Economic yield associated with different types of tourists a pilot analysis

Economic yield associated with different types of tourists a pilot analysis DISCUSSION PAPER Susanne Becken Landcare Research PO Box 69, Lincoln, 8152 New Zealand E-mail: beckens@landcareresearch.co.nz Geoff Butcher Butcher Partners Ltd Consulting Economists Level 7, Securities House, 221 Gloucester Street Christchurch New Zealand E-mail: gvbutcher@xtra.co.nz 1

Economic yield associated with different types of tourists a pilot analysis Abstract Providing quality products with a high yield has become a priority in many tourist destinations. Little is known, however, about the wider economic benefits of tourism and specific tourist types. We undertake a first assessment of economic yield by value added by different types of tourists, and employment yield resulting from their activity. The analysis reveals that the ranking of different tourist types in terms of benefit by expenditure is the same as by value added, and almost the same as by employment yield. We propose that further analysis use a finer breakdown of expenditure and business categories, and recommend that the analysis of economic yield be enhanced by measurements of sustainable yield that incorporate social and environmental dimensions. 2

1 INTRODUCTION In recent years, many tourist destinations have shifted their marketing focus away from simply increasing the number of tourists to enhancing the quality associated with tourism growth. The method of increasing quality is often articulated as moving away from mass tourism with low expenditure per person and moving towards quality tourism with high per capita spending. Tourism New Zealand (TNZ) went even further by describing their ideal visitor as a high-yield tourist who engages with the local cultures and environment in an interactive way. However, so far they have not defined exactly what they mean by high-yield. Estimates of the economic impact of tourism are usually based on statistics about visitor expenditure (see Figure 1). The Tourism Satellite Account (Statistics New Zealand, 2002) breaks down total output (which is broadly equivalent to tourist expenditure 1 ) into intermediate input from other industries and value added by the tourism industry. At the individual level, however, expenditure is still the commonly used parameter to describe economic impact, and discussions of the optimal tourist usually focus on levels of expenditure rather than on levels of value added. This expenditure measure does not necessarily allow conclusions about the real economic benefit, because direct expenditure does not take into consideration effects such as consumption of intermediate products, the scale of flow-on impacts, or the generation of employment. What is needed is an indicator that reveals a wider measure of the total economic benefit associated with various types of tourist expenditure and tourists, and that allows classification of tourists according to their contribution to the tourism sector and to the wider economy. The concept of yield (European Commission, 1997; Tourism Tasmania, no date) has become popular in tourism marketing. While there is no consistent definition of yield, it is generally agreed that in practice yield is always smaller than expenditure, because yield is the net economic gain that takes account of the benefits and costs of tourism activity (Dwyer and Forsyth, 1997). In this sense, yield could be equivalent to the net profitability of a business or could be interpreted even more restrictively as the net gain for the host society, taking into account the costs of providing free infrastructure and other non-market costs, such as the degradation of the environment resulting from tourist activity (Reynolds and Braithwaite, 1997). The latter could be referred to as sustainable yield, as opposed to economic yield (see Figure 1). 1 GST (Goods and Service Tax) is excluded, because values are expressed in approximate basic prices. 3

Expenditure: amount spent on carrying out tourist activity Value added: sales minus intermediate inputs; i.e. value added comprises savings, taxes, wages and salaries, depreciation and profit Financial yield: profitability of an organization Economic Value Added: net operating profit after tax (NOPAT) over the capital employed Economic yield: economic performance that could be measured using value added, financial yield, or Economic Value Added Employment yield: employment generated as a result of tourist activity Sustainable yield: incorporates social and environmental dimensions with economic yield; the social and environmental dimension could be monetized, where appropriate. Figure 1. Definitions of different economic concepts applied in this study. This pilot study aims to analyse expenditure for different tourist types in terms of their direct contribution to value added and employment generated by the tourism industry, and the effects on the total economy by taking into account flow-on value added and employment effects. Hence, we measure economic yield and employment yield (Figure 1) associated with different types of tourists. The primary objective was to see whether estimating the yield of visitors according to their total value added and employment impacts instead of simply their direct expenditure would give a different ranking of tourist types. Non-economic effects are not taken into account at this stage, but should be incorporated in further studies on sustainable yield. 2 METHOD Information was obtained from 156 tourists about their expenditure in nine different categories during their trip to New Zealand. This information was gathered as part of a larger study undertaken between November 2002 and January 2003 in Christchurch and Auckland in the form of an exit and a diary survey. Based on their transport and accommodation behaviour, tourists were classified into six tourist types: auto tourist, camper, backpacker, comfort traveller, visiting friends/relatives tourist (VFR) and coach tourist (for a full methodology see Becken and Gnoth, in press). Coach tourists were also asked to provide the package price they paid overseas, and a 10% commission for the overseas operator was subtracted 2. Because there is a distinct difference in travel behaviour between Asian and non-asian coach tourists (Becken, submitted), this study only analyses the expenditure of non-asian coach tourists, for which an approximate breakdown of package costs was available based on information obtained from a large Australian wholesaler (pers. comm., Scenic Tours). Some tourists did not provide information on costs for selected categories although it was likely that costs had been incurred, for example for food or accommodation. In these few cases, the unknown cost per day was replaced by the average for the 2 This is a crude estimate based on interviews with wholesalers in Australia. The aggregated commission depends strongly on the degree of vertical integration and could be higher than the suggested 10%. 4

respective tourist type and the category so as to be able to keep the otherwise usable cases in the analysis. The disaggregated expenditure data were combined with value added and employment ratios for the relevant expenditure categories in order to estimate direct and total value added and employment per day for the various tourist types. These ratios for direct and total (direct plus indirect) value added as well as direct and total employment effects per tourist dollar spent were taken from a set of national multipliers where the ratios had been adjusted to 2001 prices 3. The following standard industry categories were matched with the categories for which tourists provided expenditure information (see also Table 1): o Accommodation => Accommodation o Air transport, services to transport and storage => Domestic air travel o Vehicle and equipment hire => Rental vehicle o Road passenger transport => Land transport o Water and rail transport => Other transport o Bars, clubs, cafes and restaurants => Food o Other sport and recreational services => Entertainment o Retail => Other. Expenditure on petrol required special treatment because of the excise tax (38.5 cents per litre in 2003, pers. comm., Ministry of Transport) that is charged, and modified further because most of the balance of the cost is related to the manufacture of fuel rather than the retail margin charged by the petrol station. The GST and excise taxes were treated as direct added value, and the remaining $0.50 per litre was split between petroleum refining and retail margins, with the associated employment and value added to expenditure ratios. Table 1. Value added to output ratios and employment* per $ million (2001 GST-inclusive prices). Accommodation Air transport Rental and equipment hire Petrol Road passenger transport Water Bars, cafes and rail restaurant Sport and recreation Retail Direct value 0.52 0.45 0.59 0.58 0.54 0.63 0.40 0.45 0.56 added** Direct + 0.85 0.71 0.86 0.61 0.85 0.89 0.83 0.84 0.86 indirect value added** Direct 15.19 3.47 4.01 1.6 12.61 3.36 15.26 7.55 13.28 employment* Direct + indirect employment* 19.63 6.83 7.94 2.6 17.47 6.39 21.22 13.16 17.43 * Employment is expressed in Full Time Equivalent (FTE) jobs per $million of expenditure ** The usual tables from Statistics New Zealand are expressed in approximate basic prices, which exclude most GST. In this analysis we have manipulated the tables so we can express the ratios in terms of market price including GST, because that is how we measure visitor expenditure. 3 Statistics New Zealand. Input Output tables 1995/96 Modified and extended (Butcher, 2002). 5

3 RESULTS The yield associated with the six different tourist types are presented in the form of expenditure yield, value added yield, and employment yield, whereby the rankings of tourist types are analysed in absolute terms and with regard to type-specific average ratios of valued added to expenditure and employment to expenditure. The sample size for each type differs (auto tourist [30], camper [29], backpacker [56], comfort [21], VFR [11], non-asian coach tourist [10]), and does not reflect real market share of these types (Becken, 2002). This means that the sampling error varies for the different types. 3.1 Expenditure The expenditure by different tourist types (Table 2) shows that auto tourists (rental car and motel) were the highest spenders on a daily basis, followed by non-asian coach tourists. VFRs and backpacker tourists emerged as low spenders, while camping tourists and comfort travellers (staying at Bed and Breakfast) were medium spenders. Table 2. Expenditure per day (NZ$ including GST) by tourist type. Means per Accommodation Air travel Rental Petrol Land Other Food Enter- Other Total day NZ$ vehicle transport transport tainment Auto 51.2 19.4 37.8 8.7 2.2 3.6 34.9 22.1 35.3 215.2 Camper 17.2 5.6 27.2 7.8 9.3 3.4 16.7 15.9 8.7 111.8 Backpacker 17.9 7.2 6.8 2.3 8.4 1.8 17.4 22.6 5.7 90.1 Comfort 47.1 18.6 7.1 3.1 6.5 2.2 27.5 23.7 8.2 144 VFR 18.6 2.2 4.7 3 4.7 1.8 15.9 12 17.9 80.8 Coach 84.9 0 0 0 39.2 0 24.4 36.6 15.5 200.6 3.2 Economic yield by value added Value added per dollar of expenditure was calculated by applying the value added factors in Table 1 to the expenditure. The results, expressed in value added per visitorday by tourist type (Table 3), show that the ranking of visitors is unchanged from the ranking based on expenditure per day. Auto tourists generated the highest value added per day ($110), followed by non-asian coach tourists ($100). VFRs and backpackers emerged as low generators of value added per day ($41 and $44, respectively), while campers and comfort travellers were medium generators of value added per day. 6

Table 3. Direct value added per day by tourist type. Accommodation Air Rental Petrol Land Other Food Enter- Other Direct VA VA:exp travel vehicle transport transport tainment per day*. ratio Auto 26.6 8.7 22.3 5.0 1.2 2.3 14.1 9.9 19.9 110.1 0.51 Camper 8.9 2.5 16.1 4.5 5.0 2.1 6.8 7.1 4.9 58.0 0.52 Backpacker 9.3 3.2 4.0 1.3 4.5 1.1 7.0 10.1 3.2 43.9 0.49 Comfort 24.5 8.3 4.2 1.8 3.5 1.4 11.1 10.6 4.6 70.1 0.49 VFR 9.7 1.0 2.8 1.7 2.5 1.1 6.4 5.4 10.1 40.8 0.50 Coach 44.1 0.0 0.0 0.0 21.1 0.0 9.9 16.4 8.7 100.3 0.50 VA = value added Table 4. Total (direct and indirect) value added by tourist types ($ / visitor-day). Accommodation Air Rental Petrol Land Other Food Enter- Other Total VA VA:exp travel vehicle transport transport tainment per day ratio Auto 43.5 13.7 32.4 5.3 1.9 3.2 29.0 18.6 30.3 177.8 0.83 Camper 14.6 4.0 23.3 4.7 7.9 3.0 13.9 13.4 7.5 92.3 0.83 Backpacker 15.2 5.1 5.8 1.4 7.1 1.6 14.5 19.0 4.9 74.6 0.83 Comfort 40.0 13.1 6.1 1.9 5.5 2.0 22.9 19.9 7.0 118.4 0.82 VFR 15.8 1.6 4.0 1.8 4.0 1.6 13.2 10.1 15.4 67.4 0.83 Coach 72.1 0.0 0.0 0.0 33.3 0.0 20.3 30.7 13.3 169.7 0.85 Discussions of the definition of yield have focussed on the possibility that different measures of yield would give different rankings of tourist types. We hypothesized that the highest expenditure per day might not correlate with the highest economic yield by value added per day, because different industries have different ratios of value added to expenditure and because different visitor types spend different proportions of their expenditure in the various industries. A potential change in ranking will be indicated by the averaged value added to expenditure ratios varying between tourist types. While expenditure and value added per visitor-day clearly differs for the six tourist types, the ratio of value added to expenditure is approximately the same for all visitor types (see last columns in Tables 3 and 4), although camping tourists display a somewhat higher direct value added to expenditure ratio because of their high transport usage. This result suggests that using expenditure per visitor-day as a surrogate for value added yield can be an acceptable procedure for ranking visitors. 3.3 Employment yield Because employment generation is sometimes perceived to be an objective of government policy, we have also estimated yield in terms of the employment generated per visitor-day. The employment tables (Tables 5 and 6) show that non- Asian coach tourists have the highest yield per visitor-day (2.6 FTEs per thousand visitor-days) and the highest direct employment effect per dollar spent (13.2 FTEs per $million), while camping tourists have the lowest impact (1.0 FTEs per thousand 7

visitor-days and 9.1 FTEs per $million spent) and VFR travellers and backpackers generate the lowest employment yield (less than one FTEs per thousand visitor-days). If yield is defined in terms of the total employment effects across the economy the differences between tourist types diminish slightly, but the VFR tourist is still the one with the lowest yield (1.3 FTEs per thousand visitor-days), while the coach tourist still generates the highest yield (3.6 FTEs per thousand visitor-days). Measuring yield in terms of employment generated does change the ranking of visitors according to yield, with coach tourists now ranking above auto tourists. This occurs principally because coach tourists are much higher spenders in the employment-intensive industries of accommodation and entertainment. Table 5. Direct employment yield by tourist types (FTEs / 1000 visitor-days) and direct employment per $ million of expenditure. Accommodation Air Rental Petrol Land Other Food Enter- Other Direct Empl. per travel vehicle transport transport tainment empl. yield $m of direct expenditure Auto 0.8 0.1 0.2 0.0 0.0 0.0 0.5 0.2 0.5 2.2 10.31 Camper 0.3 0.0 0.1 0.0 0.1 0.0 0.3 0.1 0.1 1.0 9.14 Backpacker 0.3 0.0 0.0 0.0 0.1 0.0 0.3 0.2 0.1 1.0 10.56 Comfort 0.7 0.1 0.0 0.0 0.1 0.0 0.4 0.2 0.1 1.6 11.18 VFR 0.3 0.0 0.0 0.0 0.1 0.0 0.2 0.1 0.2 1.0 11.76 Coach 1.3 0.0 0.0 0.0 0.5 0.0 0.4 0.3 0.2 2.6 13.15 Table 6. Total (direct and indirect) employment yield by tourist types (FTEs / 1000 visitordays) and total employment per $ million of expenditure. Accommodation Air Rental Petrol Land other Food Enter- Other Total Empl. per travel vehicle transport transport tainment Empl. $m of direct yield expenditure Auto 1.0 0.1 0.3 0.0 0.0 0.0 0.7 0.3 0.6 3.2 14.7 Camper 0.3 0.0 0.2 0.0 0.2 0.0 0.4 0.2 0.2 1.5 13.5 Backpacker 0.4 0.0 0.1 0.0 0.1 0.0 0.4 0.3 0.1 1.4 15.4 Comfort 0.9 0.1 0.1 0.0 0.1 0.0 0.6 0.3 0.1 2.3 15.8 VFR 0.4 0.0 0.0 0.0 0.1 0.0 0.3 0.2 0.3 1.3 16.4 Coach 1.7 0.0 0.0 0.0 0.7 0.0 0.5 0.5 0.3 3.6 18.0 4 DISCUSSION The analysis revealed that while there are differences in expenditure and value added patterns for the six tourist types, the ranking of tourists by expenditure is the same as their ranking by value added. This is because the differing expenditure mix by various visitor-types does not lead to a difference in the ratios of valued added to expenditure by visitor type. Ranking visitor types by employment yield does alter the ranking slightly, with coach tourists now ranking above auto tourists. The pilot study provides some confirmation that there are considerably different economic benefits associated with each type of tourist, and also suggests that ranking of tourists according to yield per day is not significantly affected by whether the measure of yield is gross expenditure, value added, or employment. However, the 8

sample was too small and the analysis too coarse to give much certainty to this latter conclusion. In particular, both the expenditure data from tourists and the ratios of value added and employment to expenditure for industries were probably still too aggregated. We postulate, for example, that these ratios may vary significantly across the different sub-sectors of accommodation and other major industry groups, and that the mix of expenditure across these sub-sectors will also vary notably by visitor types. It is hypothesized that a finer breakdown of categories would provide a better picture of differences in value added and employment. Additionally, it seems necessary to break down value added into its components, for example taxes and salary and wages, because this would allow distinction of effects at different geographical, political and structural levels. For example, taxes collected by businesses provide a benefit to central government but not to the tourism businesses themselves, while value added other than taxes should be further differentiated into labour and capital returns. The aggregated measure of value added as employed in this pilot-study does not allow such refined analyses. In terms of economic benefit it would also be useful to distinguish economic activity occurring in structurally weak regions compared with economically strong regions, such as the main gateways and tourist hubs. It would also be valuable to investigate whether different tourist types impose differing non-market costs per day (e.g. greenhouse gases, use of public infrastructure, etc.). In other words, enhancing the analysis of economic yield by adding social and environmental dimensions would provide a sustainable yield measure of the tourism industry as a whole. Finally, our results have all been expressed in terms of yield per day, which implies that visitor-days are expected to become the binding constraint on New Zealand tourism, presumably because of some perception that overcrowding is determined by visitor days 4 or some limit to community acceptance of visitors. A proposale has been presented to New Zealand s Foundation for Research Science and Technology to investigate a number of these issues in future years, and until then our conclusions must remain no more than tentative findings. 4 Rather than, for example, overall visit or visitor days in particular icon destinations, or in national parks. 9

References Becken, S. (2002), Energy use in the New Zealand tourism sector. Thesis in the fulfilment of the requirements for the degree of Doctor of Philosophy. Society, Environment and Design Division, Lincoln University, New Zealand. Unpublished. Becken, S., and Gnoth, J. (in press), Tourist consumption systems among overseas visitors reporting on American, German, and Australian visitors to New Zealand, Tourism Management. Becken, S. (submitted), Spatial and temporal dispersion of coach tourism in New Zealand and implications for sustainability. Submitted to Tourism Geographies Dwyer, L., and Forsyth, P. (1997), Measuring the benefits and yield from foreign tourism, International Journal of Social Economics, Vol 24, No 1/2/3, pp 223-236. European Commission (1997), Yield management in small and medium-sized enterprises in the tourism industry. General report. Luxembourg Office for official publications of the European Communities. Reynolds, P.C., and Braithwaite, R.W. (1997), Whose yield is it anyway? Compromise options for sustainable boat tour ventures, International Journal of Contemporary Hospitality Management, Vol 9, No 2, pp 70-74. Statistics New Zealand (2002), Provisional Tourism Satellite Account 1998-2000. Available at www.stats.govt.nz Tourism Tasmania (no date), How to make more money from your attraction or tour business? Yield Management for small to medium-sized attractions and tour operators. Available at www.discovertasmania.com 10