How to realize DX in tourism industry

Covid-19 has accelerated the need for Digital Transformation (DX) in travel and tourism, making it a top priority for destinations and tourism services.
We can pave the way to overcoming this crisis by promoting DX in order to understand the diverse needs of tourists and redefining the attractions of destinations.

In brief

• We cannot wait any longer for DX to transform tourism business models in an era of living with Covid-19.
  
• Promotion of DX in tourism will be driven by destinations which link it to improved destination management.
  
• Tourism DX can create a database for every industry, serving as a source for innovation.

Environmental changes affecting tourism

Since the beginning of 2020, the world has been facing a situation unlike anything that we have seen in our lifetime due to the overwhelming global impact of the Covid-19 pandemic. As of end November 2021, we have seen the Covid-19 situation become less volatile: restrictions are gradually being lifted in Japan and our lives are slowly returning to normal. In contrast, some countries have re-imposed lockdowns, due to a recent spike in Covid-19 cases. In addition, a new variant of Covid-19 has been identified, so Japan still faces a great deal of uncertainty. We will be compelled to live with this troublesome infection for still some time. With this in mind, consumption patterns are also changing as we explore the “new normal” of living with Covid-19.

The pandemic has had a substantial impact on the tourism industry, which has based its business model on travel and mobility. According to the World Travel & Tourism Council (WTTC), inbound tourists to Japan have disappeared due to global travel restrictions and the number of domestic travelers (590 million people in 2019) has declined by almost 50% to 290 million people in 2020. The combined travel spends of domestic and inbound travelers fell from 26.8 trillion yen in 2019, to 10.7 trillion yen in 2020. The market saw a previously unimaginable reduction of 16.1 trillion yen in one year, which is a year-on-year decline of 60%. The GDP of the global travel and tourism industries fell by USD 4.5 trillion to USD 4.7 trillion, representing a year-on-year decline of 49.1%. There is a significant impact on tourism in Japan and overseas.

Changes in tourism caused by Covid-19

What kind of changes has Covid-19 generated for tourism? We can identify three broad areas:

1)  Conceptual changes in tourism

1. The previous predominant business model - based on the premise of travel to the destination - has been devastated by travel restrictions
2.  Solutions to promote spending on e-commerce sites, etc. without needing to be in-country, and pseudo-tourism via virtual tours are attracting attention
3. New hybrid forms of tourism combining in-person visits with digital channels will be increasingly important

2) Changes to traveler expectations of value

1. Previously, low price and convenience were key criteria when travelers selected a destination
2. As a result of the Covid-19 pandemic, infection prevention measures have become major criteria for selecting destinations. People tend to place a higher value on destinations with a safe and secure environment, in spite of the need to pay for it
3. It will be important for destinations to offer hygiene and safety information to visitors, e.g., visualizing the number of people inside buildings such as cultural and other facilities which tend to be crowded

3) Change to the balance of power between tourists and destinations

1. Destinations have prioritized attracting tourists to generate spending in local communities, and have been in a relatively weak position in relation to those visitors.
2. There has been a trend for destinations to reject tourists if they do not respect measures for infection prevention during the pandemic. As a result, destinations may, both now and in the future, have an equal or stronger position relative to visitors.

In particular, conceptual changes identified in 1) could be key to reassessing the business model and the future shape of tourism. In other words, tourism-related businesses need to consider how to interact with tourists and encourage consumption through the use of digital technology. In the past, the travel and tourism industries moved forward with IT introduction and digitalization. For example, digital tools including Property Management System (PMS) were introduced by individual hotels and hospitality operators. However, the sector still faces the many challenges of how to expand these consumer channels through further digitalization and how to integrate the data obtained in these channels. This applies to restaurants and retail stores which have not yet enabled digitalization of sales data.

To attract tourists, to increase spending, and to offer a safe and secure environment, etc. even during a pandemic, tourism businesses must clarify the reality of visitor behavior and consumer spending by obtaining and promoting data. This is also driving the importance of Digital Transformation (DX), as the resulting insights have the potential to transform the business model.

How to achieve DX in tourism

Japan’s Ministry of Economy, Trade and Industry (METI) definition of DX is “To enable companies to adapt to drastic changes in the business environment and to transform their products, services and business models based on the needs of visitor and society, as well as to transform the business itself, organization, process, corporate culture and to establish the competitive edge by using data and digital technology.“
To achieve this, the first step is to migrate all business-related data from analog to digital. IT introduction and digitalization is already underway, but Digital Transformation (DX) involves both digitalizing data and transforming business through the analysis of such data. However, many tourism-related businesses go no further than IT introduction and digitalization without progressing to DX.

The efforts of individual businesses in the travel and tourism industry are insufficient to grasp the diverse needs of tourists and attract them to a destination. It is important for a destination in its entirety to attract visitors by understanding their needs and offering relevant services. However, there are still few local communities which capture data about the demographics of visitors to a destination, and their behavior and level of spending when they do.

Individual businesses within the tourism sector which provide services for visitors are the true owners of data about visitor behavior and spending. In the first instance, we need to move forward with the digitalization of these businesses. However, tourism businesses relatively consist of many micro-, small- and medium-sized businesses and, as such, it is not easy for these individual businesses to use their own data for DX, due to limiting factors which include skills, knowledge, and resources.

As a consequence, to achieve broader DX in the tourism sector, it is better to focus on improving the environment for businesses to capture data about visitor behavior and spending through digitalization, rather than for each business to strive individually for DX. Subsequently, destinations can consolidate data coming from each business and visualize visitor behavior and spending at a local level. Finally, there will be a way to contribute insight for individual businesses. In doing so, a tourism destination (businesses) will be able to obtain an accurate picture of their visitors which is required for better business management and thus, can take a first step in destination management by attracting more visitors and sending them to individual businesses.

It is important for tourism business to understand how and what kind of data is available, by utilizing visualized insights and dashboards about local areas, even if it is difficult to fully leverage data. Instincts and analog criteria which were the earlier foundations of business management can be supported by data if it is correctly used and understood. In addition, it becomes easy to understand the significance of digitalization and data usage, which will pave the way to business transformation.

To make this prospect a reality, we need to start discussing which kinds of data can be shared in specific local communities. As an example, EY provides support services in Okinawa where four local entities have started a joint initiative for a “data-driven tourism promotion model,” which aims to revitalize tourism in the era of the “new normal”. These four entities are the Okinawa General Bureau, Okinawa Prefecture, Okinawa Convention & Visitors Bureau (OCVB), and the IT Innovation and Strategy Center Okinawa (ISCO).

Tourism DX as a database creator for every industry

As outlined above, tourism DX will form the foundation for data-driven management of destinations. Meanwhile, boundaries are disappearing between tourism and the industries which have some form of connection to it. The scale of this connection continues to expand, from primary industries and manufacturers to financial institutions (see “The Future of Tourism”, EY Strategy and Consulting, Nikkei BP, 2021 for details).

What does this mean? Promoting tourism DX means that destinations can accumulate not only tourism-specific data but also cross-industry data about every local service offering. This will probably result in the creation of a large database for local-level industries. As such, the database can work to visualize the state of local communities while database functions can be deployed for policy and business decisions to monitor a rapidly changing environment, which cannot be done with data from regular large-scale surveys and research. This data will become a business resource that all industries will need, far beyond a single use as a tool for the management of tourism businesses and destinations.

It is important for this database to be open to local communities. A gap in the ability to obtain and use data depending on the scale of a company can be a restriction in driving innovation. If tourism data—namely, data about local communities—is centrally held in a single database to which every player has access, it has the potential to encourage more startups brimming with excellent technologies and ideas, both inside and outside the tourism industry, to enter local communities and create an increasing number of new business initiatives. We cannot overemphasize the importance of extensive and high-quality digital data as a source of innovation. Future tourism will be expected to play a role as the foundation for accelerating local digitalization and as an incubator that uses local data to drive innovation.