As Brexit looms, rising cost of labor should worry UK hoteliers

Westminster Bridge in London at sunset
Photo courtesy IakovKalinin

In its annual hotel report, Knight Frank warned that cost pressures of labor in British hotels were “set to intensify as the UK renegotiates its relationship with the EU.”

An increase in the National Living Wage was expected to combine with the need to pay staff more to attract and retain them, as the UK prime minister attempted to restart stalled talks with the EU.

Knight Frank’s 2017 UK trading performance review forecast that RevPAR would grow by over 7 percent for the full year 2017, driven by 7 percent ADR growth in London and high occupancy rates in the UK provinces. Looking ahead, RevPAR growth was expected to increase by 2.4 percent in London and 2.5 percent in the regional UK, with occupancy in London down 0.5 percent and flat outside.

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The company drew attention to payroll costs, which for the year to August 2017 were 24 percent of total revenue in London and 31 percent in Regional UK—up 4.7 percent and 3.3 percent on the year, respectively. The study said that the cost had intensified, highlighting the impact of the looming Brexit, with many operators forced to offer higher salaries in order to stay competitive in tightening job market.

“The headwinds of rising costs in both expenses and payroll highlight the challenges ahead for the industry, at a time of heightened concern over the free movement of labor post Brexit,” Philippa Golstein, hotel analyst, Knight Frank, said.

“Looking ahead to 2018, there is a growing market sentiment that the rate of growth in key trading performance indicators will be lower than in 2017. Nevertheless, the weakened pound is expected to continue to attract overseas leisure visitors, which combined with strong growth in demand from continental Europe and resilience in the domestic ‘staycation’ market, should provide further growth potential for the UK hotel market.”

The Effect

The impact of higher costs was already being seen in the wider hospitality sector in September, with the Coffer Peach Business Tracker reporting that Britain’s managed pubs, bars and restaurants saw like-for-like sales decline by 0.9 percent in September as the public appeared to pull back on spending on eating and drinking out.

“Rising costs around property, tax, people and raw materials have increased pressure on margins already this year in what is an ever-competitive market,” Peter Martin, vice president of CGA, which produced the Tracker, said. “Faltering sales will only add to sector concerns.”

The report was released as the UK prime minister, Theresa May, was due to fly to Brussels to attempt to restart talks with the EU over the UK plans to leave the union, with the future of EU nationals currently living in the UK one of the sticking points. Research commissioned by KPMG for the BHA shows that the UK hospitality sector was ‘highly reliant’ on EU workers, with up to 24 percent of its workforce made up of EU migrants.

In mid-October, Karen Bradley, the culture secretary, sought to reassure the sector. “EU nationals have contributed an incredible amount to the UK economy and to your sector in particular and we want to make sure that you have the labor you need, and that you have the people you need to enable you to thrive and continue,” Bradley said. “I know full well that the reason people come to Britain is because of all we have to offer and we have none of that to offer if we don’t have you providing them with great accommodation, great food, great places to drink, great places to socialize, and just making that whole experience wonderful.”

The sector now needs to turn those words into action.

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.