The UK is not due to leave the European Union until March 2019, but the country’s hotels are already feeling Brexit’s impact.
The fall in the value of the pound has meant increased costs for imported goods, while fears over the right to remain has meant that EU nationals from the mainland—many of whom are employed in hospitality—have found themselves wary of remaining or put off coming to the UK at all.
The weak pound had driven a Brexit bounce, with overseas visitor numbers swelling, looking for a bargain. “The boost to inbound holidays from the weak pound has started to fizzle out and ongoing uncertainty around Brexit and the fragile economy is a recipe for some tough year-on-year comparisons for the next few months,” Liz Hall, head of hospitality and leisure research at PwC, warned in March.
Falling Numbers
The UKHospitality Travel Monitor reported an accelerated decline in inbound passenger numbers, falling 11 percent year-on-year in December, a significant reversal compared to growth of 9 percent in the first half of the year.
The decline was driven by a continued decrease in business travel and travel from the U.S. In the first half of the year, visitor numbers from North America had increased 28 percent, but then fell 8 percent in August, September and October and a significant 17 percent in December.
Additionally, these figures were compounded by a decline in travelers from continental Europe, which were down 11 percent year-on-year in December.
Supply is exacerbating the issue. According to data from STR, a potential 9,000 new rooms could open in London in 2018, well ahead of the 8,000 that opened in 2012.
Now, pressure is increasing, with Jonathan Langston, co-founder of HotStats, saying that profits were in the vice. In the capital, despite a fall in occupancy of 0.9 percentage points to 81 percent for April, RevPAR rose by 1.4 percent, with a 2.5-percent increase in rate, while total revenue per available room daily rose by 1.2 percent, said Langston. However, gross operating profit per available room fell by 0.3 percent.
Payroll as a percentage of revenue rose by 0.6 percentage points on the year to 25.3 percent in London hotels in April, with Langston commenting that wage inflation was growing faster than revenue inflation.
Langston credited this to several factors. “The National Living Wage is significant [as is] the departure of people, because the uncertainty of Brexit means that you have to pay more to keep people or pay more to attract them. The last four years have been a steady increase across London but we’re seeing the detachment from revenue growth not delivering profit growth.”
In the provinces, RevPAR was up by 3.4 percent, with occupancy rising by 0.4 percentage points and rate by 2.8 percent. Total RevPAR was up by 2.5 percent, but payroll as a percentage of total revenue was flat, implying that payroll costs had risen at the same rates as revenue. “Rooms revenue should result in payroll declining as a percentage of revenue,” said Langston. “It hasn’t.”
Gross operating profit per available room was up by 2.8 percent. “Profit went up but conversion was flat,” said Langston. “You should really convert revenue increases by 50 percent, but they are not.”
Cost of sales per rooms let also rose by 2.6 percent on the year. “That is mainly OTA commissions, or more business through OTAs, or both,” said Langston. “We’re now at 76.3 percent occupancy, which has got to be pretty much capacity. The only place for hotels to squeeze is rate, where they are being successful. F&B is just not good in hotels. Growth is coming through rooms revenue.”
Looking at the market as a whole, he said that the topline is in a reasonably healthy position, but despite that, profit continues to erode for owners. “Values are linked to profits,” he said. “This means there is less money free for refurbishments. Ultimately, you’re working harder for less money.”
Pound Power
On the ground, Eduard Elias, partner and co-founder of extended-stay accommodation operator Cycas Hospitality said that since the EU referendum, a weaker pound has increased the number of UK travelers choosing to stay in the country, and encouraged more tourism from overseas visitors, resulting in a greater demand for accommodation in the UK.
“On the other hand, it has impacted the labor market, with many foreign workers leaving the country or choosing not to come to the UK in the first place,” said Elias. “Hiring the right people with the right skillset is a greater challenge and this has resulted in rising operating costs. There is also a risk that costs could rise faster than revenues.”
According to a study released in June by workforce collaboration software company Planday and conducted by YouGov, 11 percent of workers (equivalent to around 330,000 staff nationally) in UK restaurants, catering, bars and hotels were thinking about leaving the UK as a result of Brexit. According to a study conducted by KPMG, between 12.3 percent and 23.7 percent of the UK hospitality workforce was made up of EU nationals.
“To help address this potential labor shortfall and ensure we meet our ambitious expansion plans, last autumn we restructured our in-house Culture Team to create four in-house trainers who focus on ensuring people are engaged long before they start, building talent internally and upskilling our hotel teams,” said Elias. Knowing that life experience and confidence are key assets for our properties, our recent campaigns to recruit mature workers have also proved successful.
“Staffing is crucial to the success of our work. The need to recruit the right personality to create the ‘home from home’ feel associated with the extended-stay concept is in many ways the precursor to today’s lifestyle focus in hospitality.
“We find people who build relationships with those around them naturally and easily, and would therefore be able to offer travelers a more personal experience; chatting with them at an evening social, or sharing a joke and building genuine connections. Once we’ve found the right personalities, our focus then shifts to motivating and retaining this talent so we can ensure employee satisfaction translates into happy, loyal guests and delighted stakeholders. Our people-focused strategy has ensured 98 percent staff retention rates across our Cycas hotels.”
Cycas’s portfolio has a number of brands, from operators including Hyatt Hotels Corporation, InterContinental Hotels Group and Marriott International. “Bringing the talent isn’t just about the salary at the end of the month,” said Elias. “It is also about the brand and how the public views it. A trusted global brand automatically instils confidence and respect that is led from the very top to create a family. Every employee needs to feel a sense of belonging and this kind of environment is crucial in finding the right people, keeping them and maintaining the highest levels of productivity.”
With operators looking to revamp their staff offering to address waning employee numbers in an already pressured sector, some were also looking to diversify their portfolios, taking all their eggs out of one Brexit basket.
Guy Parsons, EasyHotel CEO, was looking to extend the company’s global reach. “We’re not saying the UK market is dead—our RevPAR was up 11.2 percent—but at the same time if you look at the STR figures you can see that Europe is performing ahead of the UK. London has been under pressure for a while and the regions are mixed—underlying all of that is that consumer confidence is weaker than it has been, probably because of Brexit.
“We’ve got a reasonable pipeline in the UK, we’re not pulling out of the UK, but if you look at Spain the fact is that RevPAR is rising and we’re not seeing land costs rising at the same pace. Now is the perfect time to go to Spain.”
Although the ONS has started to show a drop-off in UK outbound travel—with the weak pound the likely culprit—poor weather so far this year is likely to drive travelers in search of the sun despite the increased costs. Hotel operators and investors may find themselves doing the same thing if the UK government is unable to come to an agreement with the EU over what will happen to the right to freedom of movement.
Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.