PwC Hotels Forecast: ‘Back to basics’ - Midlands hotels need a fresh strategy for 2023 after post pandemic growth

PwC published its annual UK Hotels Forecast today with insights into the sector across the UK. Post pandemic pent up demand meant a successful 2021-22 for many hoteliers. However, the 2022-2023 forecast offers a different outlook. To date, there has been a stronger demand for rooms in 2022 than expected but that recovery is set to stall into 2023 given the rising operational costs impacting all leisure sectors. 

Inflation, energy costs and rising interest rates remain major factors impairing the industry’s recovery, in addition to staffing shortages and supply chain disruption. Consumer confidence also continues to be hit by the cost of living crisis. In a PwC consumer survey conducted in October 2022, 21% of people who expect to cut back on holiday spending say they will switch to the UK instead of going abroad. Additionally, 17% say they plan to take fewer shorter breaks with 22% saying they will economise on their accommodation options. However, current forecasts predict inflation to fall back to 3.6% by the end of 2023, which could start to ease some of the pressure. 

These challenging conditions for UK hoteliers come on the back of stronger than expected growth in 2021-2022. Returning international tourism helped London perform better than expected across occupancy, ADR (average daily rate) and RevPAR (Revenue per available room). The UK regions also largely outperformed the previously forecasted scenario for ADR and RevPAR, although occupancy was hit by a softening in demand for staycations during the summer of 2022 as people headed overseas for guaranteed sunshine. 

Regions forecast

Hotel performance in the regions outside of London is closely linked to GDP meaning that after a relatively strong start to 2023, regional hotel performance tails off and turns negative by the third and fourth quarters, ending the year with occupancy growth of just two percentage points on 2022. In real terms, ADR is set to fall gradually throughout the year to just below pre-pandemic levels.

New supply in the regions is above the historic average of 1% of total supply, with 9,350 rooms due to open in 2023 in addition to the 6,500 opened in 2022. 

Birmingham benefits from being the UK’s second largest city and 56% of total overnight visitors come from domestic tourists. Visits generally are conference-led and supported by some leisure business. With a full calendar of events this year, the local market is already seeing the benefits of the return of group demand during busy conference periods. After minimal new supply since 2013, an increase of around 5% in supply (980 rooms) is due to open in 2023-2024 which could impact occupancy growth. 

Sarah Phillips, PwC Partner and Consumer Markets Leader for the Midlands, said:

“The events in Birmingham this year have provided a much needed boost to hotels and leisure businesses in the city and surrounding areas. Over the summer, the Birmingham 2022 Commonwealth Games saw over a million visitors to the region whilst raising the city's profile globally. This was followed by the Tory Party Conference and now the return of the iconic German Market in the run up to Christmas. 

“We know that leisure and hospitality businesses were hit hard by the pandemic and the forecast for the last two quarters of the year highlights further challenges. However, with the events that were unique to the region this year, Midlands hoteliers have an opportunity to maximise on the profile of the region. That said, energy costs and cost of living are having real impacts on businesses across the UK and many will be considering what practical steps they can take to alleviate some of the impending cost pressures.”

Impact factors and solutions 

PwC suggests looking at mitigating inflation on costs such as energy costs, staffing and supply chain to find solutions to market recovery. Although hotels will be aided by the Energy Bills Relief Scheme (EBRS), which is currently only stated to last until the end of Q1 of 2023. Hotels must look to other energy consumption reduction measures such as reducing the room and water temperature in the short term or investing in solar energy measures that will reap longer term benefits. PwC also suggests a review of manual processes that can be digitised such as payroll or customer service measures such as self check in and check out. 

The current labour shortage across the market has hugely hit the hospitality sector. Between July and September 2022, there were 159,000 vacancies in the accommodation and food sector across the UK - a 5.7% year on year rise according to the Office for National Statistics. The shortages continue to fuel wage inflation with the National Living Wage forecast to rise by 8.6% to £10.23 in 2023. 

Eddie Williams, Deals Partner at PwC Midlands, comments on hotel industry recovery in a challenging environment: 

“Hoteliers in the Midlands enter the final part of the year following the highlights of the Birmingham 2022 Commonwealth Games and other events that brought both tourism and a renewed global view of the region. That said, there are challenges ahead and I would encourage businesses to be engaging with stakeholders now to consider any options to mitigate inflation and cost pressures. Through difficult times is where we see more creativity and innovation. This could be the key for hoteliers with resourcing issues to maintain exceptional customer service, a factor that would encourage return visits in the future. Optimising the operations of key facilities such as bars, gyms and restaurants as part of the experience of staying in the hotel should also be a focus.”

Rising interest rates will put further pressure on many hotels that already have high debt levels, including additional borrowing taken on during  the pandemic. Due to debt service capability and potential asset valuation decreases it is likely that hotels will have a lower overall debt capacity. Owners may need to consider how to manage cash reserves and overall debt levels - including capital expenditure and potentially asset sales - as well as having alternative financing options.