Where have all the tourists gone?

Unfounded fears about catching foot-and-mouth have combined with genuine concerns such as high price

"Don't eat beef and drink nothing but bottled water. That's the only way to avoid catching foot-and-mouth," says Phil, an accountant from Los Angeles. Myths like this are costing the British tourism industry billions. More than half a million overseas tourists stayed at home this year, after being bombarded with sensationalist media reports about foot-and-mouth. And the numbers keep on falling. In June alone, 134,000 fewer foreign holidaymakers came to Britain.

Julie Cowpland has experienced the crisis first-hand. She and her husband, Douglas, own the PowderMills Hotel in East Sussex, located near the famous 1066 battlefields and popular with overseas visitors. One loyal Dutch group has been coming to the hotel for the past 12 years and wanted to visit Britain again this year, to ramble around the pretty countryside as usual. Almost a year in advance, they had reserved 20 rooms for a weekend in June. On a quiet day in March, the Cowplands received a devastating phone call. Hearing of foot-and-mouth, the Dutch party cancelled their booking. One call and nearly all the hotel's rooms were vacant.

"It was inevitable," Julie says. "They had planned to go on walks to places such as the Seven Sisters. But unless we could guarantee that the footpaths would be open, there was no chance they would come."

This is no isolated case. Businesses throughout the country have felt the impact of a sharp dive in overseas tourism this summer. Yorkshire has suffered greatly, with almost three-quarters of local businesses affected by the crisis. "You usually find a lot of Americans and Japanese in Yorkshire, and the port of Hull is a gateway for a lot of people from northern Europe," says Lesley Young of the Yorkshire Tourist Board. "But this year, many of them are not coming because of foot-and-mouth."

The disease has become Britain's unwanted emblem. In a survey of prospective visitors to Britain in nine important overseas markets, carried out by the British Tourist Authority, 97 per cent were aware of the outbreak. Half of them said they would be worried about the disease if they were to visit Britain, and some had concerns about food safety. Confusion of foot-and-mouth with BSE has made the situation worse.

The British Tourist Authority estimates that the drop in foreign holidaymakers will cost the industry up to £2.5bn this year. More than 150,000 jobs may be at risk, and it will take years to rebuild foreign confidence in Britain as a holiday destination.

Perhaps surprisingly, cities are among the worst hit. In London, a destination for almost half of all visitors from abroad, numbers are down by nearly 14 per cent. The London Tourist Board calculates that the capital's leisure industry will lose up to £1bn this year - one-eighth of total income - affecting businesses across the city, from popular tourist attractions and hotels to launderettes and musicals.

"There has been a 10 per cent drop in audiences across the West End," says Sarah MacDonald of the Really Useful Group, which produces hit musicals such as Cats and The Phantom of the Opera. One of its shows, The Beautiful Game, will close early in September after losing almost £1m in advance bookings from the United States. The Royal Shakespeare Company's version of The Secret Garden and Ibsen's Ghosts fell by the wayside soon after opening. "Foot-and-mouth has been a decisive factor in nearly all of these closures," MacDonald says.

London tourism managers have responded by switching marketing strategies to target the domestic tourist. In April, the London Tourist Board and Superbreak, the UK's largest short-break operator, launched "Summer in the City", a campaign offering cheap holidays in London for domestic travellers. "We are trying to make up for the lack of overseas visitors," says Sandra Elliott, the director of marketing at the London Tourist Board. "It's the shortest, easiest and most efficient way to solve the problem," remarks her colleague Alex Brannen. The £100,000 campaign has started to bear fruit: Superbreak has experienced an 11 per cent rise in domestic visits to the capital this summer.

Tourist attractions across London have followed this example. The Tower of London, where more than a third of the visitors come from the US alone, turned its marketing approach inside out to attract more local tourists. Promoters put extra money into domestic campaigns, with advertisements on the Underground, Capital Radio and in local newspapers. The strategy is paying off, and visitor numbers are increasing. "We hope to do better than many competitors this year because of our change of strategy," says Danny Homan, the marketing director of Historic Royal Palaces.

Rural attractions have joined the quest for domestic visitors. At Leeds Castle, where nearly half of the tourists normally come from abroad, numbers almost tripled in May, after more money was put into domestic marketing by both the castle and the English Tourism Council. But as funding for domestic promotions dried up, visitor figures dropped again. They were down by nearly 25 per cent on some days this summer. Leeds Castle is asking for the English Tourism Council to be given more money to revive the domestic market. "We need to attract more domestic visitors now, because the long-haul visitors will take much longer to turn round," says Paul Sabin, chief executive at the castle.

But there is broad agreement that the hunt for domestic tourists is a quick fix that cannot replace the overseas market in the long run. Overseas visitors bring in a great deal of foreign cash. Cities in particular rely heavily on foreign visitors, who last year spent more than £7bn in London alone, over five times as much as their domestic counterparts. While many British visitors stay with friends or relatives when they come to London, most overseas travellers seek out paid accommodation. "We do not ignore the domestic market," Sandra Elliott says, "but we get much better returns from the overseas market."

The 12 per cent reduction in spending by foreign visitors has damaged many businesses, and the British Tourist Authority is working to claw back Britain's share of overseas travellers. Tactical advertising campaigns have been launched in key overseas markets, with the backing of a £14.2m emergency grant from the government. Posters in Germany carry desperate-sounding slogans such as "YES, WE'RE OPEN!!". International celebrities front PR campaigns, and even Bill Clinton has been used to proclaim the joys of spending time in Oxford.

The British Tourist Authority is also in talks with the Department for Culture to secure an extra £8m specifically to help rebuild foreign confidence in Britain as a holiday destination. It will not be easy. After the Gulf war, it took three or four years to convince Americans that it was safe to take a break in Britain - even though the conflict was nowhere near western Europe.

Nor is foot-and-mouth the only factor keeping Americans away. The economic downturn in the US has persuaded many Americans not to go on holiday at all this summer. Leading companies such as Virgin Atlantic Airways have already warned that the troubled American economy is beginning to take its toll on transatlantic traffic.

The strong pound and huge price gaps compared to other European destinations add to British woes. In fact, tourism insiders have been worried about the plummeting number of overseas visitors for some time. Britain is simply too expensive. The London Tube is the most costly in the world, with a one-way ticket averaging £2.50, while the cheapest good wine costs more than twice as much as in Germany or France.

Richard Tobias, the chief executive of the British Incoming Tour Operators Association, is convinced that Britain can overcome the disadvantages of a strong pound by offering value for money. "We have to compete on quality," he insists.

But this will not be easy with the country's image problems. Foreign media reports have shown a country plagued by dangerous animal diseases, fatal train disasters, devastating floods, endless queues in hospitals and other horrifying crises. Stern, Germany's leading current affairs magazine, recently published a damning article about Britain called "The English patient", which painted a vision of a troubled third world country.

Such reports have an effect. Cautious visitors from abroad even boil the tap water, while others are terrified by the prospect of falling sick and being treated by overworked NHS doctors. "We have certainly got an image problem," says Richard Tobias. "We will have to work hard in the next few months to focus on the positive things of Britain. It will be a tough job."