The Rise of the All-Inclusive Resort

All-inclusive resort hotels are a booming global business that earns billions of dollars per year. For decades, their typical clientele has been families from the United States and Europe seeking convenient vacations on beaches along the Mediterranean or Caribbean. But their appeal now extends to customers, and hospitality providers, across Asia—and with the same basic economic rationale.

LISTEN HERE: For the entire conversation, and episodes in the weeks ahead on this subject and others, follow Ones and Tooze wherever you get your podcasts. 

When did resort hotels get their start? How does the business model of resort hotels work? What effect do they have on the communities they are located in?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: What’s the history of resort hotels? How did they get their start?

Adam Tooze: There are three convergent strands in the history of the modern resort. One is the very idea of seaside living, which goes all the way back to the Romans. So much of this in Europe traces back to the Romans, who had resort towns all along the coasts of what is now modern Italy. And those then really disappeared with the collapse of the Roman Empire. But from the 18th century onward, if not before, Europeans were visiting the seaside, notably in Britain, then also in Germany—Heiligendamm in Mecklenburg was the first German resort on the Baltic. By the 19th century, with railways, you had a lot of seaside resorts that were easily accessible by train from the city. And by the 1930s, you had regular paid holidays, which enabled people to go to the seaside. There’s actually an extraordinary film on YouTube about the first cohort of French people who, from Paris, took the train to the Normandy Atlantic coast and bathed during the ’36 Popular Front government, when they had their first paid week of vacation. So that’s one strand.

The other strand is the spa, which also has Roman origins, and we call it “spa” because the Romans had a curative bathing complex in what is now the Belgian town of Spa. And so in that hilly landscape with natural mineral springs, the Romans already developed a culture of bathing. This wasn’t confined to the Roman Empire. The Egyptians, many of the Mediterranean cultures had elaborate bathing cultures, as do non-European and many other Eurasian cultures. But if we’re actually fast-forwarding to the present and asking ourselves when does the modern all-inclusive resort come into existence, it’s again in Britain, the most developed of the European countries in the 1930s, in the legendary Butlin’s holiday camps. And then from the 1950s, Club Med. And it’s really Club Med that, from 1950 onward, founds the modern concept of the all-inclusive, party-focused enclosed resort.

CA: I’m curious how the business model of the modern resort works exactly. How does the all-inclusive concept work for both sides of the transaction exactly?

AT: It addresses what business economists or microeconomists refer to as the holdup problem. The holdup problem, which is fairly familiar from all sorts of settings, commercial and noncommercial, is the problem of your reluctance to enter into a contract when you don’t know whether one party to the contract will subsequently revise the terms of the deal in a very unfavorable way. So basically, the fear of the anxious parent is that you sign up to go to this resort, you’re in a food desert, shops are miles away, and they’ll gouge you when you get there because the restaurants will be too expensive. I spend a lot of time in airports—this is the American airport business model. Not true in Europe, right? So in Europe, they in fact resolve this problem by saying, our promise is in British airports that nothing will cost more than it does in the high street, so come and do your shopping in the airport. Whereas you’d have to be a fool to buy anything in an American airport because they resort to this primitive holdup-type thing. You’re there. You can’t escape. We can charge you $25 for a sandwich if we like. So the all-inclusive model eliminates the holdup problem. And what it says is, we will get more deals, and more people will agree to go on holidays than they would if they didn’t have this problem. If you promise them a fixed price, more people will actually sign up to go.

So in the end, you get more business, more activity, more sales. Which is also why you get much bigger brand names in European airports than you do in American airports because the European model is just to increase the volume of sales at this particular point at your standard price. Don’t try to, as it were, make super-profit by charging anything you like through the holdup situation. And indeed, once you get people there, the model is exactly the cross-subsidization thing that you pointed to, and resorts have demonstrated that it is significantly more profitable. And some of the stuff I’ve seen online suggests that the profit margins are almost twice as high for the all-inclusive deal. One of the reasons the resorts like it is that the payment is all upfront. So they receive a large lump payment, and then their relationship with their customers is unaffected by any kind of transaction. So it creates goodwill. Once you’re there, you just feel basically they’re extremely generous because the original payment was made beforehand.

CA: What can we say about the economic effect on the communities that these resorts are situated in?

AT: Well, the advocates of the model would say that because you get bigger business, in the end there are more jobs created by this kind of model. And there are hundreds of all-inclusive resorts. One figure I saw said there were about 860 all-inclusive resorts all over the world and about half of them are in the Caribbean. And so the advocates of the model would say, it’s a tourism-generating business. The critics would say, first of all, why is it that in a situation like the Caribbean, you do this enclosure? Part of it is basically pandering to a bunch of racist or racialized stereotypes about people needing a comfort zone, not wanting to be “distracted” by the particularities of the local region, and just wanting to enjoy the paradise of the beautiful water and needing this enclosed bubble in which to do that.

So, from a cultural and political point of view, they are an extraordinarily kind of colonial, you could say, model of vacationing. And in economic terms, the consequences of that can be very severe in that for some of the resort systems in the Caribbean, it’s estimated that only about 20 to 30 percent of the revenue generated by the resort stays locally in the form of wages and local supplies, and the vast majority of the revenue generated flows back out again in forms of dividend payments and flown-in supplies that create this bubble of essentially a North American existence or a European existence in a physical geography that is someone else’s or some other place. And the cruise ship is the extreme case of that, right? Because there’s virtually no local labor either. You basically just have maybe guides or bus drivers who just ship the people around. It’s a very ambiguous model, I think, of development. The obvious solution is actually just to insist on localizing as much as possible to attract local investment and to build supply chains, which actually rely heavily on local economies.

CA: The people visiting these resorts in places such as Turkey and the Caribbean tend to be Americans and Europeans. Is the concept of a vacation of this sort itself an inherently Western one?

AT: Well, it may have been historically. It no longer is. It’s a hugely popular global model of tourism. So I was looking at figures for the Chinese resort business, and it’s gigantic, as you would expect. I mean, it’s huge. So Macau, the great Asian gambling center, if you look at the origin of the 30 million people who visit Macau, 90 percent are from Asia, and 85 percent of those are from Hong Kong and mainland China. Now, that’s 30 million visitors. Vegas gets 40 million visitors a year. So Macau is just 10 million short of Vegas. Mexico’s tourism complex generates 66 million visitors. The Chinese tropical island of Hainan has 99 million visitors a year. Everything’s bigger in China. It’s just bigger, right? Chinese visitors are the big drivers of global tourism and global luxury consumption. It’s just a numbers game. And the Chinese middle class is so large. It may once have been a kind of European colonial thing, but, yeah, China does colonialism, too.