Hotels must accelerate transformation as cost pressures hit the bottom line

Profitability takes a hit

As a result, the overall impact of inflationary cost pressures has hit GOP margins for hotels in London and the regions between pre- and post-COVID (see table). Regional hotels have been more severely impacted due to their cost inflation being less well covered by revenue per available room (RevPAR) growth than in London.

For the full year 2023, we expect a stagnating GOP margin in London (with potential for up to a 1.5 percentage points decrease) and a continuing GOP margin decrease in the regions (of up to 2.3 percentage points). Our revised outlook for 2023 shows RevPAR growth set to exceed this GOP margin decline - although those hotels struggling to achieve the market RevPAR growth will trail behind their pre-COVID GOP.

^{_{Source: HotStats, STR, PwC analysis}}

What does 2024 hold in store?

Our initial 2024 outlook is based on the April 2023 PwC UK Economic Outlook forecast of GDP growth of 1.0% and annual inflation falling to 2.0% by the end of 2024.

The UK hotel market in the regions should benefit from this improving but subdued economic outlook, with both domestic corporate and leisure demand for accommodation projected to experience further growth. However, this will likely be hampered by the potential oversupply from new hotel openings, leading to a moderate RevPAR growth of around 3% overall.

We assume that London will also continue to benefit from a weak pound and increasing numbers of incoming visitors, leading to RevPAR growth of around 6%.

Key actions for hotel operators

Our current engagements with stakeholders across the sector highlight a number of activities that hoteliers are focussed on in efforts to navigate the challenging environment. These include a mix of short-term tactical actions as well as more strategic and transformative approaches to improving efficiency and taking cost out.

Key actions hotels can take to manage immediate cost pressures include:

• Changing inventory levels to match volumes to an optimal cost base (e.g. by removing rooms from sale ‘semi-permanently’ based on expected variable cost changes)
• Optimising service offerings by removal of lower margin services
• Exploring opportunities for supplier consolidation and contract renegotiation, viewing relationships as partnerships rather than supplier/customer interactions.
• Implementing and reviewing staff optimal productivity models, ensuring a correct level of full time employees (FTEs), in line with demand. It is essential that efficiency gains realised during the COVID bounceback are maintained as occupancy increases.
• Reviewing business mix and focusing on opportunities to increase higher margin volume e.g. through meetings and conferences.

More strategically, in this higher interest rate environment, hotel operators should consider the most cost-effective financing solution, both when refinancing and investing. Reviewing previous capex business cases around areas such as energy saving investments will also be key to longer term sustainable growth.

Other more transformative approaches include divesting poor performing assets and non-core activities, new acquisitions where a strong synergy exists, and reviewing operating models and considering organisational restructuring.

Get in touch for a deeper dive into our hotels market data to find out what it means for your business.