France is by far the most popular tourist destination in the world. In 2013, the country attracted 83 million holidaymakers to its shores. Its nearest competitor, the US – with a population almost five times the size – managed just 67 million.

Statistics like this make France the envy of hoteliers across the globe. Yet, despite the country’s apparently inexorable attraction to foreign visitors, the French hotel sector seems to be going nowhere fast.

Paris, the industry’s traditional engine room, remains a closed market. Demand is, as always, extremely high, but the near impossibility of building new hotels anywhere close to the city centre means supply is still painfully low. The result is a sort of stagnation across the capital’s branded hotels; 2013 saw average daily room rates remain fixed at €118.70, occupation improve by just 0.4 points and revpar rise by an insignificant 0.5%.

A sense of paralysis also hangs over France’s provincial markets. Slower to recover from the crash than Paris and dominated by a single operator – Accor – many are now in need of renovation, but new investors remain a rarity. Increasing competition from emerging European beach and sun markets, such as Croatia, is further strangling growth. Revpar grew by just 0.2% in branded hotels within the provinces in 2013.

Taking the country as a whole, year-end statistics give a similarly static picture; branded hotels saw a small 0.2 point decline in occupancy and a 0.4% loss to average daily rates, with revpar shrinking slightly by 0.7%.

But, while these end-of-year figures appear to show an industry in stasis, the underlying reality is far more volatile. Powerful economic forces, along with bold new business strategies, are pulling at the ligaments of the French hospitality sector.

Most significant, though perhaps least tangible, is the impact of France’s stubbornly low GDP growth – 2013 saw it rise by just 0.2%, (for a sense of perspective, the UK’s rose by 1.9%), and 2014’s forecast offers only a 0.9% increase. Though a blow to the entire sector, it is particularly worrying for France’s regional hotels; largely dependent on the domestic market, a lack of spending money among the French populace is bad news for business.

"The French regions have suffered for the last four years, and low GDP is the main reason they are continuing to do so," comments Gwénola Donet, head of the French team for Jones Lang LaSalle Hotels & Hospitality Group.

"I remember forecasts in the mid-2000s where the stabilised French GDP growth was between 2.0 and 2.5%. But, if you look at the various forecasts, we’re not expecting to see those kind of figures even in the next three years."

The going rate

As well as low GDP growth, French hoteliers also face the government’s recent decision to increase VAT for hotels from 7% to 10% (still just below the European average of 10.8%). Though only established on 1 January this year, it has already prompted serious debate; a recent survey by Olakala suggested 89% of French hoteliers intend to raise daily room rates. The president of French hospitality union UMIH Roland Heguy has also estimated that each additional tax point will result in 10,000 job losses, meaning the VAT hike could cost the industry 30,000 staff.

But again, it is the provinces that will suffer the most. Already hard pressed, they are less able to absorb a new drain on resources, and many hoteliers outside the capital will have little choice other than to pass costs directly on to customers. Already, regional hotel associations have advised members to lift nightly room rates by 3%.

Yet, despite the widespread concern over taxes and GDP, not everyone in France’s hotel sector is mired in worry. Christophe Alaux, CEO of hotel services for France at Accor, regards his country’s financial position with a little more of a laissez-faire attitude.

"Though I’ve monitored the effects of the new tax on our performance in relation to our competition, so far we’ve not seen any impact," he says. "GDP has not had a direct effect on us yet," he continues. "However, I do think that if we cannot recover or twist the trend in the long run, it may become more of an issue."

Last year was one of ups and downs for Accor, dominated by the eviction of its second chairman and CEO, Denis Hennequin, in just three years. The group’s French performance showed great fluctuation; poor figures for the first quarter contrasted with substantial increases in occupation ratios and average prices for the second quarter, though overall improvement was seen across all three of the firm’s economic, midscale and upscale segments, according to Alaux.

Within this positive trend, however, the up and midscale sectors performed much more strongly. Alaux attributes this to the "better balance between international and domestic customers," allowing these hotels to capitalise on the burgeoning Chinese tourist market. While true, this explanation ignores the impact of France’s poor domestic market on Accor’s weaker economic segment. Perhaps GDP is more significant than Alaux is willing to admit.

We’ll always have Paris

As France’s largest hotel operator, Accor’s recent reorganisation into two separate divisions – focusing on asset management and hotel operations – also carries huge potential weight. Charles Human, managing director of HVS Hodges Ward Elliott, believes it could see Accor breaking away from the traditional asset-light strategy that currently dominates the global hotel sector.

"Marriot was probably the first," he says. "But, almost all the international chains have been following the asset-light model and selling real estate. It’s a global trend.

"Paris, the industry’s traditional engine room, remains a closed market. Demand is high, but the impossibility of building new hotels anywhere close to the city centre means supply is still painfully low."

"But, Accor is the only one that’s indicated it is going to start to reverse the model. They are announcing they will not necessarily sell off all their remaining assets, and they may even start to buy.

"I think this is largely down to Accor’s new chief executive Sébastien Bazin. He’s come out of a private equity background with a major hotel investor thinking he can create value by owning hotels – he believes now is a good point in the cycle to be owning and buying."

It remains unclear the extent to which France will be included in such a strategy. While more than 85% of Accor’s owned assets can be found on the continent, around 80% of the group’s development pipeline is now outside of Europe. Moreover, Alaux, discussing the firm’s French arm, claims it will "keep going with management and franchise contracts," although "selective" and "profitable" ownership of economic and midscale segments will also be considered.

On the front line

A more pressing concern for France is the potential widening of the gap between Paris and the regions. Already hit harder than the capital by low GDP growth and the VAT price hike, the provinces must also contend with Paris attracting the lion’s share of foreign investment.

"The big question mark for France is the provinces," says Donet. "Paris will no doubt remain a key investment focus. Its revpar trading performances are high, and there’s hardly any risk for capital preservation.

"The regions are under pressure; while there is still a lot of interest from investors on locations outside Paris, we’re more or
less talking about stagnating hotels or those with low increases in EBITDA. There’s no expectation for more intensive investment competition in the next three years.

"However, while confidence is not improving, there is at least a better vision now," she continues. "Last year, revpar was falling slightly, and taxation was changing. Today, there is much less uncertainty – investors have learnt the new rules of the game, and they like clarity."

Taking a more international perspective, Human is also concerned about the future of France’s provinces.

"I think we expect to see less investment activity in regional France than we do in places like the UK and Germany," he says. "That’s partly because the UK is picking up from the downturn ahead of other European countries, but also because it’s got an easier legal and land ownership system – doing business is simpler.

"But, Paris is one of the most visited cities in the world – I can’t see that changing," he continues. "And although China and India are opening up, there is also an increasing number of travellers coming out of those markets. So, if anything, I see Paris being a beneficiary of that rather than a net loser."

For France, the big picture is familiar. Paris is performing well, and remains in high demand. The regions, trailing in the capital’s wake, are suffering from a dependence on the domestic market and a lack of international investment interest, though the situation is not yet critical.

The real question is how long this state of affairs will last. If France’s economic recovery fails to pick up pace and the government continues to increase taxes on businesses, the small gap that currently lies between Paris and the provinces could widen into a chasm. This is surely an outcome that nobody wants to see.