The False Economy of the Hospitality Industry in Oaxaca, Mexico

Oaxaca, Mexico-Cr-tomzap.com

Oaxaca, Mexico-Cr-tomzap.com

Tourism is suffering in the southern Mexico colonial city of Oaxaca, and has been since the civil unrest of 2006.  By 2008 it had begun to pick up, until the swine flue scare, the US economic crisis, and the negative press heaped on by journalists reporting the drug wars, by and large restricted to a couple of port towns and cities near the American border, almost 1,000 miles away.  With tourism the primary industry in Oaxaca, why in 2011 are new car dealerships doing a brisk business, is higher end home construction booming, and is the upper middle class continuing to otherwise spend like crazy?

Hotel and guest house owners complain that revenues are the worst they’ve been since 2007, yet conspicuous consumption continues. Indeed, occupancy in hotels, bed & breakfasts and other lodgings is down, and most restaurants which have traditionally catered to a predominantly tourist following are in a significant economic slump – but of course those with a healthy Oaxacan clientele continue to generate good revenue.

One tenable theory is that old money is driving the economy in the hospitality industry – a false economy.  More often than not the proprietors of hotels and restaurants own the real estate upon which their businesses are situated, outright without encumbrances (i.e. mortgage free).  The other common scenario is for these business owners to be leasing from their families; and in tough economic times rent is deferred or outright forgiven.

It’s the exception rather than the rule to encounter a business in the hospitality industry in Oaxaca making mortgage payments, or paying market rent to a non – relative third party.  Revenues are simply not coming in to service either kind of debt payment.

So with non – existent, forgiven, or deferred debt attached to real estate, all that remains to be paid by those in the hospitality industry are labor costs which remain stagnant, and cost of materials for resale (crafts, clothing and widgets in stores, and perishables and dry goods in restaurants).

A few examples support the thesis:

  • At the end of 2010, a downtown guest house with several lodging units closed its door after eight years of operation.  The owner had been paying market rent. Her other business interests had been keeping it afloat. All the other proprietors in her accommodations association have remained open for business. But not one other establishment is paying a mortgage or fair market rent to a non – relative third party.
  • A mother and son each owned a restaurant in Oaxaca.  The mother’s was in a high tourist zone, the son’s less so but with a strong local clientele.  The mother’s was rented from a non – related third party, and the son’s was owned outright, inherited from his father.  The mother had to close up shop after 15 years because of rent increases, with insufficient sales to cover costs and take home a bit for herself.  The son’s restaurant remains open.  He continues to enjoy his toys.
  • A Oaxacan operated a hotel and a crafts store.  The former was owned outright, by the family, and the latter was rented in a high traffic downtown area.  As a consequence of the 2006 civil conflict he closed the craft store.  The hotel remains open.
  • An elderly Oaxacan woman of Spanish stock owns three large, well – known Oaxaca hotels, each run by one of her children.  She complains about soft tourism, but the family is doing more than just fine, by any reasonable assessment.
  • A downtown Oaxaca restaurant never did take off, despite several years of trying, including at least one wholesale menu change.  It catered to tourists.  It kept open, nevertheless.  Finally it changed to an Italian restaurant.  Oaxacans seems to gravitate towards good Italian food, more so than international tourists.  The property is owned by the owner’s parents. Had it not been for the nature of the ownership of the real estate, by all reasonable estimations and based on simple economics, the restaurant would have closed a year after opening.

Of course there are exceptions, but each is based on specific, unique circumstances.  Once their individual states of affairs are examined, it becomes clear that operations are not inconsistent with the broad premise. For example, there are a few large hotels on leased premises, which continue to pay market rent and other expenses. It is suggested that there are two main reasons:

  1. They are owned by chains with significant financial backing such that they can easily cover a few soft years.  They’re in it for the long haul; if profits don’t materialize as expected, it can be taken in stride within the context of the broader picture, tax incentives, etc.
  2. Their use of aggressive price point marketing attracts European charter groups and other special interest trips (i.e. Elder Hostel).  They can afford to offer attractively priced packages because of volume and three-star accouterments. At the other end, there appears to be much less negative press outside of Canada and the US, and in any event overseas tour operators do not appear to have the same liability concerns.  Alternatively, profit motive keeps them actively selling.

There are other equally valid explanations for the phenomenon of conspicuous consumption in this false economy, which indeed is evidenced in other sectors of Oaxacan business and entrepreneurialism (i.e. jewellers, fast food chains, accounting and law offices in the private sector, and owners or franchisees of department and specialty stores such as Sears, Sam’s, Fábricas de Francia and Office Depot):

  • Politicians and higher level civil servants appear to earn quite well.
  • Cash is being brought into Oaxaca from elsewhere in the country, and more significantly from
    Canada, the US and further abroad, to purchase and sustain businesses so that traditional borrowing and debt refinancing is not required.
  • There are enterprises which have sources of product and significant sales outside of Oaxaca, but money nevertheless flows into the pockets of their Oaxaca resident owners (i.e. plantations of coffee, cacao and other crops and their derivatives, produced in other Mexican states and in countries throughout Central & South America).

In downtown Oaxaca there is a considerable amount of prime, unoccupied real estate, providing further evidence of the false economy, or in this case an inert economic growth phenomenon.  Property owners of substantial economic means (i.e. the old money families), rather than rent for what the market will bear, either allow their buildings to remain empty and deteriorate, or, squeeze top dollar out of renters, only to take back the premises when these retail visionaries finally realize that they cannot service the debt associated with their leases. They cannot compete with those in distinctly different financial circumstances – such as those in the hospitality industry who have succeeded, for reasons illustrated above, where others have failed.

Notwithstanding government statistics, most believe that inflation continues at about 8 – 10 percent per annum. The cost of goods required to support the hospitality industry will continue to climb, and eventually wages will have to creep up in order for Oaxacan residents to survive. This will put a strain on business owners, and begin depleting their resources – unless tourism improves.  If it doesn’t, and hotel and restaurant owners begin raising their prices in an effort to continue to maintain their lifestyles, tourists will stop visiting Oaxaca altogether.  There are too many other places in the world which offer culturally rich vacations at reasonable, competitive prices – and without the media to make travelers think twice.

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