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Despite the economic slowdown in Indonesia and globally, Southeast Asia's largest country continues to attract growing numbers of travellers from around the world. At the same time, Indonesians themselves are travelling around the country like never before. Demand for hotel accommodation is set to rise significantly over the coming years and decades as more holidaymakers and business people visit the country. Intensifying trade integration in the ASEAN region and increasingly affordable airfares are a boon for hotels and related businesses in Indonesia and should help the industry overcome current challenges of oversupply in some areas.
Business opportunities in Indonesia's hotel and hospitality industry are no longer limited to holiday resorts in Bali or hotels and convention centres in Jakarta. Without a question, the tourism hotspot and the capital city remain the two most important markets. But some provincial capitals are developing into important regional business hubs, while other areas are keen to establish themselves as unspoilt tourist destinations.
Indonesian hotel owners faced a challenging market environment in the first half of 2015, with occupancy rates declining more than in neighbouring countries. According to market research firm STR Global, occupancy rates fell by 12.6% year-on-year to an average 56.2%. Weak demand combined with an increase in capacity led to a decline in average revenue per available room. On the other hand, average daily room rates (for the hotels surveyed) rose by 3.8% to 1,073,903 IDR.
Industry representatives blamed government austerity measures for the drop in occupancy. To reduce administrative spending, President Joko Widodo – shortly after his inauguration in October 2014 – had issued new rules against civil servants hosting meetings and conferences in hotels unless absolutely necessary. The new administration had also cut allowances for hotel gatherings. Markets such as Jakarta, Bandung and Bali saw demand drop and occupancy fall after the measures had been put into practice in December, according to STR Global.
The austerity measures visibly hit demand and occupancy in destinations across Indonesia. In some places government events had accounted for more than half of hotel occupancy and overall demand for hospitality services, according to the Indonesian Hotel and Restaurant Association (PHRI). Overall though, the effect has been less pronounced. Based on Statistics Indonesia (BPS) data, the occupancy in star-rated hotels in 27 provinces was 50.1% in December 2014, down around 4 and 5 percentage points on the month and the year, respectively. The Ministry of Administrative and Bureaucratic Reform has since issued a regulation to specify activities that can be conducted at hotels. While spending on such events would be strictly supervised, the new regulation effectively relaxes the initial rules.
Reduced government demand has doubtlessly impacted business, but the hospitality industry also has itself to blame for the adverse business environment. Overly optimistic projections about the overall economy, the property market and demand for hotel accommodation in particular prompted an excessive increase in supply, particularly in the upper end of the market and in prime locations such as Bali and Jakarta. It will take time for demand to catch up.
That said, the long-term trend for rising demand in Indonesia's hospitality industry remains intact, thanks to a growing population, an expanding middle class and increasing domestic business activity. Moreover, the number of foreign tourists visiting Indonesia grew by 7.3% to 9.44 million in 2014, up from 8.80 million in 2013. The government targets a further increase to at least 10 million in 2015 and the president has proclaimed a goal of more than 20 million tourists a year by the time his term ends in 2019. That would still be significantly less than the number of tourists Malaysia and Thailand already attract today.
Yet, achieving this goal will require an extensive PR campaign on the part of the government and significant investment from the private sector (See Tourism: Untapping the Potential). In a bid to facilitate travelling into Indonesia, the government has waived visa requirements for tourists from numerous countries. Meanwhile, the lower exchange rate of Rupiah vis-a-vis most other currencies makes Indonesia's tourist industry more competitive.
A major driver of demand for hospitality services in Indonesia is the tremendous increase in airline passengers. Low-cost carriers (LCCs), in particular, have been booming in Indonesia and the wider region, driving demand for budget hotels. Indonesia's LCCs saw their combined annual passenger traffic nearly double from 29.9 million in 2010 to an estimated 56 million in 2014, according to figures compiled by the Centre for Asia Pacific Aviation (CAPA) (See Indonesia’s Aviation & Airports Sector). While growth slowed somewhat in light of the recent economic challenges and the weaker Rupiah, ongoing fleet expansions at most airlines are driving up seat capacity, meaning air travel to and across the archipelago is set to grow strongly until well into the future.
Ironically, one of the biggest obstacles for further growth in air travel is inadequate ground transportation, because insufficient road and rail links create bottlenecks in getting to and from airports (See The Missing Link: Investment Opportunities in Indonesian Railways). Yet many terminals already operate beyond their intended capacity. The country has an ambitious roadmap in place which aims to expand and upgrade infrastructure across the country. Known as the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (or its Indonesian acronym MP3EI), this roadmap envisions projects worth hundreds of millions of dollars to be implemented by 2025, particularly in transportation and energy. While MP3EI has been off to a slow start following its inception in 2011 (mainly due to insufficient private-sector engagement), there is little doubt that the archipelago will see substantial infrastructure development over the next years and decades. The rising state budget for infrastructure is testament to this (See Concrete Developments in Indonesia's Infrastructure).
As better road and rail connections and other infrastructure will see business and leisure activity spread to less accessible regions, MP3EI creates important inroads for the hotel and hospitality industry. Assuming continued economic development and urbanisation in the world's fourth most-populous country, the potential for expansion of the hotel and hospitality market is immense.
In the long run, increasing business travel within and beyond Indonesian borders, improving transport connectivity and a growing tourism industry should underpin demand across the entire spectrum of lodging, conference and restaurant services. In the current economic climate, however, with travellers watching their expenses and low-cost carriers ruling the skies, the budget end of the market offers more straightforward investment opportunities. Lower-cost services would also cater to the growing number of local business travellers, many of whom represent small and mid-sized enterprises that lack the spending power of large domestic or global corporations. With ever more Indonesians travelling for leisure, business or family visits, the country is already seeing a rise in budget and mid-scale hotel services, especially outside of Bali and Jakarta. Two or three star-rated hotels should benefit most from the expansion of Indonesia's middle income class.
In any case, investors need to carefully gauge supply and demand to ensure there is no oversupply in the vicinity of a proposed project. Studying the presence of current or planned projects that can attract more visitors to the area is equally important. Existing hotels need to focus on creating unique experiences to attract guests from Indonesia or abroad and communicating this to Indonesia’s tech-savvy consumers through social media. In doing so, hotel operators can carve out niches that will sustain sufficient occupancy even when the overall market is going through a seasonal trough or economic lull.
Finding qualified staff can be difficult in Indonesia's hospitality industry (See Vocational and Non-Formal Education Opportunities in Indonesia). Limitations on the employment of foreigners in Indonesia make this situation even more challenging, although foreigners can be employed with restrictions as mid and upper-tier managers.
In the long run, the growth prospects in Indonesia's hotel and hospitality industry should eclipse the challenges. Looking beyond the current oversupply in some regions, it is expected that over the next decade hundreds of new hotels will be needed, which spells opportunities for domestic and foreign investors in the budget, standard and luxury segment.
Global Business Guide Indonesia - 2015
Contribution to GDP: 9.6% (2016)
Number Employed in the Sector: 12.16 million (2015)
Monthly Average of Foreign Tourists: 940,361 (Jan-Oct 2016)
Domestic Tourism: 270 million trips (estimated, 2016)
Competitiveness Score: 37/140 (WEF, 2016)
Regional Rank: 4/15 in Asia-Pacific, 4/9 in Southeast Asia (WEF, 2016)
Most Popular Locations: Bali, Jakarta, Yogjakarta, Bandung, Batam, Medan.
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