UK hotel insolvencies at highest level for 5 years

The number of UK hotel sites which became insolvent in the year to Q3 2019 reached the highest figures since 2014.

Statistics for hotels and hospitality distress

According to figures analysed by UHY Hacker Young, in the 12 months to September 2019 the number of insolvencies rose by 60% to 144 (year to September 30 2019) from 90 the year before. 

Unfortunately, the official statistics from the Insolvency Service on Industry Insolvencies to September 2019 (table A1c, lines 243-248) look even worse. Taking into account the wider definition which also encompasses holiday parks, caravan parks and other short-stay accommodation it rises to 173 sites, a figure last beaten in 2012.

Headwinds for hoteliers

Hacker Young attribute the rise in insolvencies to:

1. a slowing UK economy and the cutting back of discretionary business expenditure;
2. rising costs;
3. increased competition from challengers such as Airbnb; and
4. weak consumer demand from falling overseas tourist numbers .

The last point about falling overseas demand is based on 2018 figures and is not supported by the recent ONS Overseas travel and tourism provisional results to September 2019 which shows marked increases in both: (a) visits to the UK by overseas residents - 3.1 million in September 2019 (3% more than in September 2018), and (b) spend by overseas residents - £2.4 billion on visits to the UK in September 2019 (21% more than in September 2018).

Costs are main cause of falling profit

Hotstats' latest data on UK hotels' profitability shows that the 12 month fall in GOPPAR (gross operating profit per available room) of 1.8% across the UK (a 2.4% fall in London) comes from increased cost, in spite of revenue growth.

Hotels excessively reliant on agents and booking websites suffer badly - they can easily lose up to 25% of the room rate in commission.

The weakness in £Sterling (which fell from €1.44 in 2015 to a low of almost parity with the Euro in August 2019) has made the UK unattractive as a destination for foreign workers, causing staff costs to increase (payroll has increased by 2.3% between November 2018 and November 2019), and has substantially increased the cost of supplies.

As usual, the pain is not spread evenly, with anecdotal evidence suggesting that insolvency is a greater risk among privately-owned unbranded hotels outside major cities.

Bad news on costs in 2020

Worse is around the corner. Chasing after the goose that lays the golden eggs with an axe, the Government has taken the step of dramatically increasing the new National Living Wage and increases in the National Minimum Wage from 1 April 2020, which will see low-paid workers earn nearly a thousand pounds more a year. For example, a rise from £8.21 to £8.72 for workers over the age of 25, marks an increase of 6.2 per cent. Full-time workers aged 25 or over on the National Living Wage will receive a pay rise of approximately £930.

Younger workers will also receive an increase to the national minimum wage of between 4.6 per cent and 6.5 per cent depending on their age, with 21-24 year-olds benefiting from a 6.5% increase from £7.70 to £8.20 per hour.

An easier answer to cost reduction

There is one easy step the UK Government could take to reduce cost. Almost all European countries charge a lower rate of VAT for hospitality to improve their invisible exports. The UK still applies a flat rate.

Improving non-rooms revenue

Howard Kennedy's hotels team are hosting our next hotel breakfast seminar, the third in the Early Check-In series, here at 1 London Bridge on 29 January 2020 with a panel of experts advising on how to optimise hotels' non-rooms revenue.  If you would like to attend, please drop me a line: ed.john@howardkennedy.com.