Industry Update
Opinion Article18 September 2019

Amid Brexit Fatigue, Hoteliers Converge in Manchester to Talk UK Market

By David Eisen, Director of Hotel Intelligence and Customer Solutions for HotStats

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It's wild times in the UK. At least that's the perception of this here Yankee. Regardless of politics, ever since Jan. 20, 2017, the U.S. has been on a rambunctious ride of its own, and now, with the appointment of Boris Johnson as UK prime minister on July 24, 2019, the UK has gotten to join in the rollicking fun, as the calendar moves closer to Oct. 31, the day the UK is slated to leave the EU bloc.

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How ironic that the withdrawal date coincides with Halloween; yes, it's scary times!

It's also precarious times. As reported, British lawmakers voted in favor of a proposal requiring the government to seek a three-month extension to the Brexit deadline if it can't agree with the EU on new terms for separation by Oct. 19.

How will this impact business? To wit, our business: hotels. And with Brexit as the backdrop, other variables, including supply and labor costs, are having an impact on overall revenue and profitability. On Oct. 9 and 10, in Manchester, England, hoteliers will try to make sense of it all during The Annual Hotel Conference. Ahead of the conference, HotStats spoke with three industry experts—Kristian Dijkstra, director at C1 Capital, a hotel and serviced apartment investment specialist; Andrew Robb, chief business development officer at RBH Hospitality Management, a hotel operator; and Mirelle Maunder-Brown, director at Optimize Revenue, a solutions provider for the hospitality industry—to get their takes on a variety of UK-focused hotel topics:

1: On the current overall state of the UK hotel market and its impact on hotel trading and investment:

Dijkstra: Hotel trading in London remains strong, despite significant additions to hotel supply. London benefits from a broad range of demand generators, which ensures that even if there is a reduction in room night production, there are sufficient other sources of demand to replace the loss.

From an investment perspective, London hotel yields are coming in due to limited stock being available (fewer investors selling due to strong trading conditions) and a weight of foreign equity looking to invest into London, despite Brexit.

From a provincial perspective, we are seeing large variances in performance between markets. In general, top-line trading levels have been on an upward trajectory; however, the pace of growth is slowing down. At our stabilized assets, we are seeing limited to no growth at net profit level due to an increase in wage costs, higher commission levels and food cost of sales.

We have seen that the key UK markets have continued to attract investor interest; however, unlike London, we expect that some investors will choose not to invest outside London until there is clarity around Brexit.

From a trading perspective, we are likely near the top of the market; however, should trading deteriorate in the next one to three years, we would not expect to see a flood of assets to the market, similar to 2009-2012.

Robb: Overall, it is a very mixed position across the UK. Some markets have had very strong RevPAR performance so far, whereas others have really struggled with RevPAR declines due, primarily, to significant supply increases. All hotels have had increased pressure on their bottom-line profitability due to significant increases in minimum-wage levels.

Brown: It looks like a game of two halves: RevPAR performance in the UK has been flat, with decreased occupancy offset by increased average rate; meanwhile, London is seeing a similar trend, but has managed to overcompensate for the loss of occupancy with increased rates. The changing landscape of supply in some key locations tends to be suppressing rates. Unfortunately, there are less opportunities in the Regions to increase rates based on reduced levels of demand and this, combined with a lack of reduction in costs, is having a negative impact on overall profitability.

2: On the impact of Brexit uncertainty and what the future might hold:

Robb: The biggest impact I have seen is on the transaction front. Initially, there was a reluctance from some investors to transact in the UK until Brexit was concluded, but that seems to have moved on, and what we are seeing now is a huge amount of capital being available and ready to deploy in UK hotels, but, unfortunately, there are very few hotels available on the market, which is causing frustration amongst investors. Existing hotel owners are realizing that if they do sell their hotel, then it will be difficult for them to recycle that investment into another hotel, due to lack of product on the market and, therefore, they are either holding onto the hotel or are only selling if they can achieve a significant premium, which in turn makes hotel investment opportunities less attractive for those wishing to buy.

Brown: The devaluation of the pound has had a positive impact on the inbound market with an increase of length of stay and spend. This has been more noticeable in the serviced-accommodation sector than in the hotel sector, particularly in places like Edinburgh.

Undoubtedly, there is concern regarding the cost of goods and services as the Brexit decision looms. The hospitality sector depends heavily on workers from European countries and Brexit will increase challenges around resources and associated costs relating to goods, increasing the need for operators to put contingency plans in place.

Dijkstra: The greatest impact of Brexit has been on staffing. Throughout the UK, it has resulted in a shortage of staff for certain positions, especially housekeeping and waitstaff. For non-British nationals working in hotels, the uncertainty has resulted in people moving out of the UK.

Beyond that, London hotel performance has remained strong and Brexit has only impacted a small amount of demand; however, there is sufficient pent-up demand to replace any that could be lost due to Brexit. This has resulted in a slight shift to more transient demand sources at the expense of corporate sources.

Provincially, we have seen little impact on demand that can specifically be linked to Brexit.

3: On key performance indicators and the ones giving the most worry:

Brown: Operators need to ensure that they are looking at RevPAR and RGI on a more frequent basis during this time of uncertainty. The imbalance between Average Rate Index and Market Penetration Index can quickly result in negative RevPAR and RGI. This will result in revenue managers needing to be "on the ball" in the event that their strategy needs to change—from a rate strategy to potentially an occupancy-based strategy, depending on market conditions.

While F&B revenues could be stronger, the M&E sector opens up opportunities for growth. Putting more robust resources against this to support TRevPAR and GOPPAR is a must. Without this, negative regional RevPAR will erode profitability.

Robb: What is concerning me the most at the moment is the existing pressure on profit margins and what impact a softening of the market could have. According to HotStats data, provincial performance for the rolling 12 months to July 2019 shows 1.7% growth in RevPAR, but a 2.8% decline in GOPPAR. Hoteliers are faced with the prospect of needing 2%-3% RevPAR growth just to stay flat in terms of profitability and if we were to experience a downturn in the market, then we could be faced with 5%-10% reductions in GOPPAR.

4: On the strategies hoteliers are employing to grow the top line and combat expenses:

Dijkstra: Since wage cost is such a significant cost line, we regularly look at how these costs can be controlled. This is largely done through cross-training of employees (reception employees setting up a function room, for example), as well as improved methods of forecasting staffing levels and productivity.

We regularly review utility costs and look at ways toward making improvements to the building to reduce consumption, as well as training staff to switch off lights and turn down the air conditioning/heating to a predetermined temperature once a guest has checked out.

As a strategy, one of our hotels is incentivizing longer-staying guests to not have their room cleaned in exchange for an additional in-room amenity. This achieves a considerable saving at a small cost.

We also ask our hotels to run regular reviews of all contracts in place to ensure they are still competitive. Oftentimes, contracts are put in place and the small contracts are forgotten about because they are insignificant on their own; however, combined significant savings can be made.

Brown: Hoteliers are adopting a rate-growth strategy in order to negate the associated costs of occupancy strategies. This is successful in London due to levels of demand, but shorter lived regionally. The imbalance of rate versus occupancy will ultimately result in reduced revenues and profitability due to lower levels of demand, which is also compounded in city-center locations where there is increased accommodation supply, such as Manchester, Liverpool and Belfast.

The Regions tend to be counteracting their reduced revenues with expenditure in sales and marketing to drive increases in their F&B and M&E business. The implementation of M&E strategies deploying principles of revenue management are growth areas and much needed across the UK.

Contrary to this, London is investing in the aligning/future-proofing of its technology with mobile solutions, and upgrading hardware and software to support the changing needs of guests.

The recognition that current business plans need to be reviewed more frequently and adjusted in line with changing demand has been on the increase over the past few months.

Robb: There are huge efforts going on across the industry to drive profit. One of our biggest focuses has always been on developing and retaining top talent as we fundamentally believe that, with the right investment and development in our people, we will subsequently drive the best financial results. This takes many forms, but we are especially proud of our long-term development programs, which offer clear career progression and motivate and engage our teams. In addition to our focus on people, we are also heavily focused on maximizing profit flow-through, ensuring that whether we exceed or fall short of revenue targets, we are being the most efficient we can in all cost areas to maximize the bottom line.

5: On the particular UK destinations that are performing the best and those that are not:

Robb: Performance across the UK for year-to-date July shows some real highs and some real lows. London is having another strong year with YTD RevPAR growth of 4.2% and 2.3% YTD GOPPAR growth, according to HotStats. That's despite a 2% increase in supply. Manchester is another positive story for the year with 4.8% YTD RevPAR growth and 2.2% YTD GOPPAR growth, against a 4.5% increase in supply.

Unfortunately, the trend across the rest of the UK is not as positive, with supply increases having a detrimental impact on RevPAR. In particular, markets like Heathrow have seen huge increases in supply, which has resulted in RevPAR decline of 9.4% YTD and a 16% YTD GOPPAR decline. An uptick in supply in the Glasgow market has impacted both RevPAR and GOPPAR YTD, with declines of 3.6% and 9%, respectively.

Overall, the trend is that supply increases are having a significant impact on performance. It's why location, brand and operator become even more critical to ensure profitability.

Brown: Belfast, Manchester and Liverpool are the most challenging markets that we are seeing. The level of increased supply from serviced accommodation and hotels in each of these areas suppresses rate, especially midweek. The preponderance of international companies in these locations, which have strong levels of volume, coupled with increased accommodation choice, shifts the power to the consumer, rather than the hotel. Fortunately, the level of sporting and entertainment events over numerous weekends props up average rates, but it's still a struggle.

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David Eisen

David Eisen is Director of Hotel Intelligence and Customer Solutions for HotStats, a monthly profit-and-loss data benchmarking service. He is responsible for business development activity in the Americas and developing marketing strategies to drive HotStats’ brand awareness. Prior to joining HotStats, David served as Editor-in- Chief of the Questex Hospitality Group, which includes Hotel Management magazine.

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