Two sides to Croatia’s tourism: Breaking records vs. decreasing rentability

Two sides to Croatia’s tourism: Breaking records vs. decreasing rentability

In Croatia, tourism is perceived as a successful industry. Each year, records are broken in terms of arrivals and overnights, owners of the more luxurious apartments for rent on the country’s coast are buying apartments in Zagreb after nearly every season, and wages paid to chefs and waiters during the tourism season equal those of the middle management in traditional industries. Furthermore, tourism accounts for a fifth of the country’s economy, and this year, the sector in question posted a turnover of over EUR 10 billion.

Nonetheless, there are two sides to Croatia’s tourism industry. In addition to the side reflected in nominal consolidated figures, the country’s tourism also has a flip side that demonstrates all the inefficiencies of managing both capacity and space. Croatia’s tourism has the lowest accommodation occupancy rate in the Mediterranean and the most unfavorable accommodation capacity structure, with more than half of all the beds in private accommodation, while hotel and campsite capacity accounts for just over a third of the total accommodation capacity. At the same time, there have been only a handful of greenfield investments in hotels over the past 20-odd years. Perhaps the best example of the state the country’s tourism industry is in is the fact that, during the past two peak seasons, more precisely in July and August, every third bed in private accommodation was empty.

All those who understand the tourism business know that without good-quality hotel capacity and large tourism companies, there is no sustainable development of the tourist destinations, i.e. higher value-added tourism. The answer to the eternal question of how to develop a tourism industry that is more than just the sun and the sea is quite simple – we need to attract serious investments in the hotel capacity that we sorely lack.

For the past year and a half, since the founding of HUT as the umbrella organization for the country’s tourism sector, we have been raising the awareness among the media, various experts and general public about the flip side of the Croatian tourism and the necessary changes we need to make to utilize the potential of our tourism sector.

In the latest edition of Turistički impuls Q4, a magazine published quarterly and presented to all the stakeholders in the tourism industry and the media by HUT, we provided an overview of the last tourism season’s results – results that investors in tourism focus on. We saw the following outcome: Last season, Croatia’s largest tourism companies posted a slight drop in profitability and a substantial drop in rentability. The companies’ rentability, showing the profit made over that particular period as compared to the total engaged assets, went down by more than 10 percent in a single year to the extremely low 7.9 percent. The average rentability rate in the Mediterranean is between 10 and 12 percent, which means that investors considering where to invest will immediately dismiss Croatia as one of their options.

Instead of heaving theoretical economic debates, discussing whether the share of tourism in the country’s GDP is “too large”, we should acknowledge our reality and the fact that tourism is still one of our few industries that have the potential to grow and develop further. And that is something we should make good use of.

Furthermore, the government has finally recognized the main issues here. Lowering the VAT rate on certain tourism services, starting with next year, is merely a band-aid solution that will stabilize the situation in the tourism business to a certain extent; however, to achieve a serious shift for the better in the business environment, we will need to make a more significant step forward. Croatia still has the region’s highest VAT rate on tourism services, as well as a number of additional levies and charges, and investment obstacles that make us even more non-competitive.

Next year, we will continue to work alongside HUT to highlight these issues in different ways and formats. As for the first year and a half of our cooperation, we can safely say it has been a major success – in addition to lowering the VAT rate on some of the tourism services, we have managed to get much higher foreign employment quotas in the tourism industry, and launched a change in the model for importing foreign labor, which has become a critical factor in continuing the development of tourism in the country.

Those are the two turning points for the tourism industry; however, we still have a lot of work before us!