Inflation, Interest Rates, Recession: ‘So?’

Let’s start with some good news :

Occupancy and Revenue are record level high in 2022 and forecasted to surpass 2019 pre-pandemic. The outlook looks fairly positive.

Despite some positivity on the horizon, hoteliers still face various challenges. Inflationary pressures are set to squeeze profits as food, beverage, and energy prices soar, while the ongoing supply chain issue and staffing challenges continue, also driving increases in payroll and operating expenses. As the VAT rate returned to the standard 20% in April and business rate relief is capped at £110,000 per business, hoteliers will feel the pinch to the bottom line in the medium term

So, in spite of higher revenue, are hotel owners really hitting the bottom line?

Do top brands really helping hotel owners or are they just reaping the benefit?

This week, we’re taking a deep dive into some of the latest UK hospitality industry insights, using data from expert reviews. 

Post-COVID inflation

There are more inflation and cost pressures now in the United Kingdom than in the United States or Europe, and hotel owners are feeling the strain, especially hoteliers. 

According to data released by the U.K. Office for National Statistics (ONS) in April, inflation rose 7.8% year over year, up from 6.2% in March. The inflation rate has hit a 40-year high with the risk of tipping the UK into a recession. The Monetary Policy Committee forecast that CPI inflation was expected to average slightly over 10% at its peak in 2022 Q4.

Labour shortages and higher wages, aggravated by the closure of staffing opportunities from the European Union, are driving up prices. 

The British pound has devalued against major currencies, including the United States dollar. Bank of England has raised the interest rates by 25bps on 16th June 2022 to 1.25%: this is likely to be increased in the next few months. 

In May, the United Kingdom government announced an emergency economic stimulus package valued at £18.8 billion ($15 billion), including rebates on higher energy costs and additional support for lower-income households. The price of energy has already risen substantially, and it will rise even more in October and November. 

Brand loyalty – is this applicable to hotel owners?

Who is the real winner here Hotel owners/stakeholders/operators or Big Brand franchisees?

Lionel Benjamin, the co-founder of Ago Hotels, which operates 14 hotels in the UK, agreed that a sweeping cost-of-living stimulus won’t immediately benefit U.K. businesses.

Benjamin said hotel owners need help from the brands, with costs in such an inflationary environment. He said brands are beginning to reap fees from the top line as occupancy soars, but owners are paying most of the costs before the bottom line is calculated.

“Owners need to breathe. Brands talk about brand loyalty, but how about loyalty to the owners who are loyal to the brands?”

“Most fees are calculated on room revenue, so if there is revenue, brands will do well,” Benjamin said. “Brands do not need to wait to see the earnings before interest, taxes, depreciation and amortization before their cuts are taken,” he added

“The labour situation is bad now without losing any more good people. To offset that potentiality, we have had to increase salaries again, so if you add that increase on to all the inflationary pressures on the [profit and loss account], then profitability will decline,” he added.

Current hotel valuations

Alex Sogno, CEO at hotel asset management firm Global Asset Solutions,

“Although the focus on the top lines is necessary for a speedy recovery, it is recommended asset managers and hotel owners rerun their projections: Evaluate the inflation impact on their 10-year projection and clearly estimate the risk of a high debt ratio on the discounted cash flow. It is important not to misjudge the inflation threat until it is too late.”

He added it is important to not play down rising prices and concentrate only on operating departments’ recovery efforts.

Conclusions

In the last two years’ experience, certain hotels, locations and asset types have performed better than others such as Staycation properties and limited-service hotels than city centre hotels.

Nevertheless, Hotel stakeholders need to consider how technology, company culture and hiring practices can determine how well a hotel will perform this is what some of the leading limited lenders in hospitality are looking at.

In conclusion, there may be a slight bump in the road along the way to recovery for those who can manage this season well and will certainly wither the storm if any recession does happen, hotels are very optimistic that the inbound travel will increase and will continue to improve their rates, occupancy and RevPAR.

Signing off until next Friday for more news on Hotels and hospitality.

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Reference/Credit: UK hospitality events, Costar ( for hamlet hotels), Boutique hotel news, Hamlet Hotels research team 

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