PROMOTUR I

Background

Promotur is the entity in charge of promoting inbound and domestic tourism in Peru and,
since creating the Tourism Planning and Promotion Division in 1992, it has been
developing a series of marketing strategies and activities for increasing tourism in the
country.

At the beginning of 2001, the Tourism Planning and Promotion manager, Mr. Alberto
Jimenez, spoke to the Board of Directors and presented to them the progress the entity
had thus far achieved. During his presentation, Alberto highlighted what was the most
important achievement:

“From 1992, the year terrorist activities reached their most critical level, to last year
(2000), we have grown nearly 60% (see table 1), a higher rate than any of our
competitors has demonstrated. This has been made possible thanks to the design and
efficient application of a coherent strategy.”

One of the directors, Dr. Alfonso Linares, interrupted his speech.

“Alberto, the results are in black and white, and nobody can dispute them. The increase
in international arrivals to Peru is impressive, but what I don’t understand is why tourism
sector representatives are unsatisfied with what our institution is working on. How would
you answer that?

Alberto: “Well, Dr. Linares, they will always ask that the results be greater. It’s normal. I
wouldn’t worry about that. While the facts prove we are right, no one can OBJECTIVELY
question our efforts.”

The President of the Board, Fiorela Vegas, then asked Alberto: “Alberto, you are
proposing a 20% increase for the 2001 budget versus last year’s. This would mean
about USD 4.7 millions, wouldn’t it?”

Alberto responded: “Yes, it would, Miss Vegas. The situation is one in which our budget
has been progressively reduced over the past five years, from 1996 – 2000, to the point
where now it is much lower than what any of our competitors are investing in tourism
promotion, especially in our main markets. While we have been slashing our budget,
they have been boosting theirs. This is a trend we have to begin to reverse.”

Miss Vegas: “Alberto, tell me, what is the tourism promotion budget of our main
competition?”

Alberto: “Official figures for 2000 are:

Mexico: USD 30 million

Costa Rica: USD 11 million
Guatemala: USD 10 million
Ecuador: USD 9.5 million
Bolivia: USD 8 million
 As you can see, they are investing a lot more than we are. Since 1996, the exact year
we began our budget reduction trend, they started increasing their promotion investment
somewhere between 5% and 10%.”

Miss Vegas: “Alberto, would you show me the table on those countries’ international
arrivals?”

Alberto: “Here are the comparisons from 1996 – 2000.”

Country 1996 1997 1998 1999 2000 2000/1996

Mexico 19,175,987 19,200,876 19, 280,976 19,345,654 19,714,788 2.8%
Costa Rica 1,233,765 1,301,654 1, 357,293 1,379,113 1,381,089 11.9%
Guatemala 713,965 721,655 736,111 765,783 789,333 10.6%
Ecuador 589,699 605,242 630,545 649,222 656,944 11.4%
Bolivia 499,578 523,764 569,123 587,989 603,091 20.7%

“During that same period (1996-2000), we grew 21.3%, which means we have
outperformed our competition, as I just finished pointing out.”

Miss Vegas:

“Very well, Alberto. But then, if we have gotten better results through investing less than
our competitor countries, why do you want to increase the budget?

From where I stand, we are being more efficient, and Peru is selling itself very well.
Besides, as you know, public sector resources are shrinking. What you have shown me
throughout this entire presentation is that you DON’T NEED A BIGGER BUDGET. In
other words, if you cannot give me a valid reason for a tourism promotion budget
increase, I cannot see the point in approving one. Rather, I think that at best we will
maintain the current budget.”

The meeting had, at this point, gone on longer than was scheduled. It was supposed to
consist of two parts: presentation/discussion of the results and 2001 budget approval.
Given that the first part had taken up practically the entire meeting time, the board
members decided to end this one and to meet again in two days time to discuss the
tourism promotion budget. Alberto knows his evidence has to be very well structured,
and he has sufficient information, which is laid out in the following sections; all that
remains is to analyze it and doing so with the help of his team and advisors.

Peru’s inbound tourism market

The most important inbound tourism markets for Peru are the U.S., Chile, Argentina, and
the UK (see table 3). The rest of the world doesn’t even add up to 5%. With the
exception of the UK, all countries have experienced significant growth in sending tourists
to Peru. From 1992-2000 Chile surpassed 100% growth, while Argentina reached 70%.
Nonetheless, average spending by foreign tourists declined by 13.5% from that same
period (see table 4).

Tables 5 and 6 set out the most important characteristics of foreign tourists from those
four markets. These figures were gotten from the Foreign Tourist Profile studies carried
out annually from 1994 – 2000, the methodology of which was very rigorous, thus the
results are highly reliable.

Competitors

Peru’s main competitors in tourism are Mexico, Costa Rica, Ecuador, and Bolivia. The
following paragraphs offer a brief analysis of each country’s strategies and results.

Mexico: The U.S. accounts for 70% of Mexico’s inbound tourists, and it has been
aggressively promoting itself as a destination for fun in the sun on incredible beaches as
well as a place for archeological tourism. Since 1996, Mexico has maintained and even
slightly surpassed the level of tourism revenue, having earned approximately USD 19
billion. 60% of its budget is allocated to promotion in the U.S., 30% to European
countries (UK and Germany, mainly), and the rest to Asian countries that are not yet
registering significant volumes. Its tourism infrastructure is highly developed, as well.

Costa Rica: The U.S. accounts for 40% of Costa Rica’s inbound tourists, while the UK,
France, and Italy 45%. The remaining 15% is comprised of a large number of countries,
yet none of them represents more than 3%. It promotes itself aggressively in the U.S.
(50% of its budget) and Europe as a nature tourism destination, and its promotional
message, “no artificial ingredients”, registers elevated levels of recall, particularly in the
U.S. Its two most important achievements from 1992 - 2000 are the sustained increase
in international arrivals and maintaining per capita tourist layout of approximately USD
1300.00. Its tourism infrastructure is also first rate.

Guatemala: This country is seen as the most similar to Peru in terms of tourist
attractions. It is positioning itself using a three-pronged strategy: archeology, nature, and
living culture. It has achieved a noteworthy increase in U.S. inbound tourists, which
represented 20% of its 1996 international arrivals, whereas in 2000 that number climbed
to 45%. Guatemala decided to use its proximity to the U.S. to the maximum, and set
aside 70% of its promotion budget for that market. In 2000, tourism revenue reached
nearly USD 870 million. Its tourism infrastructure is very similar to Peru’s.

Ecuador: It has been exploiting its primary attraction, the Galapagos Islands, very
effectively. It began latching onto Peru in its communications strategy, but this has been
modified over the past two years. Its main inbound tourism markets have been Colombia
and Peru, yet it is now betting on attracting greater numbers of tourists from Europe and
the U.S. Therefore, it decided to distribute its promotion budget in the following manner:

Spain: 35%
UK: 25%
U.S.: 25%
Italy: 10%

It has brazenly chosen not to invest in markets that have traditionally generated the most
inbound tourists, yet it has only managed to capture between 10% and 15% of European
and American tourists. Its major achievement is the increase in per capita spending,
which rose from roughly USD 600.00 in 1996 to USD 875.00 in 2000. It is promoting
itself strongly as a nature tourism destination and, with a little less emphasis, as one with
a wealth of Spanish Colonial influence.

Bolivia: This country has been selling very well as a supplement to Peru since both
countries share one of the most sought after tourist attractions: Lake Titicaca. Bolivia
allocates 70% of its budget to three European markets: the UK, Spain, and France. The
rest is divided up into the U.S. (20%) and its neighboring countries (10%). It began
employing this strategy aggressively in 1996, and its most important outcome has been
in the number of inbound tourists from these markets: approximately 21% in total. It has
also increased its tourism revenue to an approximate total of USD 483 million or 10%
greater than that of 1996.

Tourism promotion budget

During the last five years, the breakdown of the budget has been:

U.S.: 26%
Chile: 25%
Argentina: 23%
UK: 21%
Others: 5%

It promotional activities include the usual: to the end consumer (advertising, advertorials,
handouts, and Internet information) and to the trade (trade shows, workshops, fam trips,
and press tours, the latter having major influence on the end consumer). Moreover,
promotion costs in the U.S. and the UK are significantly higher than in Chile or
Argentina.

The idea has been to maintain the budget in proportion to the number of international
arrivals and tourism revenue generated from the most important countries. In spite of the
fact that Peru has a tourist attraction par excellence in Machu Picchu, the level of recall
is quite low in comparison with some of its competitor countries like Mexico, Costa Rica,
and Guatemala.

2nd Board of Directors meeting

Alberto and his team have two days to prepare the evidence for the 2001 budget. After
listening to Miss Vegas’ questions, Alberto is also questioning whether the results from
the analysis were exhaustive. The conclusion from the first board meeting left little doubt
as to what the matter is: Why does Promotur need a larger tourism promotion budget?
Tables

Table 1 Table 2
International arrivals to Peru Promotor: Tourism Promotion Budget

Year Arrivals Year Budget

1992 545,978 1992 $6,900,000
1993 616,909 1993 $7,650,000
1994 632,977 1994 $7,800,000
1995 671,321 1995 $8,100,000
1996 701,988 1996 $5,000,000
1997 760,555 1997 $4,800,000
1998 800,133 1998 $4,600,000
1999 812,672 1999 $4,350,000
2000 851,205 2000 $3,900,000

Table 3
International arrivals to Peru broken down by countries of origin

Other
USA Chile Argentina UK
Year countries
1992 245,776 189,344 73,669 27,865 9,324
1993 258,832 229,876 79,896 38,898 9,407
1994 262,908 238,455 80,577 41,877 9,160
1995 263,455 270,233 85,780 42,801 9,052
1996 269,321 291,154 92,663 39,455 9,395
1997 272,899 341,897 98,887 36,976 9,896
1998 271,877 381,988 102,677 34,654 8,937
1999 273,466 396,654 104,832 28,976 8,744
2000 274,998 412,958 125,881 27,436 9,932

Table 4
Per capita spending of Foreign Tourists in Peru*

Per capita
Year expenditure
1992 1099
1993 1101
1994 1200
1995 1200
1996 1189
1997 1087
1998 1024
1999 998
2000 951
* Does not include round trip travel expenses
Table 5

1994 Foreign Tourist Profile

USA Chile Argentina UK

Reason for trip (%)
Vacation 69 44 61 77
Professional/Business trip 11 23 8 9
Visit family or friends 10 22 25 6
Other 10 11 6 8

Countries visited during trip (%)

Just Peru 77 76 74 81
Peru plus other countries 23 24 26 19

Main destinations visited (%)

Lima 90 85 84 95
Cusco 76 53 51 88
Puno 49 21 17 83
Arequipa 65 49 47 77
Ica 59 43 46 75
Tacna 3 34 13 2

Accommodations (%)
Hotel/Hostels 81 54 56 89
Family/friends’ house 19 46 44 11

Activities (%)
Visiting historical/archeological sites 85 66 65 98
City Tours 78 65 66 89
Visiting natural areas 77 28 25 81
Visiting rural communities 75 21 17 80
Visiting museums 75 27 31 79
Shopping 70 87 89 77

Length of stay (number of nights) 15 9 8 17

Per capita expenditure (USD) * 1,452 987 876 1,489

Group size (number of people) 4 4 4 5

How trip was arranged (%)

Through an agency 25 7 6 45
Independently 75 93 94 55

* Does not include round trip travel expenses

Table 6
2000 Foreign Tourist Profile

USA Chile Argentina UK

Reason for trip (%)
Vacation 68 45 62 78
Professional/Business trip 10 24 9 8
Visit family or friends 11 21 24 7
Other 9 10 5 7
98 100 100 100
Countries visited during trip (%)
Just Peru 66 75 76 69
Peru plus other countries 34 25 24 31

Main destinations visited (%)

Lima 91 85 83 97
Cusco 76 51 54 85
Puno 50 19 18 85
Arequipa 64 51 48 80
Ica 54 39 49 70
Tacna 2 41 14 1

Accommodations (%)
Hotel/Hostels 80 56 53 90
Family/friends’ house 20 44 47 10

Activities (%)
Visiting historical/archeological sites 86 67 66 99
City Tours 78 65 65 89
Visiting natural areas 78 30 24 83
Visiting rural communities 76 20 18 81
Visiting museums 74 30 30 77
Shopping 69 84 87 75

Length of stay (number of nights) 12 7 5 13

Per capita expenditure (USD) * 1,134 859 798 1,205

Group size (number of people) 4 4 4 5

How trip was arranged (%)

Through an agency 24 8 7 46
Independently 76 92 93 54

* Does not include round trip travel expenses