PHILADELPHIA In part two of our interview with AMResorts President Alex Zozaya shares his outlook for Mexico and the Caribbean and discusses his company’s development in Cap Cana in the Dominican Republic. (Part 1 of the interview is available here.)
HOTELS: With Mexico fighting off negative publicity from the drug war and the Caribbean historically having a shortage of flights, what is your outlook for 2011 for Mexico and the Caribbean?
Zozaya: Mexico is going in a different direction than the Caribbean—not everything goes together. They have an overlap, certainly. If Mexico lowers its rates because of the risk perception, it would drive some business from Dominican Republic and Jamaica to Mexico, and therefore things will go down in Dominican Republic.
On the high-end products, the perception of risk in the luxury segment is not something you are going to move by dropping the rates. So we are not discounting the rates in Mexico. We need to fight that reputation with information. We are trying to stay away from the big umbrella of Mexico. So when crime happens in Mexico, most likely in the border cities, it will not affect the specific resort destinations. If something is happening in Tijuana, for example, that should not affect Los Cabos, which is more than 1,000 miles away and a very safe destination.
We also must make sure the consumer understands the geographical differences, where the things are bad or better, and the distances between the two as well as the connectivity directly to those airports so you don’t have to connect through all the dangerous places.
That being said, what I do see is the mass market of Mexico is dropping rates. They are nervous because they don’t have as many reservations on the books as they had last year, even though last year the economic crisis was stronger or more serious. For Mexico, the booking pace are not moving as fast or at the pace that it is moving in places like Jamaica, Dominican Republic, Costa Rica, etc.
One of the most important airlines to the leisure destinations in Mexico was Mexicana Airlines. That airline is not operating any longer. It’s not officially bankrupt but it is in Chapter 11. That left a huge hole in the market.
Little by little, the other airlines are replacing those services, but they’re doing it at a much higher rate. What is happening is the consumers pay more for the airlift and less for the hotel. The same thing is happening in the Caribbean. The consumers pay more for the ticket because there is less capacity on the airlift and they’re paying less for the hotels.
The oversupply in Mexico that is the consequence of the booming of 2005, 2006 and even part of 2007 created a lot of new rooms. We didn’t have the same growth in the supply of airline seats, and as a result to fill up those rooms we need to discount deeper than the airlines are doing to fill up those seats.
HOTELS: What about for the Caribbean?
Zozaya: In the Caribbean there was also growth in supply, especially the Dominican Republic and Jamaica, which are the largest destinations in the Caribbean, and Cuba. Even when Cuba does not take the U.S. market, Cuba is growing. Cuba is taking a lot of Canadians, for example, and Cuba is taking a lot of Europeans. Those Canadians could be customers of Dominican Republic or Jamaica.
As a result of the additional new supply in Cuba, hoteliers in the Dominican Republic and Jamaica are also discounting their rates. On the other side, airline tickets are—best-case scenario—the same price as the previous year, but most cases higher than the previous year. The hotels are just the other way around, and as a result of that, the booking pace in the Caribbean is as good or even better than the previous year. In other words, the occupancy we have on the books for this coming winter 2011 is looking better than at this time last year for 2010. But the rates that we are getting are very similar or lower than the previous year. That, of course, does not allow us to grow rate, and the markups are narrow because we have an increase on the operating expenses. We have some inflation, specifically in energy, and that is a very important ingredient in the hotel business, especially in the results.
The other big problem is that the dollar is very weak. Because of that, the Americans find that their dollars don’t take them that far when they travel outside of the country. Also, because we have our costs in local currencies, when the dollar is weak like it is right now our operation cost increases. So even in the Caribbean where the booking pace for 2011 is looking good, the total profitability is not looking that great because operation costs have increased. Therefore, 2011 is not going to be a great year in terms of profitability.
The other big competition we’re having right now, even more so in the Caribbean than in Mexico, are the cruise ships. The cruise ships are bigger, better and cheaper than ever before. That is huge competition because the cruise ships don’t have the same cost structure; they don’t pay a lot of the taxes we pay on the local destinations. They can offer a lot of value for money, so I don’t blame the consumer for choosing the cruise ships sometimes. You take one or two of those big cruise ships and they have more beds than whole islands in the Caribbean. And, of course, cruise ships are discounting because they also need to gain the market share against Orlando, for example, or Vegas, which is significantly cheaper now than what it was two or three years ago. So I think it is all part of the same. The world is cheaper now.
Flagship Gems in Dominican
HOTELS: You are working on a new development project in the Dominican Republic at Cap Cana. Could you share some details on that?
Zozaya: Right now we have 22 hotels in operation and about 8,000 rooms. Under construction, we have a Secrets in Huatulco, two hotels in Puerto Vallarta—one Now and one Secrets. That would give us 25 hotels in the very short term. In addition, we are about to break ground in Los Cabos with one more Secrets. Add four hotels in Cap Cana and one in Costa Rica and that puts us with 31 hotels in the next two years with over 12,000 rooms.
That is in addition to all the new deals that we’re negotiating in the very short term as a result of the crisis. We’re negotiating deals in new destinations for us, but where we have distribution and knowhow in places like Ixtapa, Cozumel, Puerto Plata in the Dominican Republic, as well as Aruba. Our growth will continue to be very strong and we could have 35 to 36 hotels with maybe 13,000 to 14,000 rooms in the next two and a half to three years.
Going back to Dominican Republic, in this case specifically to Cap Cana, we have a project that is called Gems. Gems has four resorts, very luxurious, all suites because the destination of Cap Cana is very luxurious. You already have one of the best, if not the best, golf courses in the Caribbean, which is a Jack Nicholson Signature called Punta Espada. You also have very high-end residences and one of the best marinas in the Caribbean.
We already have a Secrets there. The Secrets has the highest rate of any of our resorts. And within [Cap Cana], we have the best beach; it is actually half a mile and it is an absolutely spectacular beach. The land was very expensive so we cannot build anything that is not very luxurious. We do believe that the destination deserves and will make profitable the higher end hotels.
We are building 1,100 suites in four hotels there. One is going to be a Zoëtry with 200 suites, one is going to be a Secrets with 350, and then one is going to be Now Resort with 350. The other one is Now Preferred with 200 rooms. We are going to have about 21 restaurants and we are building a shopping arcade. It’s going to have some of the services in the cluster model, including the spa, the casino, a dolphin site, shops and restaurants. At least five of the restaurants will be in this area that all of the guests staying in one of the hotels could share, including the convention center and the retail.
The investment in the development is going to be around US$400 million, and we believe that this project is not going to be that profitable in terms of return on investment, percentagewise, because we are investing significantly more money here than traditional projects. I think what we’re going to accomplish in this project is creating our flagship. We’re going to have a longer-term return. It will still be significantly high compared to our competitors but we can take the return on investment here in eight to nine years rather than six or seven.
We do believe if we do things right and we have enough quality here, this is going to bring a benefit to the whole company, not just to those hotels by themselves. As a result of that, we are willing to invest more money, of course, in the construction, and later on in the management.
We are very specialized and will continue to focus on this niche: resorts, all on the beach, all in great places within the region that we have influence. But we have the obligation and the strategy also to continue to grow and escalate the quality of our brands to higher end.
So this new project in Cap Cana is very ambitious. This is not going to be just adding rooms to the existing supply and competing with the existing hotels. We truly believe that it’s going to be different. We will be competing with all the destinations and we’re going to bring customers that otherwise wouldn’t go there if they didn’t have this type of product. So that’s the only reason why we are moving forward with adding rooms rather than just staying where we are or acquiring existing hotels at a lower acquisition cost.