Exclusive Report: Hotelier ME Supplier Survey 2015

The Hotelier Middle East Supplier Survey 2015 reveals that hotel suppliers are still grappling with issues of bribery and corruption, while increased competition and undercutting is putting pressure on rates as the market matures

Last year’s Hotelier Middle East Supplier Survey 2014 exposed a worrying trend of corruption in hotels with the majority of suppliers saying they had either been approached for, or were considering offering bribes to secure contracts.

However, this year’s survey has revealed other challenges in the industry, including increased competition and a wide-spread practice of undercutting. As always, most of the suppliers who responded to the survey are based in the UAE (62.5%), while suppliers also responded from Germany, the UK, North America, and France. The large majority of them supply to the wider Middle East, including countries such as Egypt, Jordan, and Algeria.

Numbers Game
A majority of businesses (23.5%) said they posted net profits of US $250,000-500,000 in 2014, with 11.6% showing net profits between $1 million and $5 million. No respondents registered any losses, compared to 11.76% of respondents who said they did during 2013.

Suppliers are also generally optimistic about performance in 2015, with 91.3% expecting annual turnover to be more than 2014, and 8.7% expecting turnover to remain the same. None of the participants expected turnover to reduce in 2015.

Similarly, 82.61% of respondents expected net profits to increase in 2015, while 17.39% were more cautious in their predictions and anticipated that they would match their 2014 profits.

Some of this optimism could possibly be attributed to rising prices, with 40% of respondents saying they had increased their rates since 2014.

However, the majority (56%) have maintained costs, while 8% of suppliers had, in fact, dropped them.

Of those suppliers whose prices were increased, 80% only raised them by 0-10%, while 20% had dropped them by 11-20%. A smaller number (4%) had increased prices by 41-40%. The respondents offered various explanations for increasing their costs, including the rising valuation of raw materials, increased rates by the manufacturers themselves, as well as a shortage of supply.

From the 8% of respondents who revealed they had dropped prices, 96% had cut them by 0-10%, and a smaller 4% had slashed them by 11-20%.

Falling prices were attributed to larger sales volumes, reduced dependency on borrowing, reduction of raw material costs, and the need to be more competitive in the market.

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Industry Concerns
Among the big concerns shared by suppliers is the increasing competition, and the practice of undercutting to get deals, with more than 80% of respondents attesting to price wars, while 63.64% said increased competition was the biggest challenge facing their business in 2015.

Commenting on the practice of undercutting, Rational International Middle East chief representative Simon Parke-Davis says it’s a common occurrence around the world, and not just in the Middle East alone.

“It is known as competition and is designed to give customers the choice. However it can be misused and give an unfair advantage. We believe in economies of scale and [offering] customers benefits throughout the whole life cycle of our products. So we invest in people and increase our capital to show commitment and professionalism to the customers and distributors in a way no other manufacturer is able to,” he tells Hotelier.

Sparrow International sales director Nader Hijazi also said customers today are more conscious of price, compared to the market before the recession in 2008.

He explains: “What I’ve noticed now in the market is that people are very cost-conscious. It’s not the Dubai of pre-2007, where no one cared about cost and they were all about quality. Now there is enough competition in the market and the field is more levelled, so they look at price as well as quality.

“So when we face a situation where one of our competitors tries to undercut us, we try and explain to potential customers that the benefit they get from working with us cannot be measured purely in financial terms — for example, the maintenance, the support, the quality of the products, and the transparency we offer.”

Despite the challenges, suppliers overall saw increasing competition as a sign of growth in the industry.
Monin MEIA trade marketing manager Pierre Fraboulet comments: “Competition is great, because it is a global sign that the industry is performing.

“If there was no competition, then there would be a problem.”

Other stumbling blocks suppliers mentioned include reduced workforce (4.55%), outstanding debts they are owed (4.55%), and market saturation (13.64%).

They also pointed to bribery and corruption — some of the biggest causes for concerns in Hotelier Middle East’s previous supplier surveys — as an ongoing challenge. Respondents this year were split evenly, with 50% saying bribery was negatively affecting their business, while the rest felt otherwise.

Similarly, 50% of respondents said they had been in a situation where they were asked for a bribe by a procurement manager or buyer — 4.8% less than last year — while an equal number said they had never faced such an issue.

Nearly half of suppliers surveyed (54.55%) said they knew other firms that had offered bribes to secure business. More than 85% of participants however, said they would never resort to bribing a procurement manager or other buyer, while 13.64% said they would consider it.

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Payment Terms
Whereas vendor contracts are standard procedure in other parts of the world, the results of the Hotelier Middle East Supplier Survey 2015 show that almost a third of suppliers (31.82%) work with hotels that don’t enforce contracts.

While for 36.36% of respondents, hotels that enforce contracts only make up between 1-20% of their business.
Interestingly, however, 81.82% of respondents were of the opinion that hotels should enforce contracts, while 18.18% did not believe it was necessary.

It’s a sentiment expressed by some of the suppliers Hotelier spoke to. Rational’s Parke-Davis says: “We feel in this region there is no requirement to force anything with clients or customers.

“Show your morals and professionalism in delivering what you promise or paying your debtors on time; this is enough to show what type of company you are.

“The only benefit of a vendor contract is that you are tied together, if you are doing the right things your relationship will be close anyway.”

Food Source general manager Sacha Schatt adds that sometimes it doesn’t make a difference whether a hotel has a contract with a supplier or not. “We have customers where we don’t have a contract and we’ve been working with them for 10 years; and then we have contracts with customers and no payments or they are not paying as much as they should.

“I think they have to be enforced by the hotel group, but for example, you can have a contract from the corporate office and at the end of the day it’s completely up to the chef, or the purchasing department. So it helps if you have a contract and that the corporate office is supporting you, but it doesn’t necessarily mean they will buy your products,” he says.

With contracts still not the status quo in the Middle East, more than 63% of respondents said it is taking longer than ever to receive payments from hotels. That said, some suppliers are of the opinion that contracts do very little when it comes to enforcing payment terms.

Sparrow International’s Hijazi says: “[It is] a UAE culture, where there are lax laws and if you don’t get a payment, it’s an extremely long, tedious, annoying process to get your money from whoever hasn’t paid you yet. It’s not new — it’s been ongoing for a long time; less so in hotels to be honest. Usually you sign contracts with payment terms of 60-days post-delivery by hotels, whereas small coffee shops and individuals tend to have payment issues.”

Hijazi also said the length of legal proceedings makes suppliers reconsider filing any legal action against creditors. He explains: “Even if you’re legally transparent and everything is fine, if you open a court case, it can take years and usually you lose more money than you recover. So you really can’t do much about it. The only flip side is that the person who doesn’t want to pay is only damaging his own reputation, and other suppliers refuse to work with him.”

“But legally there’s not much you can do here. In other countries, for example, you have the small claims court. Here there is no small court for financial disputes, you have to go to the judge and it takes a long time to get sorted,” he adds.

The survey showed that a large percentage of respondents were owed money from hotels for products or services (73.68%), with 72.22% saying they would definitely receive the payments, while 27.78% were confident of receiving the payments they were due.

Two of the companies that responded, however, feared there was a slight chance they would have to close down if outstanding payments were not received.

In general, suppliers seem confident in the growth of the industry, with 31.82% under the impression that the luxury market offers the most opportunity for growth, followed by 22.73% in favour of resorts. Only 9.09% of respondents believe the economy segment offers opportunities for growth, which is in contrast to the growing number of mid-market hotels being signed — with current numbers standing at more than 50, according to Dubai Department of Tourism and Commerce Marketing.

La Marquise marketing manager Olga Mirtova is among those gearing up for the rise of the mid-market. She says: “I would anticipate three- and four-star hotel growth. Percentage-wise, necessity-wise, I believe the demand is huge and I believe hoteliers understand that market trend, and will invest in more hotels.”

More than 60% of suppliers continue to believe the UAE poses the biggest opportunity for them, followed by Saudi Arabia at 31.82% and Qatar at 4.55%. Whether suppliers will cotton on to the industry’s changing dynamic and pay more attention to the mid-market is something time will tell. Hotelier will be interested to see how perceptions may change next year.