ABSTRACT

In the 1980s, Croatia recorded about 8 million arrivals and 53 million overnight stays, which dropped to 2.5 million arrivals and 10-11 million overnight stays in the 1990s. Since then, tourism has steadily increased, reaching 17.78 million arrivals and 90 million overnight stays in 2022. Tourism’s contribution to GDP more than doubled, spurring investments and improving accommodations. However, competition has pressured revenues, while costs have risen due to higher wages, interest rates, private accommodation growth, emigration, and inflation. This paper investigates the impact of personnel costs on hotel industry profitability from 1993 to 2022, focusing on the recent exponential rise in personnel costs. These rising costs threaten profitability due to labour shortages, continuous labour imports, declining productivity, and increasing input prices. Using data from 6,127 hotel companies obtained from FINA, analyzed with the two-step system robust GMM method, the study found that a 1% increase in net salary costs results in a 3.7% decrease in gross profit margin. The analysis highlights the dual impact of increased tourism demand: while it boosts economic growth and investments, it also creates significant cost pressures. Understanding these dynamics is crucial for formulating strategies to maintain profitability in Croatia’s hotel industry amidst growing competition and economic challenges.