How Attractive is Nigeria’s Hospitality Industry? – A Report

Proshare

Tuesday, November 26, 2013/ PearlMutual

 

The hospitality industry can be categorized under the service industry and refers to the provision of lodging services, restaurants, event planning, theme parks, transpor-tation, cruise line, and additional fields within the tourism industry. The world over, hospitality industry has provided high yields in returns to investors, being an impor-tant part of development and economic emergence and attractiveness.

 

As the world continues on its recovery path, the Nigerian Market has seen an influx of international brands, as well as expansion and additions of more rooms in the al-ready established hotels. As expected, security is a major determining factor for these often experienced investors, therefore, the favourite destinations are Lagos, Port Har-court, Abuja, Calabar and Enugu.

 

Indeed, Nigeria’s macroeconomic expectations bodes well with a continued ex-pansion in this sector over the immediate to medium term. According to a report by W Hospitality group, Nigeria has c.7,500 rooms under contract for 2013 only and has been experiencing a visible growth trend over the last three years.

 

We hereby present an analysis of the Nigerian hospitality industry’s attractiveness based on Porter’s five forces for discerning investors.



A. THREAT OF NEW ENTRANTS

An industry is attractive if there are entry barriers that reduce the rate at which new entrants can spring up. We believe that entry barrier is high for the hospitality indus-try, as it is capital intensive and has become more technology driven than was previ-ously required in the industry. Hence, this factor increases the attractiveness of the Nigerian Hospitality Industry.

B. COMPETITORS’ RIVALRY

A high level of rivalry within an industry usually leads to ‘price war’ among the cur-rent players. This will in turn increase the cost of doing business and put downward pressure on margins and profitability. Though the hospitality industry has a large number of competitors with very low customer loyalty and low switching costs, these issues do not decrease the attractiveness of the industry. We believe rivalry can be effectively managed through quality differentiation, innovative technology, style and exquisite service delivery.

C. SUPPLIERS’ POWER

When an industry’s suppliers have bargaining power, they dictate price which will in turn reduce margins of the industry players. The suppliers to the hospitality industry are numerous and can easily be replaced, hence are unable to exert any significant power on the industry players. This makes the industry very attractive for prospec-tive investors.

D. BUYERS’ POWER

In the hospitality industry, customers are afforded a variety of options based on costs, quality of service, product categories, and special offers. Indeed, the customers’ power is high, which ordinarily should make the industry less attractive however, due to the seasonality of the hospitality business, customer can only meaningfully take advantage during off-peak period. However, in peak seasons like December, when the demand for hospitality industry services is high, the customers’ power is low, giving the firm an opportunity to set prices and increase profits, recovering most of the off-peak short falls.

Overall, we consider the buyer’s power on the industry to be average.

E. THREAT OF SUBSTITUTE GOODS

A substitute can be regarded as something that meets the same need, but currently outside the specific industry being reviewed. The threat of substitute though present is moderate at best and does not affect the attractiveness of the industry.

OVERALL SUMMARY:

Based on our analysis of the industry, we consider the industry to be an extremely attractive one for prospective investors. The only known alternative for the industry under review is squatting with relatives, which has proven to be more expensive qualitatively. Therefore, the industry scored eight (8) out of ten (10) on our in-house industry attractiveness grid. 

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