Hotels face a twin challenge as they grapple with escalating labor expenses and a squeeze on room rates.
Hotel Profit Struggles in April
April saw a tough time for hotels, as margins took a hit due to escalating staff costs and room rate pressure.
UK hotel wage bills rose from 31.6% of revenue to 33.3% in April compared to the previous year, and from 29.5% to 31.4% in London, according to RSM's analysis.
A slight dip in average room rates, from £138.29 to £137.54, put additional strain on margins.
While a surge in demand managed to boost occupancy year over year, it wasn't enough to offset these twin factors. Gross operating profit dropped from 31.8% to 30.1% in the UK and from 37% to 35% in London.
Chris Tate, head of hotels at RSM UK, acknowledged that hoteliers have been grappling hard to pass on the increasing costs to price-conscious consumers.
Although this might be a tough pill for hotels to swallow, it's great news for inflation – and the Bank of England's interest rate.
Thomas Pugh, economist at RSM UK, explained that although headline Consumer Price Index (CPI) inflation surged to 3.5% in April, it was mainly due to utility, tax rises, and the late Easter. He added that there was little evidence of firms passing on the rise in employment taxes, and this claim was backed up by the hotel data.
Uptick in Hotel Spending
The spike in consumer confidence is a silver lining for the hotel sector.
Three distinct measures of consumer confidence all inched up in May, with analysts suggesting that the "toughest times are behind us."
"There's a sense that consumers are becoming more comfortable with spending, which will serve as a strong tailwind to offset the headwinds," Pugh remarked.
He further pointed out that real incomes of UK households have grown over the past few years, which is the main pillar of consumer spending. Weekly earnings, excluding bonuses, hit an impressive 5.9% growth in April, according to the Office for National Statistics.
"People still want a break," Tate said. "The challenge now lies in sustaining this positive momentum, especially against the tumultuous economic and geopolitical backdrop."
Enrichment Insights
- The surge in UK hotel payroll costs in April 2025 was primarily due to changes in the national minimum wage and employer National Insurance Contributions (NICs).
- Although occupancy rates improved, the attempted increase in Revenue Per Available Room (RevPAR) couldn't effectively counterbalance the mounting costs, leading to a decline in gross operating profits.
- On top of these challenges, hotels might face additional hurdles such as a reduction in rates relief and uncertainties surrounding utility costs and economic factors like tariffs and global growth slowdown. However, the signs of improved consumer confidence offer a glimmer of hope for future growth.
- Navigating a complex environment of rising costs and capped revenue growth demands strategic management for hotels to maintain profitability amid such challenges.
In the challenging financial landscape, hoteliers are finding it tough to boost room prices to cover escalating staff costs and other expenses, due to price-conscious consumers and mounting costs like taxes. However, a recent uptick in consumer confidence might lead to a more relaxed approach towards spending, which could potentially help hotels offset their financial strains and sustain profitability.
