Research indicates that international tourist arrivals in the UAE grew at a compound annual growth rate (CAGR) of 12.4 per cent, from 9.5 million tourists in 2010 to approximately 17 million in 2015, markedly above the global growth rate of 3.9 per cent for the same period.

Considering travel- and tourism-related spending, the UAE witnessed $33.7 billion (Dh123 billion) being incurred in 2015, growing at rate of 7.8 per cent since 2010. Leisure accounted for more than 80 per cent of that expenditure, emanating from source markets such as Western Europe and other GCC states.

To an extent, demand has been fuelled by measures such as airport expansion, building of theme parks and providing tourists with a range of hotel accommodation.

The supply of hotel rooms in Dubai increased by 6.5 per cent year-on-year in Q1-16 to 82,760 rooms. The Department of Tourism and Commerce Marketing is targeting 140,000 to 160,000 hotel rooms by the end of the decade. Data from STR Global also shows that a further 20,291 hotel rooms are currently under construction, of which 10,019 are due to come online by year-end.

Globally, economies have begun to be increasingly intertwined, resulting in interdependencies among stakeholders within the sector.

As investment in technology bears fruit, social media, search engines e-commerce portals, and other online marketing channels significantly contribute to consumer preference of hotel brand and locational awareness within tourism. Previously obscure options and locations have begun to emerge on the luxury map.

The top seven areas in which technological advances are transforming the hospitality industry and enabling a new level of customer service:

1 Online booking systems

2 EPOS (Electronic Point-of-Sale)

3 CRM (Customer Relationship Management)

4 Marketing Automation

5 Social Media

6 Smartphones

7 Smart Appliances

There are a number of solutions that have already begun to change the way that business is done. The common attribute that they all share is the fact that they allow businesses to have a more convenient, informed and valuable relationship with customers.

The UAE hotel sector is overcrowded with five-star luxury rooms, housed in prime real estate in enviable locations, and with a number of upscale brands managing them. Dubai still remains as a preferred destination for luxury and mid-market travellers alike. By 2020 an additional 20,000 rooms are expected to be introduced, of which 53 per cent will be luxury offerings.

When a market is awash with choices in the high-end sector, there’s bound to be an overspill. Dubai is seeing the construction of 54,000 rooms imminently, and another 72,000 planned for the region, leading to a possibility of a supply overhang.

Since the UAE hospitality sector has been predominantly occupancy-driven, it can be quite difficult to fill up a hotel room without compromising on price as measured by the hotel’s average daily rate. For example, the UAE, in spite of fresh introduction of supply, witnessed occupancy rise from 66 per cent in 2010 to 77 per cent in 2015.

On the contrary, ADRs in 2015 dropped by over 5 per cent to $231 in Dubai and 3.1 per cent in the UAE as a whole to $190 in face of a rise in competition. Consequently, revenue per available room has declined considerably over the years.

This may imply greater investment in loyalty programmes and promotional activities. Such innovative marketing may be favourable for occupancy — however not for the ADR of luxury properties. Intensifying competition has maintained pressure on ADRs, where in H1-16 this fell by 3.5 per cent in Dubai compared to the year before.

Imagine the food pyramid one grows up learning. At the very bottom of the pyramid is a surplus of all the basic requirements. But as one goes higher, the foods become more decadent and therefore, its availability scarce.

A mature hospitality market tends to work on a similar principal — mid-range options are available in surplus, whereas luxury is limited to the discerning leisure traveller. In the face of tightening corporate travel budgets, business travel too is faced with this reality.

This then transcends into carefully ‘adjusted’ investment returns from hospitality projects, based on more rationalised development costs and return expectations. Being in the UAE, one might already observe that this pyramid is inverted. There is huge percentage of luxury offerings at the top and relatively weak mid-market supply at the bottom.

Governments bear cognisance of the threat of a potential supply overhang of luxury and upscale hotel rooms, and are therefore willing to encourage development of three- and four-star hotels. This has affected under-construction upscale hotels, which have either stalled or deferred their launch dates or contemplating a distress sale. Furthermore, hotel guests tend to evaluate the cost of services that matter to them and are equitable in their opinion — leading to a reduced affinity for luxury offerings.

International operators are responding to the need to diversify the region’s hotel mix. Local hotel developers have also introduced mid-segment hotel brands in the light of these developments. As the dynamic of luxury changes, it will not be long before the fundamental assessment of what defines luxury changes. And the “Royal Suite” fails to be the standard all luxury is measured against.

There comes a need to extend hospitality offerings beyond in-resort amenities to sustain tourist inflow. Theme parks with unparalleled offerings are now taking centerstage.

New theme parks are also planned for Abu Dhabi. With such developments, hotel accommodation would be expected to rationalise its offering to cater to the new normal.

— The writer is a partner at RSM UAE.