contribution to GDP, including both direct and indirect activity, was KSh561.8bn
($6.2bn) in 2014. Although total value has increased from KSh462.8bn ($5.09bn)
in 2013, the sectors share of GDP has fallen from 12.1% to 10.5%.
Meanwhile, room revenue in the hospitality industry has been in decline since
2012, shrinking by 7.1% in 2014 to $540m according to a hospitality outlook
report for the region by professional services firm PwC South Africa. Since 2011,
room revenue has fallen cumulatively by 16%. PwC also reports that Kenya
suffered a 5.3% decline in stay unit nights in 2014. At the same time, occupancy
rates have been dwindling. Across all classifications the average occupancy rate
for the country came in at 55.4% in 2014, down from 59.5% in 2013 and 66.1%
in 2011. PwC predicts a further fall to 50.7% by 2016.
Forecast
Despite these negative indicators, the outlook going forward is somewhat
brighter due to the industry expanding its links with new source markets as well
as strengthening perceptions of security. In its report, PwC predicted a further
decrease in room revenue of 4.1% in 2015, before modest growth of 2.9% in
2016. In general terms, the firm forecasts a recovery for the Kenyan hotels sector
in terms of 4.7% growth between 2015 and 2019, with stay unit nights returning
to 2011 levels by around 2018. Many local industry operators seem to agree that
the current pressures are in general short term and are attributable to recent
security issues. Some European tour operators and travel agents, however, do
not expect recovery to begin until the end of 2016.
Impact
The recent slowdown has had adverse effects on both jobs and businesses,
particularly in the beach tourism segment, Hotels across the coast that were full
until recently are now registering 10% to 20% capacity, which is not
sustainable, Kiiru Mahiaini, CEO of Incentive Travel, told OBG.
By Q4 2014, the number of charter flights into Mombasa airport had fallen to four
a week, compared to 32 per week in Q4 2013. Hotel occupancy rates in
Mombasa, Kenyas second-largest city, halved in the same period from 70% to
35%. In the tourist towns of Kilifi and Kwale, occupancy in November 2014 was
even lower, averaging 20% and 18%, respectively.
In March 2015, before the Garissa attacks, Mohammed Hersi, chairman of the
Kenya Coast Tourist Association, told local media that 25 hotels in the coastal
region had been forced to close down, with job losses amounting to almost
20,000.
New Markets
Kenyan operators are now seeking to diversify revenue streams through the
expansion of source markets in order to grow the tourism sector. The key

markets thus far have been the UK and the US, Odudoh told OBG, but theres a
lot of interest in Asian markets and also Latin America.
Kenya Airways has already begun taking steps to boost its links with Asia by
increasing flights to China; In November 2013, the airline introduced non-stop
flights to Guangzhou and in 2014 it launched additional one-stop services to
Beijing and Shanghai, via Bangkok. China Southern Airlines also launched a
service between Guangzhou and Nairobi in a code share with Kenya Airways in
August 2015. The carrier is planning to run 20 flights per week to service growing
numbers of passengers between the two countries. Overall, in 2014 around
120,000 passengers flew between China and Kenya, a figure expected to
increase by approximately 15% per year.
Business
While the increase in air-passenger numbers can be partly accounted for by
demand within the leisure market, it also speaks to the growing potential of
business tourism in Kenya. According to PwC, with sector growth forecast to
show an average compound annual growth of 4.7% beginning in 2016, the
business and hospitality industry is helping to compensate for the shortfall in
leisure tourists by providing Kenya with business customers. Corporate travel
has been booming. Since the third quarter of 2014 it has been pretty stable and
reliable, Manish Nambiar, general manager of the Kempinski Villa Rosa, an
upscale hotel in Nairobi, told OBG.
Meanwhile, high-end hotel chains in Nairobi continue to thrive: room rates at a
typical five-star hotel such as the Sankara are published at around $400 per
room per night, and actual average rates are between $220-250. Occupancy
rates are as high as 70%, achieved through corporate guests who make up
around 95% of the hotel bookings.
Located in prime urban locations, and with five-star facilities, Kenyas leading
high-end hotels are well positioned to benefit from government plans to grow
MICE tourism (see analysis). According to hotel media outlet Hotel News Now, in
July 2015 the upscale hotel market boasted significant annual growth in both the
average occupancy rate and revenue per available room. The former jumped
from 11% to 61%, while the latter grew by 33.6% to KSh9354.16 ($102.90). The
segment also benefitted from a visit by US President Barack Obama in the same
month.
New Supply
In a testament to the long-term appeal of Kenyas tourism industry, Nairobi is set
to see the construction of a number of hotels within the next two years, including
several by domestic firm Simba Corporation aimed at mid- to low-budget
travellers. By the end of 2015, three new high-end hotels will also hit the local
market the Golf View Hotel, the Radisson Blu and the Grand Sapphire which
will provide a combined total of 672 rooms. In total, 1600 new rooms are planned
for 2015 and 2016, according to PwC. Moshi Perera, general manager of the

Sankara, told OBG, We are forecasting growth of 28% in bed supply from now
until the end of 2016 in the three- to five-star segment of the market. This will
force average rates in the industry down.
The upcoming growth in supply is not only confined to the capital. In the leisure
market, the beach and safari segments continue to receive investment and
additional supply. For example, in May 2015 the Chinese company Sultan Palace
Development announced that it had begun working on the construction of 198
luxury vacation homes in Kilifi County on Kenyas coast. Liu Tiancai, general
manager of Sultan Palace Development, told local media, The decline in tourism
numbers is only a short term occurrence. We have invested in the coast because
we believe that Kenya has the potential to return to its glorious days sooner than
many think.
Domestic Tourism
A leading source of revenue for both new developments and existing facilities in
the short term is expected to be the domestic market. Domestic tourism has
saved the industry. Without it, hotel occupancy would be near nothing, Mahiaini
told OBG. Domestic tourism did not even exist 10 years ago, for the most part.
This year even August, normally a busy month for foreigners in Kenya, saw many
more Kenyans visiting the coast than foreigners. The emerging Kenyan middle
class is driving this.
Indeed, the industry has begun to pay more attention to the domestic tourism
segment as it continues to evolve into the sectors primary source of income.
According to the WTTC, domestic travel spending accounted for 58.1% of direct
travel and tourism GDP in 2014. This figure is expected to grow by 5.5% in 2015,
to reach KSh233.9bn ($2.6bn). Over the next decade, the WTTC forecasts that
domestic spending will continue to increase at an average annual rate of 5.2%,
reaching KSh386.7bn ($4.3bn) in 2025.
A crucial source of support for the hotel segment, domestic tourists have
bolstered revenues for hotels in Kenyas coastal towns and cities. Over the 2014
Christmas period, for example, occupancy rates in Mombasas hotels were
between 80% and 90%, with some achieving nearly 100% occupancy. Kenyans
accounted for 70% of all festive bookings. Sam Ikwaye, executive officer of the
Kenya Association of Hotel Keepers and Caterers, told local media at the time,
We have an influx of Nairobi residents who have come down to the coast. They
have really supported us. We are telling those who are still undecided on where
to go that Mombasa is the place.
Hotels are also trying to capitalise on local trade by bolstering their ancillary
revenue streams, such as food and drink. It is key for hotels to offer much more
in the Nairobi market, so a lot of them have substantial bar and restaurant
offerings. For example, Kempinski has five restaurants with a total capacity of
600 people, Nambiar told OBG. With a dual occupancy rate of 1.2 across 200
rooms, the maximum number of guests we can accommodate is 240. Thus a key

driver of food and beverage revenue is the local population coming to eat and
drink in our restaurants.
Marketing
In steps to stimulate the sector, the government has introduced a number of
measures, the first of which was the launch of the Tourism Recovery Taskforce in
July 2014. Headed by private sector hotelier, Lucy Karume, the taskforce was
charged with developing a comprehensive strategy for reviving tourism,
including initiatives to improve security, develop infrastructure and shift the
perception of the country in foreign markets. The short-term budget for the body
was set at KSh200m ($2.2m).
The general response within the industry has been positive, The taskforce is
helping. It is composed of people from across the whole tourism spectrum,
including the private sector. We believe that whatever they put forward will be
implemented. Odudoh told OBG. Initial confidence building measures have
included re-training the Tourism Police Unit.
In its first few months, the taskforce spent much of its time lobbying foreign
embassies to remove or soften their travel advisories for the country. Weve had
one-on-one meetings with the British High Commission, the Americans, the
French, the Australians and a team of EU and Europe ambassadors, Karume
told local media in October 2014.
Although the terrorist attack in Garissa in April 2015 was a tragic setback for the
taskforce, the lobbying effort had some success, with the British government
modifying its travel advisory in June 2015 to state that travel in most of Nairobi
was safe.
The taskforce has also launched an extensive marketing campaign to promote
Kenya overseas. In April 2015 the Kenya Tourism Board, alongside a number of
private sector representatives, sent a delegation to the World Travel Market
Africa exhibition in Cape Town, South Africa, in order to promote the I choose
Kenya campaign and speak about the enhanced security measures that the
country is taking. Prior to the event, Muriithi Ndegwa, managing director of the
Kenya Tourism Board, spoke to local media about the importance of reassuring
Kenyas source markets that the country is ready for business. The destination
has faced some challenges recently and we have to rebuild confidence. This is
the first time that we will be participating in World Travel Market Africa and we
strongly believe that it is a good platform to reassure the African markets, he
said.
Additionally, the Ministry of East African Affairs launched a new branding and
tourism campaign called Make It Kenya at the Milan Expo 2015 in Italy.
Developed with the help of PR company Grayling, the campaign aims to utilise
technology as a tool to promote Kenya to both tourists and investors worldwide.
Digital content on the campaigns website can easily be accessed and shared on
portable devices such as smartphones and tablets. Phyllis Kandie, cabinet

secretary for East African Affairs, Commerce and Tourism, told local media, With
the continued rise of globalisation, it is imperative that Kenya has a nation brand
that can differentiate us and tell our story.
In May 2015 the government announced that it would increase the tourism
promotion budget significantly to KSh7bn ($77m) for fiscal year 2015/16. Annual
security spending also increased by 12% in July 2015 to KSh223.9bn ($2.5bn).
Tackling insecurity remains the top priority of the governments strategy to
sustain the growth momentum of the economy while creating jobs, National
Treasury Cabinet Secretary Henry Rotich said in his budget statement.
Classifications
In Q4 2014 the government implemented a brand new programme geared
towards improving quality assurance and standardisation across all of the
countrys tourism facilities. The scheme is overseen by the Tourism Regulatory
Authority (TRA), and will, in effect, bring Kenya in line with the rest of the EAC,
whose standardisation criteria regulates hotel grading and classification in
Rwanda, Tanzania and Uganda.
The TRA has already carried out classification training exercises for hotels and
restaurants in both central Kenya and the South Rift Valley region, and it expects
to complete the programme by June 2016. There will be 19 officials delegated to
conducting assessments of facilities and hotel classifications will be held for a
period of five years, although individual properties will have the opportunity to
apply for a new classification or re-classification within the same period at a cost
of approximately $50. The impact of the programme at the top end of the hotel
spectrum, however, is expected to be somewhat limited. The ratings initiative
wont really affect the corporate branded hotels, as they already have their own
standards they stick to, Nambiar told OBG.
Taxation
There is one government measure that many within the industry are keen to see
the removal of the value added tax (VAT). Introduced in 2013, a 16% tax is
added onto sales, which some say is harming the recovery of the sector. In the
tourism industry, there is strong competition throughout the East Africa region.
VAT has never been levied in other countries, and its removal would mean that
we can once again operate on the same level, Odudoh told OBG. Indeed,
neighbouring countries, unhindered by the VAT, are becoming increasingly
competitive in terms of prices. In July 2014 Karume, who was then chairperson of
the Kenya Tourism Federation, told local media, Kenya remains the only EAC
state that is currently levying VAT on tour operator services, transportation of
tourists (hire of vehicles) and conservation fees. This is affecting the sector.
The effects of the VAT have been compounded by government steps towards
devolution, as mandated by the amended constitution of 2010, which has led to
several county governments introducing other taxes on tourist establishments.
For example, in 2013 the Mombasa County Government introduced a monthly $5

bed tax for all hotels and resorts, plus a $40 per month levy on all tourist
vehicles. At a time when the hotel sector is struggling for occupancy and tour
operators are closing down, there are indications that these additional expenses
are causing frustration for many within the industry.
Outlook
Kenyas tourism sector, the second-largest foreign exchange earner after the tea
industry, is currently navigating a number of significant issues that are proving
challenging to its growth, ranging from security concerns to taxation.
However, the current difficulties have been recognised by the government, which
is making substantial investments in the promotion and growth of the industry.
There are also encouraging signs from the private sector, as businesses seek to
tap into new markets and business avenues, including the Asian leisure market,
business tourism and the domestic segment. The industry, forced to diversify in
the face of the ongoing slowdown will, upon the return of the core international
markets, emerge much stronger.