News for the Hospitality Executive
Sink or Swim for the UK Hotel Industry?
August 17, 2009 - Baker Tilly Restructuring and Recovery LLP has warned that 2010 is set to be even tougher for the already struggling UK hotel industry with the luxury end of the market bracing itself to bear the brunt of the challenging times.
However, in the first edition of Full House, a briefing for the leisure and hospitality industry, Baker Tilly comment on what the hotels need to do to help navigate these difficult times.
Bob Bailey, partner, Baker Tilly said: "It is predicted by forty percent of European hotel executives that more than five hotel chains will go into insolvency in the coming year – and it is easy to see why. The Office of National Statistics shows the number of visitors to the UK has fallen from 33 million to 31 million during the 12 months ending in April 2009, and many companies are reducing employee travel to cut costs which is having an adverse effect on hotels that rely on corporate business.
"We have been working with banks, owners and management teams to come up with new solutions and give practical advice to help buck these trends. We have been focussing on beating industry benchmarks for cost management, treating no cost as fixed, ensuring that every opportunity is maximised and working with staff and management teams to make the most of human, property and brand assets."
The June UK Chain Hotels Market Review shows that RevPAR was down 11.5% and profits fell nearly 17% for the first six months of this year. The Full House sector briefing offers some practical suggestions to hotels to increase their share of the reduced recession market and aid recovery :
The hotels sector is definitely feeling the squeeze of the economic downturn, as depressed consumer spending and a decrease in room occupancy lead ultimately to an increase in hotel failures. In the last comparable recession of the early ‘90s, around 1,500 hotels went out of business and it seems it is the luxury end of the market that is struggling most this time round.
Premier Cru, is one of Baker Tilly Restructuring and Recovery’s strategic alliances in the leisure and hospitality sector, put their heads together with our team currently working on hotel assignments, to look at what can be done to help navigate these difficult times.
What goes around, comes around
There's no good way to say this – almost every indicator, every expert and every anecdote says that it's going to be even tougher next year. The main trends for both London and the provinces are that occupancy, average room rate, the revenue available per room, the income available before fixed charges per room, profitability and staff levels are all down.
There is no point in spreading false optimism, because burying heads in the sand is the worst way to go about things in the current climate. But if there is pragmatism in the trade, then it's only because we've seen it all before. RevPAR (revenue per available room) since 1981has ranged by nearly 50%, from the lows of the 1981 recession through the 'things can only get better' highs of the ‘90s, up and down via two Gulf Wars, the SARS epidemic and the London bombings. For the hotel trade and its funders, instability is part of the deal, if not part of the fun. But there are many managers out there who know what it takes.
The June ‘UK Chain Hotels Market Review’ shows occupancy levels in the UK are down 3.4 percentage points for the first six months of this year. RevPAR was down 10.1% in June alone, and an average 11.5% for the first half of the year. Profit – measured as income before fixed charges – was down 16.7% in the year to June, with daylight appearing as June's profits fell by a slightly rosier 11.6%. Despite the general malaise, London hotels maintained an encouraging 84.1% occupancy in June, as discounts pushed the average room rate in the capital down by 8.8% to an average of £115.69. Yet, London hotels are performing better than their provincial counterparts, with occupancy rates in for the first half of 2009 for London at 77.3% versus 65.8% in the rest of the country.
In general, it is the high-end hotel market that is suffering most, as companies reduce employee travel to cut costs, affecting many of these hotels who rely on executive business. Yet leisure spending is set to fall less sharply, with Savills research showing that overall leisure spending by individuals is forecast to dip by less than 1% this year, which could explain why the budget hotels are not feeling the pinch as acutely as the luxury chains.
In fact, the expansion of the budget hotel sector can be traced to the 1990-1993 recession, when the demand for ‘value for money’ rooms increased. Over recent months, we have seen a similar trend – as customers who previously might have sought out well-known hotels and restaurants trade down.
Nevertheless, the insolvency statistics show there is a general rising trend of hotel failures. In Q3 2007, no hotels went into administration, yet by Q1 this year, that had risen rapidly to 31 from just two in Q3 2008. While the Q2 2009 figures show the number of administrations fell back to 12, this is to be expected due to the industry’s seasonal nature. However, all eyes will be on Q4 and Q1 2010 figures after a poor summer and as traditional holiday income tails off.
While the sector ’s health score remains consistently modest compared to other industries, interestingly we have seen a steady fall of only four points from the high times of 2007 - see PDF chart - Hotel industry performance (274kb).
There have been some notable hotel failures in the past six months, including Folio Hotels, Real Hotel Group, Four Pillars, The Ellington in Leeds and The Forbury in Reading. It is predicted by four in ten European hotel executives that more than five hotel chains will go into insolvency in the coming year.
With the number of visitors to the UK falling from around 33 million to 31 million during the 12 months ending in April 2009, according to the Office of National Statistics, it is easy to see why hotels are struggling.
A question of balance
What doesn't kill you, makes you stronger, they say, and this is certainly true of businesses in a recession. Those that survive, come out stronger, leaner and more resourceful. If a hotel can increase its share of the reduced, recession market, then there's every chance that it will maintain that share of the bigger, recovery market.
Over the past months, we've been working with banks, owners and management teams to come up with new solutions. We focus on beating industry benchmarks for cost management, treat no cost as fixed, ensure that ever y opportunity is maximised and work with staff and management teams to make the most of human, property and brand assets. Some of the most common areas are considered below – you may want to ask your customers if they are looking at them in their business.
Look after the pennies
Inevitably, we have to start with costs. Whether it's pennies or pounds, you have to look after them when income is down. We have improved EBITDA (earnings before interest, tax, depreciation and amortisation) from 5% to 15% in some client properties, and we always start by getting payroll and other costs under control.
And what if the hotel provides live-in accommodation – is rent proportionate to salary? We recently implemented a review, moving rent from a flat rate to 13% of wages. Those earning above the minimum wage are now paying a fairer rate in relative terms and this produced a saving of over £20,000 per annum.
If the hotel is not part of a group or chain, it could benefit from creating a purchasing group with other local businesses, so that ‘volume discounts’ can be negotiated. Don’t just apply this to food and beverage purchases – look at other areas – such as marketing and promotional activities.
Think short, medium and long-term
Having been slow to respond, many four and five-star hotels have now reviewed their pricing and are challenging three-star properties and budget sectors. But simply slashing room rates is a dangerous game if kept as a primary tactic.
We recommend hoteliers look to add value where they can by putting together packages. Analyse previous trends to anticipate the peaks and troughs and get promotions in place early.
They could try to work with local partners such as visitor attractions, theatres, shopping centres and sports venues so that the cost of building an attractive package and marketing it can be shared, without tying into a lower room-rate that will subsequently have to be maintained.
Could they think about investing some money in building a flexible e-marketing capability? The initial cost of creating a really good content management system and a high quality database may be very little compared to the ease and economy with which they will then be able to advertise tactical and seasonal promotions. If there is already a good database of existing customers, they can build loyalty by making sure that they are the first to hear about good offers.
They should talk to their suppliers about joint marketing and promotion, so that loyalty can be developed in the local area. We have had a lot of success in recent months, sharing the cost of marketing and promotions.
Conferences and business meetings are down. But if these facilities
are available, hotels should keep using them. Spending by public sector
organisations is up, so are they targeting the local authority or companies
in their area whose business is reliant on government contracts? The market
for weddings is one area that is also holding up at the moment. While these
tend to be long term bookings which may not pay up immediately, it is good
for confidence to know that there are high-value bookings across the year
Baker Tilly is an independent firm of chartered accountants and business advisers. We're a national firm with over 2,200 employees and over 280 partners generating a fee income of over £204 million which positions us as one of the leading mid-tier accountancy firms. With a network of 29 offices in 25 locations across the UK, we are your local firm with national strength.
Premier Cru is a professional management company offering a range of financial, operational, marketing and sales services d esigned to turn-around underperforming hotels.