The biggest challenges affecting hotels through this period of high inflation relate to the cost of labour, rising energy prices, coping with supply chain issues, the cost of debt and uncertainty that makes budgeting for the year ahead almost impossible.
Discussing these issues at a seminar in London last week ‘Managing and financing hotels through ultra-high inflation’, organised by HVS, Bird & Bird, EP Business in Hospitality and AlixPartners, an impressive line-up of experts discussed the current challenges facing UK and European hotel revenues, costs and profitability, as well as the impact on M&A activity and financing,
Kicking off the session Thomas Emanuel, senior director of STR Global, painted a positive post-COVID recovery for the hotel sector, both in the UK and across Europe, with rates some 25% on 2019 levels and occupancy at around 95% of previous levels. ADR growth, he said, was real, rather than inflationary, but “we still need that group demand to come back,” he said, “although the gap between leisure and corporate bookings is now starting to close".
Looking forward he predicted a softening for the UK sector through September, October and November although there was likely to be a stronger end to the year and growth moving into 2023. However, the cost of living has now replaced COVID as the biggest concern for the industry.
Kathrin Cockhill, EMEA director of Hotstats, balanced the positive top-line performance for hotels, with the impact of rising costs – including a 30% increase in housekeeping labour per room compared with 2019 and utilities up 35% - and for some over 68%. “Rising costs have yet to impact profit margins, particularly as strong ADR has been able to off-set this,” she said, “but there is a need to maintain that excellent ADR as we move into Q4 2022 and Q1 2023."
A panel session chaired by HVS London chairman Russell Kett heard senior representatives from Bird & Bird, AlixPartners, Kerzner, Accor and Jumeirah Hotels address the impact of inflation on budgeting, the supply chain, profitability, refinancing and mergers and acquisitions in the sector, as well as taking questions from the audience.
“The world has fundamentally changed for those who re-financed pre-COVID,” said Bird & Bird’s James Salford. “We are starting to see people refinancing on deals but the cost of debt is clearly going to be a huge challenge.” AlixPartners’
Graeme Smith said that this was translating into a “wait and see approach” when it comes to raising money or restructuring while Salford added that although there was plenty of finance available, the fact that debt costs had doubled since 2019 would impact lending. “We will see more owners being asked to put more equity in – we have seen some portfolio owners selling single assets to generate cash – I think we’ll see more of that coming forward,” he said.
Panellists said that keeping existing lenders on side was vital. “Focus on driving topline – maximising rooms and all other ancillaries and strong communication with lenders to keep them engaged. Control what you can control,” advised Accor’s Aiden McAuley.
Addressing supply chain issues Kerzner’s Jan Hazleton said that hotels will need to rely on a good general manager, who’s good at crisis management and can figure out alternatives. “The other side is development [of hotels] and during the underwriting there will have to be longer time frames on construction,” she said, adding that many of the estimated 122,000 rooms in the UK’s current supply chain were likely to see delays in build times.
On the rising cost of energy, McAuley emphasised the importance of getting the basics right, such as energy efficient lights and zones which can switch off automatically, and ensuring that all business management systems were functioning correctly. Tackling rising staff costs in London, David Nicolson of Jumeirah Hotels said that Jumeirah had improved staff benefits with positive results including providing breakfast, lunch and dinner, running more staff outings each year and obtaining constant feedback from staff.
“We will see six months of difficulty then steady recovery – and the sector will emerge stronger and more experienced at dealing with all the disasters life throws at it,” concluded HotStats’ Kathrin Cockhill.