NATIONAL REPORT—Canada is at an inflection point. According to the Organization for Economic Cooperation Development’s (OECD) forecasts, Canada’s GDP will grow at a lackluster 1.4 percent, among the worst performing advanced economies. While government institutions are working to mitigate Canada’s resource curse, their policies have thus far failed to break it.
The technology sector accounts for 6 percent of Canada’s GDP and is losing its share in tourism, which accounts for 2 percent of the nation’s GDP and employs twice as many Canadians. Given an 80 percent decline in Chinese arrivals worth $2.5 billion, Canadian tourism won’t surpass pre-pandemic levels until 2025.
In 2019, Ottawa released a report titled Creating Middle Class Jobs: A Federal Tourism Growth Strategy, which acknowledged the Canadian tourism sector wasn’t reaching its full potential. The report set a target of increasing tourism GDP to $61 billion by 2030 and improving Canada’s World Economic Forum tourism ranking from 13th to 7th by 2030. The report recommends several initiatives to keep the Canadian tourism industry aligned with international best practices, including those of the United States and France.
While Canadian policymakers see the potential in tourism, Canada lacks a winning strategy to capitalize in this industry. The power play starts with taking back control of the $26 billion dollar “cash cow” that’s critical to national security—the accommodations sector.
Only One REIT
Today, there’s no Canadian owned hotel brand that’s a top choice of hotel owners and listed on the Toronto Stock Exchange. The only hotel Real Estate Investment Trust is American Hotel Income properties which owns hotels in the U.S., and there’s no Canadian travel technology company with any scale.
Foreign chains represent 60 percent of hotels in Canada, and the top three international chains account for 70 percent of the standardized and generic hotel lines, most of which are concentrated in Canadian big cities.
International hotel chains have never designed brands for Canada such as extended stay segment hotels that could be capable of reducing Canada’s housing shortage. They‘ve failed to develop properties in Vancouver, a city that generates $4 billion and thousands of jobs from tourism and maintains high hotel demand and exorbitant accommodation costs.
Chinese companies own over 100 hotels across Canada. Bill Gates’ Cascade controls Four Seasons Hotels and its management is no longer Canadian. In 2015, Marriott acquired Delta Hotels from B.C. Investment Corp. and assigned the management to a foreign operator. In 2016, Fairmont was acquired by France-based AccorHotels.
Canada’s hotel owners are incentivized to franchise foreign brands because they get better financing terms from lenders. Creating a new hotel brand requires investing more equity into the deal and additional research and development costs. In contrast, there are 65 hotel chains from Mexico to Sweden with over 50 hotels in their home country with valuation ranging from $500 million to $37.5 billion USD.
High Interest Rate Environment
The Canadian accommodations segment generates $2.7 billion with profit margins of 11 to 15 percent. However, it faces unprecedented challenges in generating positive cash flows with rising operating costs and limited opportunities for refinancing in a high interest rate environment. Free cash flow generation remains elusive.
Despite 190,000 temporary foreign workers who disincentivize employers to improve working conditions, the industry still faces a shortage of 300,000 workers. Sixty percent of the workforce are women and 30 percent visible minorities, but women and minority groups represent only 14 percent and 11 percent of property executives respectively. In the meantime, Small and Medium-Sized Enterprises (SMEs) lauded by policymakers as being over 50 percent women and immigrant-operated still need debt restructuring and financing.
To effectively overhaul the hospitality sector, there are five areas that need to be addressed: A new generation of work/live hotel brands, tax relief for hotel owners, hospitality content requirements, investment in new tourism hubs, and enterprise zones for Indigenous tourism.
The highest priority for Canada is to build a new generation of brands that carry the Canadian flag with Canadian-owned assets. Ottawa could amend the Canadian Investment Act to limit foreign ownership of Canadian hotel assets and brands to 49 percent.
This can be accompanied by new financing incentives for the creation of hotel real estate funds and trusts. Sustainable hotel brands that use artificial intelligence should be eligible for the $7 billion in Strategic Innovation Fund.
Tax Relief Needed
Second, the Canadian hotel industry needs tax relief. Travelers pay $4 billion in consumption taxes, including provincial, federal, municipal, tourism and destination taxes, which must be rationalized in exchange for hotels eliminating junk fees.
The orthodoxy that government spending on advertising drives revenue must be challenged by using data science and analytics to find solutions. Hundreds of millions are being wasted in cliché destination marketing that has made Canada the subject of memes on social media.
Third, the federal government should legislate Canadian content requirements for hospitality programming, similar to the music industry, where the Canadian Radio-television and Telecommunication Commission (CRTC) requires songs to meet certain criteria to be considered Canadian. Hospitality requirements in Canada must also go beyond furniture, fixtures, and equipment, and encompass food and beverage, technologies, and human resources.
Marketplaces should require a certain percentage of suppliers be Indigenous business owners, and general managers of hospitality companies be Canadian. Furthermore, hiring skilled refugees can reduce dependence on temporary workers, while having a positive social impact on communities.
Establish Hospitality Hubs
Fourth, provincial governments can engage industry stakeholders to establish hospitality hubs. Canada’s experience with Meta and Google—who refused to pay local news content providers and subsequently left the market—is a risk that tourism should never face. The Business Development Bank of Canada can prioritize investments in human resource technology platforms that address the largest problem cited by Canadian SMEs which is recruiting and training skilled employees.
Fifth, new regulations are required to achieve Canada’s goal of achieving net-zero emissions by 2050. With no definition of net zero, hotels obtain meaningless certifications such as those from Leadership in Energy and Environmental Design that falsely inform travelers of their sustainability practices.
Embodied carbon, the term that encapsulates all the greenhouse gases emitted during both renovation and construction—contributes 21 percent of emissions compared to 1 percent for operations.
Require Modular Construction
Canada’s tourism industry is producing 6.4 percent of world greenhouse gas emissions (GHG), which is three times its national GDP contribution. However, the hotel industry is generating 20 times this impact. New regulations could require modular construction that employs parametric prefabrication, allowing for flexible outputs, reduced supply chain costs, and reduced construction waste by tenfold for a new build.
The case studies of Saudi Arabia’s Vision 2030, Norway’s EV cruise ships and Australia’s Indigenous tourism are benchmarks. The Red Sea project includes an archipelago of 90 islands, using 100 percent of its energy from renewable sources on site with plans to become the largest certified nature reserve where light pollution is prohibited. Australia’s tourism, accounting for 3.5 percent of its GDP ($60 billion), outperforms Canada’s, driven by effective Indigenous travel strategies. In 2022, spending on First Nations tourism exceeded $3 billion domestically and $1.3 billion from international visitors. Key initiatives include developing Indigenous tourism hubs and the Indigenous Innovation and Entrepreneurs Program (IIEP), supporting Indigenous businesses in tourism. The potential is evident.
It’s time for Canadians to take back control of their hotels. Many of the foundations are in place but bold steps and reallocation of resources is required for Canada to reach its potential and become “first among nations” in tourism.
About the Author
Alexander Mirza has 25 years’ experience in Fortune 500 corporations and start-ups. After Deloitte Consulting, he led strategy at Starwood and held senior management roles at Hilton, Ticketmaster, and Caesars. He subsequently served as CEO of Asia-based Cachet Hotels. Mirza holds degrees from Harvard Business School and Queen’s University at Kingston, where he was an Aga Khan Scholar, and he serves on the advisory board of Cornell Center for Innovative Hospitality Labor and Employment Relations (CIHLER). Go to www.alexandermirza.com.