AN OVERVIEW OF SMALL MEDIUM TOURISM ENTERPRISES (SMTEs) AND THEIR ROLE IN THE TOURISM SECTOR OF SOUTH AFRICA: A CONCEPTUAL DISCUSSION

Dinesh Vallabh (PhD Scholar) Senior Lecturer: School of Tourism & Hospitality Walter Sisulu University South Africa [email protected]

It is widely anticipated that the tourism sector will become one of the key drivers of economic expansion and employment creation in South Africa (SA) over the next decade. Against this background, the objectives of the study are threefold: to examine the role of SMTEs in the tourism sector of SA; to develop a comprehensive understanding of the challenges of the SMTEs and government policy frameworks and initiatives to develop and grow SMTEs.

In SA, SMTE development is looked upon as a low cost means of addressing the country’s geographical inequalities and promoting entrepreneurial activities so as to harness the country’s full potential. Tourism is vital to the development of SA and its people as it is currently the fastest growing industry, employing an estimated 600.000 people. This paper is a literature review of a Doctoral study whereby empirical research will be conducted on a sample of SMTEs in the Eastern Cape.

Keywords: tourism sector, SMTEs, South Africa, Eastern Cape, challenges, government policy

INTRODUCTION

It is widely anticipated that the tourism sector will become one of the key drivers of economic expansion and employment creation in South Africa (SA) over the next decade. In SA, it has been suggested that the economic objectives of increasing earnings, foreign exchange, investment and job opportunities, as well as minimising adverse social and cultural effects have not been promoted through large tourism enterprises sufficiently. Instead, the advantages of developing SMTEs are being emphasised (Erero, 2011: 5; Rogerson, 2005: 5).

Against this background, the objectives of the study are threefold: to examine the role of SMTEs in the tourism sector of SA; to develop a comprehensive understanding of the challenges of the SMTEs and government policy frameworks and initiatives to develop and grow SMTEs. The international tourism literature provides a useful foundation for examining the issue of tourism linkages and small enterprises development in SA. In particular, it highlights the many constraints on SMTE development in the tourism industry, due to the dominance of large enterprises in the mass tourism industry.

In SA, SMTE development is looked upon as a low cost means of addressing the country’s geographical inequalities and promoting entrepreneurial activities so as to harness the country’s full potential. Tourism is vital to the development of SA and its people as it is currently the fastest growing industry, employing an estimated 600 000 people. It is also the largest industry in the world and the fourth largest in SA after mining, agriculture and trade. As an economic sector, one of the most distinguishing features of tourism is the overwhelming pre-eminence of small scale entrepreneurship (Saayman & Olivier, 2005: 117-118).

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A EUROPEAN PERSPECTIVE Most markets worldwide are dominated by SMMEs as they increasingly are being recognised as the engine of growth and as the backbone of the European economy (Ateljevic & Page, 2009: 288; Tassiopoulos, 2010: 30; Urban-Econ, 2010: 25). SMMEs are also the vehicle by which the people with the lowest incomes in any society gain access to economic opportunities. The approximatey 23 million SMMEs found in the EU provides two-thirds of all private sector jobs, accounting for about 75 million jobs. SMMEs are particularly important in developing and less industrialised countries. For example, micro-businesses (those with less than 10 employees) dominate employment in countries such as Italy (47%) of all employment and Poland (41%). Small businesses are thus crucial for growth and employment in Europe. Due to their flexibility, SMMEs are capable of operating successfully even during periods of economic turbulence and recession. Small businesses are seen as a vehicle for entrepreneurship (Thurik & Wennekers, 2004: 141) contributing not just to employment and social and political stability, but also to innovative and competitive power. Furthermore, these authors contend that entrepreneurship is a vital determinant of economic growth. The EU endorsed the European Charter for small businesses in 2000. The Charter embodied the “think small first” principle and the recognition that small enterprises are the backbone of Europe’s economy and the key to competitiveness (Thurik & Wennekers, 2004: 141). A Green Paper published in 2001 (European Commission, 2003) was the first EU document extolling the virtues of entrepreneurship and aimed at stimulating debate among policy makers, businesses,

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entrepreneurship policy for the future. Entrepreneurship is also a crucial element for achieving the political objectives set at the European Council meeting held in Lisbon in 2000, where the European Union committed itself to becoming, within a decade, the most competitive and dynamic knowledge-based economy in the world (Europa.eu.int: 2003). However, the European Commission report of 2005 stated that Europe still faced many challenges in order to meet the Lisbon objective for 2010. The need of an environment where small businesses do not struggle with red tape and where entrepreneurial people can transform their ideas into businesses was seen as imperative (European Commission, 2005). The Barcelona Council endorsed the 2

European Commission’s intention to present a Green Paper on entrepreneurship as a contribution to reaching ambitious goals (European Commission, 2003). Research in 2009 indicates that some member states in the European commission have made progess in reducing red tape and have simplified tax compliance procedures for SME’s (European Commission, 2010). The EU serves as a fine example for other countries to benchmark. The EU like South Africa has also been confronted with rising concerns about unemployment, job creation, economic growth and international competitiveness in global markets. Policy makers in the EU have responded to these issues with a new mandate in order to promote the creation of SMMEs. South Africa can learn from the EU experience.

THE ROLE OF SMMEs While SMMEs play a central role in the Euopean economy, they have been recognised as a major source of employment and income in many countries such as Japan and New Zealand. Detailed surveys in a number of countries suggest that a quarter of all people of working age are engaged in small business activities (Mead & Liedholm, 1998: 61). In the global context, SMMES are a source of creative and innovative energy, stimulating economic growth and competitiveness. In developing countries, including South Africa, SMME growth has become an instrumental part of such countries’ economic policies (Tassiopoulos, 2010: 20). In South Africa, SMME development is looked upon as a low cost means ofk addressing the country’s geographic inequalities and promoting entrepreneurial activity so as to harness the country’s full potential (Nsika, 2002: 55). However, Tassiopoulos (2010: 20) cautions that the failure rate of new businesses in South Africa is high, with nearly 50 percent of small businesses failing within the first five years. Many reasons for this state of affairs are provided: the wrong product, undercapitalisation, poor cash flow, poor management, lack of succession planning and technological obsolescence, amongst others. The most frequently cited reason for business failure is perceived to be a direct consequence of SMME management competence (Ateljevic, 2007: 308). 3

Despite the high failure rate, SMMEs play a critical role in a country’s economy. In South Africa SMMEs contribute to the Gross Domestic Product (GDP) and absorb between 50 per cent and 60 per cent of the formally employed labour force. SMMEs also contribute 43 per cent of the total value of salaries and wages paid in South Africa. Given their numerical spread, small businesses are well placed to play a central role in stimulating the economy and boosting economic growth (Mbedzi, 2011: 1). Furthermore, SMMEs are a key source of business dynamism and innovation. Rogerson (2004: 14) reports that the benefits of developing small business in tourism has been argued by several writers. In particular, within a developing world context, it is suggested that the economic objectives of increased earnings, foreign exchange, investment and job opportunities, are promoted by developing small businesses and not through inward investment and large tourism enterprises. The subsequent sections explain the role of SMMEs in more detail, particularly with respect to employment creation. Thomas (2004: 13) explains that the tourism sector is recognized as important in its potential role as one of the few sectors that can be employment-intensive and create new jobs through SMMEs. The role of SMMEs seems to be as important in some of the world’s best performing economies, particularly, Taiwan and Hong Kong (Dorfling, 2001: 19) as is the case in developing countries. Luiz (2011: 54) points out that in some Asian countries, for example, Taiwan with welldeveloped urban industrial and financial systems, small enterprises have benefitted from subcontracting arrangements with larger firms which have significantly contributed to employment creation. In this regard, Japan is the prototype of the economy in which small and medium enterprises play a significant role, primarily through subcontracting with large firms which tend to trade on a global basis. Similarly, in Indonesia, informal enterprises generate about half of all new jobs,while in Thailand SMMEs comprise more than 97 percent of all firms in the manufacturing and service sectors. Furthermore, in Mexico, SMMEs contribute 32 percent to GDP and 64 percent to total employment (Urban-Econ, 2010: 26).

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The World Travel and Tourism Council (2011: 6) records that Travel and Tourism is expected to generate 7,806,000 jobs directly in 2011 (3.0 percent of total employment). This includes employment by hotels, travel agents, airlines and other passenger transportation services (excluding commuter services). It also includes, for example, the activities of the restaurant and leisure industries directly supported by tourists. By 2021, Travel and Tourism in the world will account for 10,203,000 jobs directly, an increase of 2,397 000 (30.7 percent) over the next ten years. Figure 1.1 depicts the increase in tourism jobs up to 2021.

Established business owners play an essential role in providing sustainability of entrepreneurship in a society by offering employment (GEM, 2011: 13). Many studies have highlighted that unemployment is a major challenge in SA (Klasen & Woolard, 2008: 1; Statistics South Africa, 2011: 1; Trading Economics, 2011: 1-2) as stated in the State of the Nation Address (SONA) by President Zuma on the 9 of February 2012. The President quoted figures released by Statistics South Africa (Stats SA) of the fourth quarter of 2011. The figures indicate that unemployment in the country has decreased from 25 percent to 23.9 percent as a result of new jobs (Kiviet, Eastern Cape State of the Province Address, 2012: 24). South Africa’s Travel and Tourism is emerging as a leading global economic driver for the 21st century. In South Africa, it is already an important contributor to employment and wealth creation, with a huge flow through effect which touches all sectors of the economy. World Travel and Tourism Council (2011: 3) reports that the total contribution of Travel and Tourism to employment, including jobs indirectly supported by the industry, is forecasted to rise by 2.7 percent per annum from 18,173 000 jobs (7 percent of total employment) in 2011 to 23,801,000 jobs (7.2 percent) by 2021. Therefore, it would follow that SMMEs make an important contribution to SA’s welfare, particularly in terms of employment creation. The World Cup bears testimony to this fact for it had allowed for the creation of over 3,600,000 additional jobs in the local economies (etravelblackboard.com 2010). In this regard, Luiz (2011: 55) observes that the small business sector in South Africa has the potential to contribute to job creation and economic growth, whilst 5

at the same time redressing historical imbalances and increasing black economic participation. It is estimated that only about 1.4% of the Black population are entrepreneurs compared with 7.5% among whites. The following section addresses significant challenges faced by SMMEs.

CHALLENGES FACING SMMEs South Africa, as a transition economy, has many challenges and it is hoped that the growth and development of SMMEs can play a role in addressing some of these. In this section a review is presented of the major challenges that are faced by SMMEs. Most of these challenges equally apply to tourism SMMEs. Several common challenges have been identified that face SMMEs in tourism as a whole in South Africa. The following issues have been identified by Small Enterprise Development Agency (2011: 7). Market access and marketing In terms of market access it has been pointed out that SMMEs are unsophisticated in terms of their business operations and lack the necessary formal systems which are often required to do business with larger enterprises. Indeed, for large businesses there is usually no interest or incentive to do business with SMMEs. Furthermore, as a whole, small accommodation providers are generally excluded from the package tour market and instead are reliant on a strong independent travel market.

Marketing is often seen as a key area of need for SMMEs. Several studies highlight the critical importance of good and extensive marketing for the success of SMMEs in tourism (Rogerson, 2005: 10). Seemingly, there is a paucity of information by SMME entrepreneurs about markets and needs of consumers is a critical constraint.

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Lack of education and training Mbedzi (2011: 25) points out that holding a tertiary qualification significantly increases the probability that an individual will be a owner/manager of the business. Education and training is highlighted as one of the most important factors hampering entrepreneurial activites in South Africa. Formal classroom teaching also has a critical role to play in developing and nurturing entrepreneurial skills. Public schools in South Africa teach economic and management sciences as one of the eight learning areas, with strong emphasis on entrepreneurship. However, due to to the fact that most teachers or facilitators lack entrepreneurial skills themselves, there is no guarantee that the facilitator is an all-important factor in the realisation of success of entrepreneurial and small business learning.

Business management skills Business management training and skills are of critical importance. Within the category of business management, are encompassed a wide array of issues including: inter alia, product development, project management, quality control, accounts and finance; management of business growth; legal regulations and compliance, and how to maintain and develop staff (Lourens, 2007: 18). The existence of poorly developed skills in the tourism SMME sector is noted. Skills development and training ensures people living in marginal rural areas and urban townships are able to take advantage and benefit through business opportunities. Greatest skills are needed for SMMEss to build or participate in marketing networks. Training courses for tourism have been weak, often generic and failing to provide the broad range of skills specifically required by tourism entrepreneurs. Seemingly, different courses are required by different kinds of businesses. The needs for training newly established tourism businesses are of a different nature to those of growing tourism business that have been in existence for a number of years.

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Information Communication and Technology (ICT) Considerable attention is being focused on the issues around ICT development in small businesses. Several studies have highlighted the importance for tourism SMMEs of taking advantage of the opportunities by e-commerce. ICT can assist with the increased information flow and in expanding access to new markets (Chiware, 2008: 7). Research by Warden and Williams (2003: 19) in the Western Cape indicates that many small tourism business businesses are not aware of the benefits that e-commerce adoption could offer the operations. Another problem resulting from ICT non-development is that very few SMMEs have facilities that allow them to process credit card payments (Lourens, 2007: 20).

Sense of place, culture and safety An understanding of sense of place and culture is a challenge across tourism SMME development (Cornelissen, 2005: 47). The development of cultural tourism products is an important element of spreading the economic impact of tourism through the development of new products, including township tourism. In terms of maximising the impact of culture, SMME entrepreneurs need to understand new ways to enhance the visitor experience. Maintaining and building good customer relations with visitors is important. Entrepreneurs also need to be able to educate visitors about daily life, land issues and society as a whole. The use of the appropriate language is also an important issue to consider as part of the visitor experience. Furthemore, concerns about safety, lack of exposure about townships are important when dealing with customers (Cornelissen, 2005: 72).

Finance Finance is viewed as one of the core challenges for SMME development as a whole in South Africa. Many studies highlight the significance of access to finance as a constraint upon SMME development (World Bank, 2006b: 11). Access to finance remains one of the priority challenges faced by small businesses. As tourism is often a seasonal activity, the commercial banking sector 8

has not been particularly supportive of lending to small tourism enterprise. In addition, the financing packages offered by commercial banks are usually not friendly to SMMEs. Much of the establishment of tourism SMMEs is a result of own financing or financing through friends and relatives (Small Enterprise Development Agency, 2011: 9). A Global Entrepreneurship Monitor (2008: 17) found that the South African financial system has traditionally catered for large corporate clients and neglect small enterprises.The study further noted that commercial banks were not well placed to cater for the needs of small businesses. Furthermore, bank officials were not adequately equipped with the necessary skills to assist entrepreneurs. Global Entrepreneuship Monitor (2011: 27) notes that finance is considered a key impediment to entrepreneurial development, and organisational initiatives need to link this concern with the development of business skills.

Regulations Regulation and bureaucracy is profiled as serious constraints upon SMME development in tourism. Small Enterprise Development Agency (2011: 10) provides strong evidence that indicates that the regulatory environment discourages business growth in the formal economy. They further highlight that tourism SMMEs experience a host of constraints from of sectorspecific regulation relating to licencing of vehicles, zoning and permits. Overall, it is shown that the regulatory burden is much higher for tourism businesses compared to businesses in the economy. The average compliance course estimated to be up to three times higher than in other economic sectors (Small Enterprise Development Agency, 2011: 10).

However, Mbedzi (2011: 26) asserts that compliance with regulations can pose a serious challenge to SMMEs, as they increase cost levels. In many cases, much costs are incurred by small businesses in order to learn which kind of regulations apply to them and how they can be handled. Furthermore, Global Entrepreneurship Monitor (2011: 27) holds that regardless of development levels of the business, stringent labour regulations and an onerous regulatory 9

system negatively affect the number of entrepreneurs. This is an important point for all government policy makers to note because entrepreneurs contribute greatly to job creation. Inadequate institutional support In South Africa, adequate progress by Tourism Enterprise Programmes, Small Enterprise Development Agency, as well as government support programmes to support SMMEs in tourism has been noted. However, there are shortcomings in these programmes that need attention in order to expand the roll-out of necessary support for the tourism SMME economy. The Human Sciences Research Council (2006a: 15) argues that current government policies focus on SMMEs but the needs of the medium sized enteprises are vastly different. To add, government needs to make provision for different interventions when dealing with micro enterprise which is often informal and survivalist. Poor infrastructure Good infrastructure is essential for enhancing competitiveness of small businesses. Infrastructure concerns public transport, tourism information provision and public amenities. Rogerson (2005: 11) emphasises the question of infrastructure development for tourism enterprises. Mbedzi (2011: 24) highlights two factors that are likely to affect the ability of small businesses to grow: the existence of basic infrastructure facilities which is usually much better in the urban areas; and the existence of properly developed commercial areas SMMEs in rural areas operate under conditions which are characterised by poor or non-existent infrastructure. For example, small business owners have to travel long distance to do their banking. In addition, they may lack electricty supply infrastructure. Furthermore, very few businesses have access to the right infrastructure, especially referring to problems associated with slow and/ or expensive internet access and the lack of good service providers in rural areas (Mbedzi, 2011: 25).

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Research on the 2010 World Cup observed that the tournament had created significant benefits for South Africa and its tourism industry. The investment in the World Cup has led the way for major infrastructural programmes such as Expanded Public Works Programme (EPWP) to support and grow local communities. News reports estimated that 1,4 million new tourists visited South Africa during the tournament (Vodacom news:15 July 2010). Furthermore, the projected overall economic impact of the World Cup was 93 billion Rand with 62 percent of this amount accounted for by spending on infrastructure and preparations (etravelblackboard.com : 2010).

TOURISM IN SOUTH AFRICA

Tourism is vital to the development of South Africa and its people and it is currently the fastest growing industry, employing an estimated 600 000 people. It is also the largest industry in the world, and the fourth largest industry in South Africa after mining, agriculture and trade (Saayman & Olivier, 2005: 117). In addition, tourism is also the biggest employer in the world, with an estimated growth of eight percent in employment annually and it has a potential to become the biggest earner of foreign currency. The political changes in 1994, opened the doors of South Africa and positively impacted the tourism industry. Tourism has thus become a fiercely competitive business (Erero, 2011: 5).

Clay (2005: 40) concurs that the development of the South African tourism industry gained particular momentum in 1994. This is evident in the number of tourists that annually visit South Africa. In particular, 1994, saw a sharp rise of 18,6 percent in tourists arrivals and this number grew to 22,3 percent in 1995. The situation can be contrasted to the one that existed before 1994, when there was a huge loss of interest in visiting South Africa due to political reasons. At the time, a number of South African tourism promotion offices internationally were closed, domestic tourism stagnated, as the majority of citizens could not enjoy and access the tourism facilities. However, since 1994, tourism has been viewed as an increasingly important sector of the economy. 11

Lemon and Rogerson (2002: 95) contend that within the global tourism economy, South Africa is one of seven countries that has experienced some of the largest increases in arrivals worldwide post- 1994. It has been rated by the World Tourism Organisation as one of the most promising destinations in Africa. Between 1994 and 1998 the number of international tourists escalated from 700,000 to 1.4m. However, since 1999, the Mandela tourism boom has waned somewhat and tourism arrivals for 1999-2000 showed that growth leveled off. During 2000, total visitor arrivals decreased. Lemon and Rogerson (2002: 96) further point out that this downturn in overseas arrivals was a matter of concern in light of the special developmental role that South Africa places on tourism as a ‘rising star’ of the economy. Furthermore Lemon and Rogerson highlight that domestic rather than international tourism constitutes the heart of South Africa’s tourism economy which accounts for 87 percent of the tourism industry. Lewis (2001: 85) emphasises that with its comparative advantages of natural beauty, temperate climate and diverse attractions combined with its superior infrastructure and transport links, “South Africa can use such an ‘integrated’ package to differentiate Southern African tourism from the rest of the continent, and provide a boost to its own and the regional economy”. Nevertheless, for tourism to develop as South Africa’s ‘new gold’ (The Cluster Consortium,1999b: 3) it is essential that a number of constraints need to be addressed. According to Lemon and Rogerson (2002: 97) the major constraints relate to: the fact that tourism has been inadequately resourced and funded by the South African government: the limited integration of local communities and previously neglected groups into tourism; inadequate or non-existent tourism training, education and awareness; inadequate protection of the environment through environmental management; poor level of service standards within the industry; the lack of infrastructure in rural areas; 12

the lack of appropriate institutional structures; and the problem of violence and crime and the threat to the security of tourists.

In an effort to chart a path toward a ‘new tourism’ in South Africa, the White Paper (1996: 19) offers proposals to unblock the above constraints within the context of objectives for reconstruction. Six key guiding principles were put forward by Thomas (2004: 21-22) towards developing responsible tourism in post-apartheid South Africa: tourism will be private sector driven; government will provide the enabling framework for the industry to flourish; effective community involvement will form the basis of tourism growth; tourism development will be underpinned by sustainable environmental practices; tourism development is dependent on the establishment of cooperation and close partnerships among key stakeholders; and tourism will be used as a development tool for the empowerment of previously neglected communities and should particularly focus on the empowerment of women in such communities. The World Travel and Tourism Council (1998: 3) highlighted that South Africa has good advantages in the global tourism market and well as some critical challenges. The advantages are as follows: the characteristics of South African tourism products are in line with global market trends for adventure tourism, ecotourism and cultural tourism; since 1994 there has been a significant increased capacity for tourism in accommodation, transport, airlinks; 13

there has been increased co-ordination of tourism initiatives in Southern Africa for expansion and increased diversity of products; South Africa represents exceptional value for money for visitors from key origin markets; and South Africa has a positive international image for its democratic political transformation.

Challenges or weaknesses identified by World Travel and Tourism Council (1998: 4) were as follows: some parts of South Africa are increasingly seen as unsafe for tourists; there are gaps in infrastructure and lack of capacity in some areas; and product quality and service levels do not always meet international standards.

Tourism sectors Rogerson (2004: 53) puts forward that the travel and tourism industry refers to the economic factors directly related to the tourism experience, namely, transport, accommodation, catering and recreation. Similarly, Tassiopoulos (2011: 10) proposes seven different key business activities of the tourism industry. These tourism business activities are also often referred to as “industries” in their own right, for example, the events industry, accommodation and catering and the recreation,leisure and attractions industry. Figure 1.2 depicts the seven tourism industry sectors.

The tourism industry encompasses many different economic activities. According to Department of Trade and Industry (2004: 4) the analysis of tourism SMMEs is confined more narrowly to those particular enterprises operating within the bounds of the travel and tourism industry. The three sub-sectors according to Department of Environmental Affairs and Tourism (2005: 14) are: accommodation (e.g. Bed and breakfasts, guest houses, backpacker hostels); 14

hospitality and related services (e.g. Restaurants, catering, attractions, arts and crafts); and travel distribution system (e.g. Tour operators, tour guides)

THE SOUTH AFRICAN TOURISM SECTOR: A THREE –TIERED HIERARCHY OF ENTERPRISES

Rogerson (2005: 12) observes that the South African tourism industry could be conceptualized as a three-tiered hierarcy of enterprises. At the top are the operations of larger established groups of enterprises which are responsible for the country’s major travel and tourism retail and wholesale operations, transportation, hotels, casinos and event facilities. The largest proportion of the SMTEs are however found in the middle-tier of the hierarchy which consists almost predominantly of white South African-owned SMTEs that operate a host of different establishments from travel and touring operations, restaurants, small hotels, self-catering and resorts, game farms, bed and breakfasts or backpacking hostels. The lowest tier in the South African industry comprises of the emerging black-owned tourism economy which constitutes a mix of formally registered micro-enterprises as well as a mass of informal tourism enterprises (Rogerson, 2005: 13). However, due to an absence of reliable statistics, the actual shape and size of this hierarchy is unknown. Tassiopoulos (2010: 45) asserts that the size of the South African tourism industry comprising its employers and employees is difficult to quantify because of the lack of reliable data and inconsistent research methodologies. For example, between 2000 and 2007 attempts have been made by various studies to determine the size of the sector and their findings vary greatly. During 2007, Prodigy and Grant Thornton (Theta, 2009a: 18) in their report of the skills audit, which was commissioned by the Department of Environmental Affairs and Tourism (DEAT), the Tourism, Hospitality and Sport Education and Training Authority (THETA) and National Business Initiative (NBI), quantified the size of the sector and they estimated it to be having a 15

total of 41 740 employers and 378 000 employees. A study conducted by TEP (2008: 16) confirms with Tassiopoulos (2008: 18) that many SMTEs are not registered or recorded, thus making it difficult to conduct empirical research.

Different kinds of SMTEs in tourism Rogerson (2005: 13) puts forward three different kinds of enterprises in the South African tourism economy namely: emerging, established and established large enterprises. Figure 1.3 illustrates the three different kinds of enterprises.

Established large tourism enterprise Cornelissen (2005: 87) mantains that SA’s travel and tourism industry is highly concentrated and dominated by a small group of large, mostly locally owned, tourism organisations. Seemingly, the South African tourism industry comprises of a large number of enterprises as well as numerous SMMEs. Cornelissen (2005: 88) highlights that in the accommodation sub-sector, the leading enterprises are Southern Sun, Protea and City Lodge which in 2004 were listed as operating a total of 183 hotels with a room capacity of over 21000 in total. The Department of Trade and Industry (2005b: 15) contends that few large businesses have dominated the South African tourism industry. Small Enterprise Development Agency (2011: 4) mantains that in both the accommodation and tour opertaing sectors of tourism, the large businesses typically aim for volume and to some degree their dominance has the effect of “crowding out” the operation of SMTEs. As a result, SMTEs tend to focus on specialised market segments. In accommodation, for example, SMTEs dominate the bed and breakfast economy, the supply of backpacker accommodation and the guesthouse sub-sector. The newer niche segments would be the “township” guesthouse. The World Bank (2006a: 2) points out that although large businesses economically dominate the South African tourism industry, the vast majority of South African tourism enterprises would fall 16

into the category of SMTEs. Furthermore, the World Bank estimates that 90 percent of tourism enterprise are small business.

Established tourism enterprises Saayman and Olivier (2005: 119) hold that established SMTE owners enjoy advantage in terms of access to capital. The authors maintain that often the SMTE is linked to alternative sources of income ranging from farming to other income generating activities. In the case of lifestyle entrepreneurs, these are often well capitalised businesses through the asset base of the entrepreneur. Secondly, in addition to economic capital, these established entrepreneurs enjoy high levels of social capital in terms of access to networks and sources of information and data to support their tourism businesses. Thirdly, the high levels of social capital are enhanced by the high levels of education of the entrepreneurs. These entrepreneurs are also noted to have high levels of managerial skills (Saayman and Olivier, 2005: 120). In addition, there are advantages for established entrepreneurs in terms of their cultural capital as represented by their language proficiency for dealing with different types of tourists. These tourists include both domestic and international markets. To a large extent, the dominance by mainly white-owned SMTEs of the tourism sector in SA can be understood in terms of the aforementioned advantages (Small Enterprise Development Agency, 2011: 18). The findings of a study conducted in the Free State province of established SMTEs entrepreneurs disclosed a profile of tourism entrepreneurs and core issues that challenged their growth (Rogerson, 2005: 16). It was found that established SMTEs overwhelmingly dominate the local tourism market, for example, in terms of the provision of different types of accommodation, conferencing, farm visits or game lodges. Overall, there is a high level of female involvement either as sole or joint proprietors of SMTEs. SMTEs are largely the domain of middle-aged or retirement-aged persons. It was further noted that the majority of entrepreneurs were aged 50 or more years. Indeed, lifestyle factors are important motivations for the start-up and operations of these tourism businesses with a household decision to fulfil the desire to run a tourism business living in pleasant countrywide surroundings. 17

Emerging tourism enterprises The group of emerging SMTEs operate at a disadvantage with respect to both the enormous market power enjoyed by large tourism enterprises and the advantages of economic, social and cultural capital of established SMTEs (Rogerson, 2005: 17). The competition offered by established tourism businesses – both large and small clearly functions as a core constraint upon the development of emerging business (Department of Trade and Industry, 2004: 26). In rural areas, the opportunities for succesful tourism entrepreneurship are reduced by problems of infrastructure deficiencies for tourism development both in terms of human resources as well as physical resources. In the Wild Coast, many of SMTEs operate at bare survival levels and approximates a situation of neccesity entrepreneurship (Rogerson, 2005: 17). In SA, accurate data on the number of SMTEs in the local tourism economy is not available, particularly in respect of the emerging black-owned tourism enterprises, many of which are unregistered informal or micro-enterprises. Van Schalwyk (2006: 25) emphasised the the neccessity of improving data collection on SMTEs. He stated “what we do not know with any certainty is the number of SMMEs in the tourism sector”. Thus this explains again the paucity of information regarding SMTEs.

THE PROFILE OF THE EASTERN CAPE

The Eastern Cape (EC) is one of the poorest provinces in South Africa with a total population of 6,3 million people. The EC is located in the south-east of South Africa, bordering the Free State and Lesotho in the north, Kwa-Zulu-Natal in the north-east, the Indian Ocean along its south and south-eastern borders, and Western and Northern Cape in the west. The province encloses 69 580 km, constituting 13,9 percent of the total land area of the country. The average population density during 2002 was 41 persons per square kilometer, and about 63 percent of the province’s people lived in rural areas. The EC has the second highest poverty levels in South Africa (47 percent of households below the poverty line, which is based on 18

imputed monthly expenditure of R800 or less) combined with the highest provincial unemployment rate of in the country (Sinxoto & Ncwadi, 2009: 1). In 2012, the level of unemployment in the EC decreased from 29.9 percent to 27.1 percent, which is still very high for the province (Kiviet, 2012: 6). The economy is a mixture of highly developed and significantly less developed sectors. With a geographic Gross Domestic Product (GDP) of R122 billion in 2006, the economy contributes some 7,9 percent to the national GDP. Its major sectors are financial and business services (20 percent), government services (19 percent), manufacturing (17 percent – mainly the automotive industry, agro-processing, and textiles, and trade (12 percent). Agriculture and tourism make important contributions to the economy of the country. Statistics SA estimated the EC to have about approximately 5.5 percent of formal businesses in SA, which comprises 6 percent of the GDP. Hence it indicates that the economy of the province and its share of formal businesses lag behind in relation to the national population. Converserly, informal businesses have approximately 9 percent share of the total for the country as a whole. It can be further noted that the EC is less richly endowed with tourism enterprises in comparison to Western Cape, KwaZulu-Natal and Gauteng (Tourism Enterprise Partnership, 2008: 10-11).

TOURISM IN THE EASTERN CAPE

Tourism in the EC has grown strongly since 1994. This is evident both from official statistics and the observation of new investments in hotels, private nature reserves, golf courses, guest houses and B&B’s. In particular, the EC is a major beneficiary of expanding domestic tourism, based on rising real disposable incomes, and in particular the emerging black middle class. The EC is currently largely a local tourism destination with some pockets attracting international tourists. Key to a tourism economy are natural tourism features, tourism events and tourism facilities (infrastructure) and services. The EC has a wide variety of untapped natural tourism features but limited facilities (infrastructure) in many areas (Tourism Sector Summit Concept Document, EC, 2007: 4). The EC province is the third most popular for domestic tourists (after 19

the Western Cape and Gauteng), but only in seventh position in receipt of foreign tourists. This is important because foreign tourists spend more, stay longer and generate more employment than domestic tourists. In particular, the EC seems to be underperforming its neighbours, Western Cape and KZN, in terms of tourism development. This is in spite of significant tourism potential (cultural, heritage, and natural resource based). In 2005, 7.3 million international tourists visited South Africa. Of those, around 517 000 visited the EC. In 2004 the province received a total of 3.7 million domestic tourists. According to Tassiopoulos, (2010: 24) established SMTEs tend to be closer to the mainstream tourism spend. Tassiopoulos highlighted that emerging SMTEs are increasingly located to mainstream urban centres or tourism attractions. In the EC, SMMEs are operating in and around East London and predominantly in the Port Elizabeth-Garden Route area. A variety of tourism activities of SMTEs in the EC have been identified by Tourism Enterprise Partnership (2008: 22). Figure 1.4 depicts the main activities of the SMTES. It is evident that accommodation in the EC is the second largest activity and therefore deemed important in this study.

SMTEs active in accommodation contribute approximately 2200 rooms to the provincial accommodation capacity. Room rates are modest at an average of R240 a night over high and low seasons. However, establishments in Mthatha and King William’s Town/Bisho have significantly higher room rates, which might be due to demand by government officials with expense accounts.

Addressing SMTEs challenges in the Eastern Cape The importance of SMTEs was highlighted at the Eastern Cape Development Corporation (Annual Review, 2008-2009: 42). Emphasis was placed on the following issues: the importance of SMTE growth and development in the provincial economy; SMTE research; 20

the provision of a platform upon which SMTE entrepreneurs, government representatives, donors, academics and other experts on a local and global scale could interact and network; the dissemination of cutting edge information and innovative solutions that define best practice methodologies and execution in the SMTE sector; and training of entrepreneurs has been seen as an important tool in order to achieve quality management.

The EC was characterised as an underperfoming region and it was further noted that it had to make significant changes in order to derive the maximum benefit from the 2010 World Cup. Explanations for this under-performance include the shortage of well-defined tourist infrastructure (roads and accommodation), poor tourism product development, marketing and branding, and an absence of a tourism network (routes, generic marketing, and tour operators). To this end, apart from the underperformance, there has been slow growth of SMTEs. Tourism Enterprise Partnership (2008: 47) views the main reason for the slow growth of SMTEs as: the tourism sector is relatively new, particularly for historically disadvantaged entrepreneurs, and their exposure to the tourism market is deemed to be inadequate and as a result many are unable to access market opportunities. Training is also considered to be inadequate and not addressing these needs. tourism operators often do not have enough and relevant practical skills and experience of the industry. This includes relevant business, technical and management skills; and the skills to maintain and grow businesses once these are started.

THE ACCOMMODATION SECTOR Accommodation plays an important role in tourism and is critical component of the tourism experience (Bennett, Jooste & Strydom, 2005: 43). Accommodation is the base from which tourists pursue activities. Accommodation contributes approximatley one-third of the spending

21

of an average tourist in South Africa. The statistics of other countries are very similar (Keyser, 2006: 179). The role of the accommodation sector Hospitality deals with accommodation establishments like hotels, motels and B&Bs; restaurants, fast food outlets and coffee shops; cinemas and convention centres. It is the largest sub-sector amongst them all accounting for about 65 percent of the sector (Theta, 2009a: 6). The distribution of the hotels that are graded voluntarily by the Tourism Grading Council of South Africa (TGCSA), indicates that out of the 6 872 graded hotels, 2084 are in the Western Cape, 1071 in Gauteng, 955 in KwaZulu Natal, and the balance is spread across the country. Accommodation is seen to contribute one-third of the spend of the average tourist and food and beverage accounts for about 14 percent of the expenditure of tourists at a destination. Accommodation is a critical component of the tourism product since the type, nature and scale of accommodation available at the destination generally determines the type and scale of tourism possible at a destination (Bennett et al, 2005: 43). Bennett et al (2005: 44) further contends that accommodation is not homogenous, and ranges from dwellings and caravan parks to ultra luxurious hotels. The nature of accommodation is mainly a function of tourists’ demand. Some tourists’ prefer a more luxurious, all- inclusive type of accommodation, while others are satisfied with the bare essentials. Accommodation may range from hotels of an international standard to bed-and-breakfast establishments to self-catering apartments and camping grounds. Some tourists prefer staying with friends or family, thereby avoiding accommodation expenses altogether. Bennett et al (2005: 44) distinguishes between serviced accommodation and self-catering accommodation. They are as follows: Serviced accommodation refers to establishments that have staff on the premises responsible for various services such as room service, meals and laundry service. This category includes hotels, motels, guest houses, farmhouses, game lodges, bed and breakfasts and any other type of accommodation that provides services. 22

Self-catering accommodation provides a place to sleep, but does not include any additional personal services. Although it is possible to obtain some of these services, they are not included in the price charged. Examples include camping sites, caravanning, apartments, chalets, timeshare, rented flats and any other type of self-catering establishment.

Recent developments in accommodation This section highlights some new developments and trends in the accommodation sector: central reservation systems (CRSs) and the Internet have had an enormous impact on the tourism industry as a whole, but more specifically on the accommodation sector. Hotel rooms and flights can be booked with the press of a button. Databases are useful and can be used also to provide the opportunity to engage in direct marketing to reach prospective customers (Bennett et al, 2005: 47; Keyser, 2006: 186) guest houses and bed and breakfasts are becoming one of the fastest-growing accommodation sectors in the tourism industry. This could be attributed to the homely atmosphere created as well as the reasonable prices that are charged (Bennett et al, 2005: 47; Tassiopoulos, 2011: 21) another development impacting on the accommodation sector refers to the increase in meetings and events, thereby resulting in a need for more conference and meeting venues. This sector is taking up a reasonable market share of the tourism industry (Bennett et al, 2005: 47) tourists are also becoming more discerning and demanding when it comes to accommodation. They do not see accommodation as merely a room to sleep in but as a total experience consisting of a wide range of services and emotional experiences that together make up the holiday or business stay (Bennett et al, 2005: 48; Tassiopoulos, 2011: 21) 23

Positioning is the way in which accommodation establishments differentiate themselves in the marketplace. By building a strong brand image, companies are able to position their product for a specific target market and appeal directly to the needs and requirements of the customer (Keyser, 2006: 187). Consumers have become more environmentally aware and discerning and many select products based on environmental criteria. Increasingly, accommodation groups are adopting environmental policies, which include energy conservation, environmental protection and recycling water (Keyser, 2006: 187).

Nuntsu, Tassiopoulos and Haydam (2004: 515) conducted a telephone survey aimed at examining the B&B market of Buffalo City of South Africa using 36 operators selected through random sampling. They provided an amalgam of services, facilities, activities and used a variety of promotional techniques with word of mouth being the most prevalent. They experienced problems such as crime, lack of sector focus, lack of entrepreneurial creativity and skills, limited support from local authorities, lack of access to finance and competition. The success factors identified were networked enterprises, access to a dedicated fund for business finance, reduced operating expenses, non-financial support, and continuous skills development. According to Nuntsu et al (2004: 517) B&Bs appeal to tourists because the properties are small and personal in nature. They add to the tourism diversity of a region and enhance the appeal of a community to travelers. Furthermore, they can have a substantial positive economic impact on the communities where they stay because most of the people who run them were once unemployed. This is particularly true in small communities, where hotel accommodation is limited and B&Bs may handle a large percentage of visitors. To this end, the economic contribution of B&Bs is in the form of increased earnings, foreign exchange, job opportunities, production, entrepreneurship and infrastructure. However, the authors point out that there is dearth of empirical studied on the B&B industry of South Africa. In spite of the widely recognized fact that it is one of the fastest maturing SMTE sector with the potential of contributing to economic growth and employment generation. This may be attributed to the local 24

individual nature of the product since studies tend to focus on large establishments such as hotels. The emergence of B&Bs as a contending segment of the tourism industry has led to many questions about its future directions. Nogilana (2011: 18) conducted a study evaluating the service quality of B&Bs in rural areas based in Queenstown, Eastern Cape. The study highlights the importance of service delivery in today’s increasingly competitive environment. There is now a growing need for increasing knowledge and professionalism on service quality management among tourism service providers such as B&B owners. Against this backdrop, in order to make the current study manageable, the current research will only focus on the accommodation sector of the Eastern Cape.

Lifestyle businesses

The accommodation sector has been a particular focus for attention concerning the development and dynamics of small tourism enterprises. An important finding from an empirical research conducted both in the United Kingdom and New Zealand is that the majority of small tourism enterprises do not aspire to grow and instead are often motivated by non-financial considerations (Rogerson, 2005: 3). Tassiopoulos (2011: 46) confirms with Szivas (2001: 164) that SMTEs were family-type businesses and that most firms in the tourism economy are small businesses, employing mostly family. Szivas (2001: 164) highlights two aspects to SMTEs. These are: the relative ease of entry into the tourism industry, as shown by the fact that many of the entrants into the tourism industry come from a wide range of industries; the lifestyle motives for entrepreneurial entry into tourism, which indicates that the industry is seen as offering a better standards of living while promising a pleasant work environment and high levels of human interaction.

A growing body of knowledge of research strongly suggests that lifestyle entrepreneurs and family businesses dominate the tourism and hospitality industries (Venter, 2004: 1; Getz & 25

Nilsson, 2003: 18; Szivas, 2001: 163; Tassiopoulos, 2011:49). The next section addresses family businesses in the tourism and hospitality industry.

FAMILY BUSINESSES IN TOURISM Relationships are the heart of family businesses. As columnist, Tom Petzinger Jr. of Wall Street Journal states “the family business has become a model for all business. The reason is that business, today more than any time in a century or longer, is built on relationships – the very stuff of which families, too, are made” (Cooper, Upton & Seaman, 2005: 244). The authors observe that family businesses understand importance of customer service and perceive it as critical to their future success. Furthermore, the authors concede that keeping up with technology is a priority of family business as it improves customer service and service quality.

Family owned businesses are a predominant component of the tourism and hospitality industry in many destinations according to Getz and Nilsson (2003: 19). The authors add that their strategic responses to extreme seasonality of demand are of vital importance to family life, enterprise and community viability, destination developmentand industry competitiveness. Many firms in the tourism economy are small businesses, and predominantly owned by sole proprietors and families.

A study by Tassiopoulos (2011: 48-52) in South Africa found that the majority

(57.6%) of SMTEs were family-type businesses. Furthermore, the nature of family businesses typically involves personal service and a high degree of contact with customers.

GOVERNMENT AND TOURISM POLICY FRAMEWORKS AND INITIATIVES Tourism has been prioritised by national, provincial and local government for its jobs and economic growth potential. Development of the sector is a shared competence of all three spheres of government, and is governed by a fairly complex policy framework that integrates growth and investment policies, environmental policies, transport policies, cultural and heritage policies, among others. 26

The first significant post-1994 policy framework guiding tourism development emerged with the 1996 White Paper on the development and promotion of tourism in South Africa. This policy clarified the roles that the private sector and government needed to play in developing environmentally sound, responsible and pro-poor tourism. The White Paper was followed by the Tourism Investment Mobilization Strategy for South Africa (2001-2011), facilitated by DEAT, which identified specific investment and growth constraints in the sector and proposed remedial actions, and which underscored the need for government, private sector, and other role-players to work more closely together to develop the sector. In acknowledgement that ownership and control of the tourism industry had not been sufficiently de-racialised in line with the broad-based black economic empowerment (BBBEE) Act 53 of 2003, a Tourism BBBEE charter and Scorecard was developed in 2005. The scorecard set targets and indicators to measure the extent to which opportunities and benefits in the tourism sector accrue to black South Africans. This included 21% black ownership by 2009 and estimated to be 30% by 2014. Similarly, targets are set for preferential procurement including 40% by 2009 and 50% by 2014. Through both the Accelerated and Shared Growth Initiative South Africa (ASGISA) and the National Industry Policy Framework, tourism has been identified as key growth sector that can facilitate shared and inclusive growth, due to its relatively low barriers to entry, its job creation potential, and the geo-competitive advantage for impoverished rural areas (such as the Wild Coast). Both ASGISA and the National Industry Policy prioritize the development of tourism as a key component of the strategy to diversify the economy out of monopolized and capital intensive minerals and energy sectors towards non-commodity tradable sectors. Similarly, the Eastern Cape Provincial Growth and Development Plan (PGDP) has identified tourism as a key sector to enable diversification from over-reliance on the automotive sector. This has been further developed with the Provincial Industrial Development Strategy, which positions tourism as one of the engines of the provincial economy in general, and the rural economy in particular. The industrial strategy provides a clear framework and approach for 27

developing “industrial action plans” for each prioritized sector, which will identify investment opportunities around which the public and private sectors can cohere that will optimally impact on poverty and BBBEE. These action plans will also provide the basis for making research and development, skills development, infrastructure provisioning, and development finance support more demand responsive and strategic. The tourism sector provides a critical milestone in the development of this Action Plan.

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Figure 1.1: Africa: Direct contribution of Travel and Tourism to employment

14000 12000 10000

8000 6000 4000 2000 0

2001

2003

2005

2007 Years

2009

2011

2021

Source: World Travel and Tourism Council (2011: 6)

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Figure 1.2: The tourism industry sectors

Transportation

Public Sector Support Services

Private Sector Support Services

Tourism Industry

Accommodation & Catering

Recreation, Leisure & Attractions

Travel Wholesale & Retail Attractions and Events Services

Source: Tassiopolous (2011: 11)

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FIGURE 1.3: The three different kinds of enterprise in the SA tourism economy

Established Large

INCREASING SIZE OF ENTERPRISE

Established SMMEs

Emerging SMMEs

Source: Rogerson (2005: 13)

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Figure 1.4: Main activity of all enterprises in the Eastern Cape

Accommodation Transport Perfomances including sport Travel agency Arts,crafts & curios Attractions Food & beverage Tour operator Other 0

50

100

150

200

Source: Tourism Enterprise Partnership (2008: 22)

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