A Funding Crisis at Destinations Spurs New Tourism Marketing Models

When tourism came to an abrupt halt in March, destination marketing organizations saw their primary revenue stream — a percentage of lodging taxes or “bed taxes” — tumble overnight.

Seven months since discussions began on how tourism would fund itself going forward after the damage from the pandemic, most organizations have seen their budgets shrink by as much as 60 percent while having to do more with less. And although some so-called DMOs have received emergency government assistance, the continued global health emergency’s strain on U.S. state budgets in particular, means that getting funding for tourism isn’t likely to take priority going into 2021.

That is forcing DMOs to do some hard thinking about changing up models from the past, according to interviews conducted by Skift over the past several weeks as new surges in coronavirus cases raise new uncertainties for travel.

Strategic marketing firm Miles Partnership, in collaboration with Civitas and Tourism Economics, earlier this year released a “Futures Funding” report laying out 10 recommended short- to medium-term priorities for DMOs until travel fully rebounds. They still are relevant now.

The priorities range from securing emergency funding to reviewing the DMOs’ structure, finding alternative revenue streams, taking on an advocacy role to push for change, and building up future reserves.

The report also shares data from a survey of 115 North American cities, all 50 U.S. states and 10 Canadian provinces, assessing their current state and recovery over the next five years. In November, Group Nao, a global innovation company, released a white paper — “Tourism Taxes by Design” — examining the use of tourism taxes in European cities as a funding mechanism, as well as data on the impact of Covid on European tourism marketing offices.

In addition to reviewing these studies, Skift spoke to a handful of DMOs to see how they’ve fared since April.

Our main takeaway: the DMO of yesterday is no longer, as destinations have been pushed into a whole new range of roles and responsibilities that go well beyond marketing in order to survive in a post-Covid world. These include advocating to lawmakers for their share of emergency funding through the CARES Act, forging political partnerships to establish new revenue mechanisms such as tourism improvement districts, demonstrating the value of tourism for economic development to their citizens, and reaching out to new corporate partners outside of the tourism sector.

“From marketing to destination management to economic development, and now it’s more a stewardship type of approach,” Milton Segarra, CEO of Coastal Mississippi and director-at-large on the US Travel Association Board of Directors, told Skift. “So in the last five years we have seen more changes in our business model than I think any other component of the tourism industry. And it’s a fast pace, extremely volatile, in terms of how you manage four basic components of this equation: a successful organization; the funding model; advocacy, dealing with elected officials; and how you’re going to deal with the communities. [I]n the middle is the visitor.”

Full DMO Funding Recovery Three to Four Years Away

In the Futures Funding report, Tourism Economics reveals a 52 percent drop in 2020 hotel tax related revenue for North American DMOs, while full funding recovery is estimated to take three to four years from now. Ninety percent of U.S. DMOs and 85.7 percent of Canadian DMOs surveyed said their annual budget had decreased by 45 to 59 percent, respectively. In Europe, one in three DMOs has seen its 2020 budget plummet by 50 percent or more.

North American DMOs also shared that they expect their 2021 budgets to decline by 27-47 percent, while Canadian tourism offices estimated a 41 percent drop for 2021, although Canadian tourism offices benefit from a wider range of federal and provincial government support. What these survey numbers reveal is how urgent it remains for DMOs to seek emergency recovery funds in the short term, as well as stable future funding sources in order to survive on the other side of Covid.

“We’re funded by the hotel/motel tax like most DMOs are,” Kristen Jarnagin, CEO of Discover Long Island, told Skift. “On Long Island, it’s very low, it’s only three percent and of that three percent we get less than 20 percent, and the rest of it goes to the two counties and they use it for a variety of distributions.”

This means Discover Long Island receives just about $3 million out of Long Island’s $17 million in bed tax revenue. “But all the tourism revenues — if you look at restaurants, retail, transportation — that’s about $740 million annually in local and state tax revenues,” Jarnagin said. “So we’re kind of fighting over the scraps for the hotel/motel. Driving those visitors is what generates that [$740 million].”

Coastal Mississippi has lost nearly $1 million in hotel bed taxes since March, despite faring better in tourism numbers over the summer, thanks of its drive destination appeal. CEO Milton Segarra told Skift the lost revenue had a very significant impact for the size of the DMO.

“It was a 20 percent [loss] on tax revenues, when you compare fiscal year 2019 with fiscal year 2020, and the total number was like $900,000 less in room tax that we did not see happening,” Segarra said.

This amount was significant for a small to medium sized DMO in the $5-6 million range budget, forcing it to make up the loss through furloughs, salary cuts, canceled service contracts and driving visitors to the destination when it reopened.

With numerous U.S. DMOs in the same boat, the consensus is that the hotel bed tax can no longer be the sole source of funding for their activities. In the Funding Futures survey, 71 percent of U.S. DMOs and 64 percent of Canadian DMOs indicated they were actively seeking new funding options.

“I personally think the industry long-term needs to diversify beyond just hotels because of what we’re going through right now,” Jarnagin said, “and just like any other corporation would in America, you would look at any funding stream you had to be successful, and that’s exactly what we should do.”

Diversifying DMO Revenue: Public-Private Solutions

In seeking alternative streams of revenue, more destination marketers have been thinking out of the box, including considering mechanisms such as the tourism improvement district, which the Funding Futures report recommends as a future stable revenue stream, particularly in light of the current tourism crisis.

Pre Covid, a handful of destinations, particularly on the West Coast, were already benefiting from increased budgets thanks to this privately managed hotel assessment. For instance, Visit Anaheim CEO Jay Burress, on a recent “Funding for Tomorrow” webinar, hosted by Miles Partnership and Civitas, shared that establishing this additional revenue mechanism in 2010 helped the DMO’s budget grow from $8 million to $20 million a year.

Amid Covid, tourism improvement districts have proven to be a DMO lifesaver, bringing in funds when the DMO otherwise might not have seen any incoming bed tax revenue. In July, for instance, San Diego Tourism Authority received $32.3 million in funding through the San Diego Tourism Marketing District (SDTMD) for its 2021 budget, approved by the City Council.

“Despite facing a significant hit to our assessment collections due to the coronavirus, our City continues to have a productive public-private partnership in SDTMD,” the district’s board Chair Richard Bartell said in a press release. “Without it there would be little to no funds for tourism marketing, which is what drives visitation that generates tax dollars to fund the city’s essential services, supports thousands of direct tourism jobs and attracts billions in visitor spending.” The San Diego City Council also extended San Diego’s Tourism Marketing District operating agreement for another 10 years.

When Los Cabos Tourism Board was forced to branch out solo after the Mexico Tourism Board disbanded a year ago, it established a second, private sector financed fund to supplement the hotel bed tax revenue — a move that came months before the global tourism halt.

“We started a second trust that is just through private contributions and it’s on a membership basis where hotels and destination management companies and activities contribute, that is being used as a complement to what the public [hotel taxes] trust is doing,” Rodrigo Esponda, managing director of Los Cabos Tourism Board, told Skift.

In 2019, that meant $12 million in Los Cabos Tourism Board’s public trust and $2 million in the private trust. While the public funds suffered a hit due to Covid and hotel bed tax declines, the private trust, which also helps to fund an office in Los Angeles, saw continued contributions from private business.

“Very interestingly throughout Covid 19, even though the hotels were closed and other businesses were not having any tours, they kept covering the cost of the membership in the private trust, which is a really good example of the relevance that they see to the activities that we do.” Esponda said. “So they understood that the only way that we could implement these [marketing] campaigns and these communication strategies was if they would keep the funding coming.”

The challenge for North American DMOs is that they’re not dealing with the same set of legal scenarios or funding options. Crisis has opened the door to innovation, but not all solutions will be one-size-fits-all. Coastal Mississippi, for instance, is putting aside the tourism improvement district solution for now, which it had begun working on last year.

“[W] e are making sure we know exactly what the organization will look like and see what other potential revenues are available before we go into that one,” Coastal Mississippi’s Segarra said. After successfully advocating for emergency recovery funding from the state, the DMO is now focused on going through every cent it receives from the hotel bed tax.

For Long Island, part of the challenge is that hotels paying into the bed tax automatically get to be members of Discover Long Island, per the current legislation. “So any hotel that pays into the bed tax gets all of our benefits for free,” Jarnagin said. “So you have to think about that, since 2013 we haven’t received any additional dollars but every single hotel that opened is a new member of ours.”

Other solutions discussed in the Futures Funding report are long-term, including building reserves and regenerative funding, as DMOs — 70 to 90 percent of North American tourism offices surveyed — look to play a more important role in the sustainability of their destinations as well as increase engagement with residents and local businesses. For now, however, the priority remains surviving the crisis by resorting to all possibilities of emergency funding from governments, while creating new mechanisms and finding new partnerships for corporate support.

Looking Beyond Tourism for Partnerships

The Future Funding report reminds DMOs that all entities benefitting from the DMO’s work and its contribution to the destination should be fair game as potential future funding partners. Tourism marketing organizations should therefore begin reaching out to and consider to non-traditional tourism partners such as airports, universities, commercial property owners, and employers.

A handful of DMOs have taken that approach since Covid and begun thinking out of the box.

“We’re having a strategic session with our board next week, and one of the topics is how we’re going to from now on reach out to the local community,” Coastal Mississippi’s Segarra told Skift. “It doesn’t have to be a hotel or a transportation company, it could be a university or a bank, or construction companies — different partners that are really important and because we’re successful, they’re successful as well.”

Discover Long Island is eyeing the “city to suburb” exodus to market its services as a type of one-stop agency for attracting businesses to Long Island. “[W]e realized there’s no regional marketing entity for Long Island for economic development,” Jarnagin said. As a result, the DMO teamed up with the area’s eight Industry Development Associations to form the Long Island Development Collective, with the aim of promoting the region as a great place to “work, live, play” and attract business to the area.

The next phase would be building corporate sponsorship programs where corporations can start buying into Discover Long Island’s branding. “[W]e’ve been contacted by a lot of developers, corporations, real estate brokers, asking how can we get involved with what you’re doing,” Jarnagin said.

Los Cabos, where 80 percent of the economy relies on tourism and events contribute 6.8 percent to the gross domestic product, quickly pivoted in reaching out to new sources of private partnerships. “We are now expanding to the restaurant association of the destination, which is going to contribute to all our marketing strategies; it has the 85 biggest restaurants,” Esponda told Skift.

“We coordinated a digital concert when we reopened the destination and that concert was funded by American Express, which would not be a traditional partner in the tourism industry, but they funded all the cost. We have had interesting conversations with a couple of banks in the destination, and also we are looking to some real estate companies.”

Balancing Marketing and Advocacy

Being deemed ineligible for the federal government’s CARES Act’s relief program for small businesses based on their classifications as 501(c)(6) non profits meant DMOs had to advocate for themselves and for tourism as major economic drivers that benefit the government and the community.

“What I don’t think we have done as destination organizations is express the importance of us,” Jay Burris, president and CEO of Visit Anaheim, said at the Funding for Tomorrow webinar. “They still think of us as a lobby group or a chamber, or a nice to have, not a need to have, not an ingrained part of a driver for the economy.” Burris suggested the creation of a future separate tax classification for tourism marketing organizations.

Coastal Mississippi also quickly embraced an advocacy role in April, alongside the state’s remaining tourism marketing offices, when it presented a case to the state as to why it must allocate a portion of the $1.25 billion CARES Act money to Mississippi’s tourism industry.

“We convinced the legislators about the need to make sure that the fourth largest industry in Mississippi, which is tourism, has a special input of dollars in this particular time,” Segarra said. “This was the first time ever in Mississippi to do something like this. It was very well received.”

By July, the state had allocated $13.5 million to Mississippi’s tourism boards, of which $3.4 million to Coastal Mississippi, which gave it funds for continued sales, marketing communications, technology, research and strategic partnerships.

With Covid county reports showing that tourism was the number one negatively impacted industry on Long Island, Discover Long Island saw it as an ideal time to introduce a new state bill for the approval of a tourism recovery investment district, whereby the additional hotel assessment funds being sought will also help with Covid recovery.

“So it’s a statewide initiative now; we spearheaded it, but it’s really a collective effort,” Jarnagin said. “It allows counties to opt in once it passes the state level.”

The legislature was adjourned before a vote on the bill could take place, but Discover Long Island hopes it will happen in January, when the same bill is reintroduced.

In a nutshell, this period of forced advocacy from DMOs has shows the need for increased community and government education on the important role of tourism marketing offices.

“You’ll be surprised how many highly successful entrepreneurs don’t know what we do or they don’t understand the business,” Segarra told Skift. “And then, the key is to educate the elected officials. The level of not knowing everything we do, it’s high and it’s our responsibility.”

Bonding with Locals Through “Community-Shared Values”

What does a tourism marketing office do when its international and out-of-state tourists disappear? It starts talking to its residents. Just as DMOs were forced to make political partnerships, they had to communicate with locals more frequently. Residents became the DMO’s sole source of visitor revenue and a critical part of keeping the destination safe from Covid, and the DMO become the guiding light for locals in terms of safety protocols and advice on safe activities, sights, and places to stay as the economy reopened.

But there’s still a disconnect when it comes to residents valuing the impact of tourism on the places they live. From a recent Longwoods International study that Skift reported on recently, only about half of Americans think tourism is positive for the country, and we found that “citizen-level education is still needed on benefits of tourism to local and regional economies.”

Tourism marketing leaders agree this is an ongoing issue. The Futures Funding report refers to it as building on “community shared values” — a strategy developed by Destinations International — and recommends DMOs to “help [others] understand your activities, and how a great place to visit can also be a great place to study, start or grow a business or invest.”

“Right now people must understand — I’m talking about the locals — they need to know the impact we bring,” Segarra said. “Here in Mississippi, the taxes generated for the state represent $600 per household less than what [locals] have to pay but on the coast it’s $1,600 less that otherwise, if it weren’t for the taxes we generate, would have to be paid by locals.”

This “need to know” advocacy also applies to European tourism marketing offices and their residents. “We are totally underestimated,” Michael O’Tremba, managing director of the Hamburg Tourist Board, recently shared. “We should communicate stronger, make it more visible what we do [.] We care for the quality of life in the city. Would we have 4,000 restaurants in Hamburg if we wouldn’t have 100 million day guests — no of course not, we wouldn’t need it. The frequency of the public transport system wouldn’t be so high.”

Almost 70 percent of Hamburg’s accommodation tax also goes into festivals or sport events, O’Tremba added, including almost 60 percent invested in culture.

Discover Long Island’s concerted effort in communicating its role to residents has been ongoing for the last five years. “But the reality is, in my opinion, no matter how much we educate the locals and the elected officials, there’s always going to be that disconnect, because it’s hard to look at the long game[,]” Janargin told Skift.

The Future DMO: An Independent “Beacon of Information”?

As the months evolve and DMOs continue to expand in their roles, new forms of collaboration and funding mechanisms are likely to continue emerging. Public-private partnerships and tourism recovery investment districts are expected to increase, but for some DMOs the sky’s the limit for innovating in the midst of crisis.

Discover Long Island believes that in a distant future, it could operate independently like an agency. “We hired a video producer, content creator in house to do our online YouTube Channel, we’re producing all of our podcasts in house, we do all of our graphic design — why shouldn’t we be a private agency that all these businesses buy into? Compared to three million dollars a year, they’ll pay a marketing agency $500,000 a month retainer.”

First securing a stable private funding stream would have to be the first step in reinventing the DMO’s model for the long-term.

What’s for sure, is that the ongoing crisis will continue to bring all parties to the table — governments, corporations, citizens and community players — to join the conversation on the critical, multifaceted role of tourism marketing organizations post Covid.

“This is what DMOs will have to understand from now on: there’s no longer the time to just promote, it’s over. The notion that you’re going to get the business because you’re able to engage with that particular individual only based on tourism attributes, it’s over. [W]hen you’re traveling right now you don’t only select a hotel or airline, you select a destination that you know — what about safety, what about crime, what about terrorism, quality of life? So the new spiral of attributes has expanded tremendously. [T]he destination has to become a beacon of information overall on what is about us.”