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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).
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
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%.
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:
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.