Hotels must accelerate transformation as cost pressures hit the bottom line

After a stronger-than-forecast performance for 2022, continued inflationary headwinds across energy, food and beverages (F&B) and payroll remain critical factors impairing the UK hotel industry’s recovery.

This update to our Hotels Forecast 2022-2023 shows that, following a weaker than forecast Q1, performance rebounded in April 2023, especially in London. With continuing strong business on the books we anticipate the UK hotel market should reach the better performing ‘mild’ end of our 2022-2023 forecast scenario for both London and the regions.

Predicted downward pressure on room rates in 2024 will limit the ability of hotels in the regions to continue to absorb these costs through price increases. This will be due to a changing mix in customer demand to lower-priced corporate and group business as well as an oversupply of new hotel rooms and the ongoing squeeze on consumer spending. Instead hotels may need to consider more radical and transformative ways of taking out cost and improving operating efficiency.

A new addition to our forecast, using HotStats as our data source, allows us to track changes in the major hotel costs that have affected hotel gross operating profit (GOP).

Labour costs

Total hotel labour cost per occupied room has increased by around 15% from pre- to post-COVID. This is a result of the National Living Wage (NLW) increase of 16% from March 2020 to March 2023, a staffing crisis and increased dependency on agency staff, together with reduced occupancy levels.

Labour costs are forecast to continue to increase in 2023 as hotels respond to the rise in NLW. We expect this NLW-driven cost increase to impact profitability in the regions more severely, with the addition of at least 10% to payroll costs in 2023 relative to 2022.

Increasing occupancy levels will also accelerate payroll costs as necessary additional headcount will result in higher wages and salary costs compared with previous years.

Utility costs

Despite the introduction of the Energy Bill Relief Scheme (EBRS), total utility costs per available room (PAR) have doubled between winter 2018/19 and winter 2022/23 (from ~£5 to ~£10). This has resulted in an average annual increase of more than 60% in utility costs PAR across the UK hotel sector from pre- to post-COVID.

While the replacement Energy Bills Discount Scheme will provide ongoing relief to April 2024, energy costs for the sector are expected to continue to create downward pressure on profitability. We expect total utility costs PAR to remain elevated throughout the remainder of 2023, averaging between £6.40 and £8.00 for the full year.

Food and beverage costs

As a percentage of F&B revenue, cost of sale (COS) has increased 2 percentage points in London and almost 3 percentage points for the regions in 2022 when compared with 2019. We expect F&B inflation to remain elevated and to further increase COS as a percentage of F&B revenue by an additional 2-3 percentage points, before starting to decline.

New initiatives and an ongoing focus on incremental revenue opportunities and cost optimisation will be essential, alongside continued efforts in menu re-engineering to maintain margins.

Returning meetings and conference volumes should provide additional revenue opportunities to mitigate the impact of these continuing increased F&B costs.

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.