After the U.K. hotel industry saw a stronger-than-estimated performance in 2022, continuing inflationary headwinds in F&B, energy and payroll are likely to impact the recovery of the country’s hotel industry, according to a recent PwC report.
As per the update to PwC’s Hotels Forecast 2022-2023, performance rebounded this April, particularly in London, following a weaker-than-predicted Q1. Given the continuing robust business on the books, the U.K. hotel market is projected to achieve the better performing ‘mild’ end of the 2022-2023 forecast for London and the regions.
In 2024, downward pressure on room rates is expected to limit hotels’ ability in the regions to continue to absorb the costs by increasing prices. This can be attributed to a change in customer demand for lower-priced corporate and group business, an oversupply of new rooms and the continuing pressure on consumer spending. Hotels should focus more on radical and transformative ways to take out cost and improve operating efficiency, the report suggested.
For this forecast, PwC used HotStas as the data source, which helped them track changes in the significant hotel costs which affected hotel GOP.
INCREASE IN LABOR COSTS
The National Living Wage (NLW), which increased by 16% from March 2020 to March 2023, the staffing shortage, the heightened dependency on agency staff and lower occupancy levels all contributed to the 15% increase in total hotel labor costs per occupied room from before to after the pandemic.
Labor costs are predicted to continue to climb through the year as hotels respond to the increase in NLW. The NLW-drive rise in labor cost is likely to affect profitability in the regions more adversely, with the addition of at least 10% to payroll costs this year compared to 2022.
Payroll costs are also expected to be accelerated by rising occupancy levels as necessary extra headcount will result in increased wages and salary costs against the previous years.
IMPACTED PROFITABILITY
The overall impact of inflationary cost pressures has affected GOP margins for hotels across London and the regions before and after the pandemic. Hotels in the regions were more adversely affected as their cost inflation was not adequately covered by growth in RevPAR in London.
For this whole year, PwC expects a stagnating GOP margin in London (with a chance for a decline of up to 1.5 percentage points) and a decrease in continuing GOP margin in the regions (up to 2.3 percentage points). The revised 2023 outlook said RevPAR growth would surpass the dip in GOP margin, although the hotels struggling to achieve the market RevPAR rise will lag behind their 2019 GOP.
PRELIMINARY 2024 OUTLOOK
The initial 2024 outlook is based on the April 2023 PwC UK Economic Outlook prediction of a 1% GDP growth and annual inflation dropping to 2% by the end of the year.
The hotel market in the regions is likely to benefit from this outlook, with domestic corporate and leisure demand for accommodation estimated to rise further. This, however, is expected to be impacted by the potential oversupply from new hotel openings, resulting in a moderate growth of RevPAR of roughly 3% overall.
London is expected to continue to benefit from a weak pound and rising incoming visitor volume, resulting in a 6% RevPAR growth.
ACTIONS FOR OPERATORS TO TACKLE COST PRESSURES
- Changing inventory levels to align with volumes to an optimal cost base (for example, by removing rooms from sale ‘semi-permanently’ based on expected variable cost changes)
- Optimizing service offerings by removing lower-margin services
- Exploring opportunities for supplier consolidation and contract renegotiation, considering relationships as partnerships instead of supplier/customer interactions
- Implementing and reviewing staff optimal productivity models, ensuring the right level of full-time employees, in line with demand. Efficiency gains realized during the pandemic bounceback should be maintained as occupancy rises.
- Reviewing business mix and focusing on opportunities to improve higher margin volume, for example, through meetings and conferences
Other transformative approaches include divesting poor-performing assets and non-core activities, new acquisitions where there’s a strong synergy and reviewing operating models and considering organizational restructuring.