By Hector Medina, Senior Manager for New Market Development Apple Leisure Group
There are a variety of factors that contribute to the growth and success of the AI resort model, but the most important ones are the high profitability and returns for investors, developers, and owners, as well as the high popularity among consumers. In fact, many of the established brands that typically operate under the European Plan (EP) model (only room but no board) have been adopting the AI model into their existing and growing portfolios.
With a robust pipeline for hotel development across Mexico and the Caribbean over the next few years, there is ample opportunity for substantial ROI for investors and resort developers in the AI resort segment.
A Robust Mexico and Caribbean Pipeline
Leisure destinations in Mexico and the Caribbean are showing an impressive pipeline for growth over the next few years. According to a recent STR construction report, there was a 33.9% increase in the rooms under development across the region as of July, when compared to the previous year.
What this breaks down to is a total of approximately 21,405 total hotel rooms in the pipeline at different stages of development in leisure destinations in Mexico, most notably in Cancun, Riviera Maya, and Los Cabos. In the Caribbean there is a total of approximately 45,994 total hotel rooms in the development pipeline, the majority being in the Dominican Republic, Cuba, Puerto Rico, and Jamaica.
Of the total rooms in the Mexico development pipeline, 12,822 are currently under construction of which approximately 62% are estimated to be AI. Within the Caribbean development pipeline, 24,033 are currently under construction with approximately 42% are slated to be AI-focused.
Customers Choose AI
Why the rise in AI development? Among the many reasons, the model is highly appealing to the leisure traveler. In 2018 there were 30 million travelers that visited the Caribbean and 40 million people visited Mexico.
All of these travelers have a choice in the type and style of hotel they book. The AI model provides consumers with a worry-free option, and one that comes with built-in value.
“It’s all about the simplicity of the guest experience. An AI resort is the place where the consumer can check-in and then check-out worry-free.”
Not only this, today’s consumer is all about searching for value, and that’s true even in the luxury segment. According to the 2019 Caribbean Resort Product: Staying Ahead of Today’s Customer Preferences by Horwath HTL, “The last downturn changed the economic landscape, but it may have also altered the behavior of consumers who have learned to live without expensive products or see the value in them.” What this means for the hospitality industry is that consumers are searching for value-related offers and that fuels the growth of the AI sector.
The Industry Chooses AI
Not only are customers choosing AI resorts, brands that have long been known for their EP models have been adding all-inclusive models to their portfolios.
In a previous article I wrote for Global Hospitality Resources, “During the last 20 years the AI offering in the Caribbean, where the vast majority of the AI product in the Americas is concentrated, has not only grown, but more importantly, it has evolved through brand segmentation and product innovation, much like how the U.S. chain scales have done so in order to augment their outreach and appeal to multiple customer demographic clusters and income levels.”
“When I first published the article back in 2014, I noted the lack of U.S. brands entering the AI space, suggesting that U.S. brands would continue to shy away. But it seems that that my original assumption was wrong and it is changing, as major legacy brands are moving into the AI segment.”
Should there be Concern for Over-Saturation?
With so many hotel rooms in the pipeline, this begs the question, does the supply outweigh the demand? For some of the more popular leisure destinations in Mexico, such as Cancun, Riviera Maya, and Los Cabos, the amount of new development for 2019 will represent five to 11% of total supply. From a development standpoint and looking at key performance indicators retroactively, there might be a slight short-term concern for Cancun and Riviera Maya before the new rooms are absorbed into the market.
But, more importantly, much of the concern is focused on external factors which are out of any operator or brand’s control, such as sargassum or recent travel advisories that have affected connectivity. The dismantling of the international offices for the CPTM will also play a factor. For Los Cabos, there does not seem to be a concern of over saturation considering the demand has increased 21% during the last five years.
For the Caribbean, as of year-end 2018, of the 26 destinations that reported stay-over arrivals to the Caribbean Tourism Association, 17 reported growth, while only 9 reported declines.
“One must take into consideration that certain destinations are still ramping-up and normalizing after the 2017 hurricanes. More importantly, airlift into the region has continued to improve, which is a good sign for investment.”
How to Capitalize on the AI Market
Both Mexico and the Caribbean are two regions where Apple Leisure Group (ALG) operates a large percentage of its resort room portfolio. Via its Vacations brands, ALG sends approximately 2.3 million passengers to both regions annually, and the company’s vertical integration, which includes several distribution channels, ensures the resorts that work within the ALG umbrella operate with strong occupancy year-round.
The AI model has become a vital part of the hospitality industry in both Mexico and the Caribbean. It’s fueling nearly half of the development pipeline across both regions for the foreseeable future and continues to be a preferred option among consumers. Now is the time to align with the right partner to break into this competitive segment.
Jim Hepple is an Assistant Professor at the University of Aruba and is Managing Director of Tourism Analytics.