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Soaring labour costs are squeezing hotel profit margins in the UK, according to CoStar after its latest data revealed a 34% increase over the past five years.
During the same time, total revenues grew by around 26%, further underlining the challenges facing the hotel industry. Furthermore, according to CoStar, a share of revenue labour costs from the 2018-19 tax year has increased from 25.5% to 29.4% in 2024.
Despite stronger revenue generation, mostly ahead of inflationary pressures, payroll costs have outpaced total revenue improvements. The report stated that increases in the national living wage over the past five years have been one of the main contributing factors.
Since the 2018/19 tax year, national living wages have increased by approximately 46%, with the hourly rate rising from £7.83 per hour for those aged 25 and over to £11.44 in the 2024/25 tax year, with the age bracket also widening to those aged 21 and over.
In this tax year, employers are expected to witness another 6.7% increase in national living wages while also having to increase their national insurance contributions to 15% on earnings above the secondary threshold, which will be equivalent to £5,000 per year from April.
CoStar stated that amid stable revenue growth and an uncertain macroeconomic outlook, profitability is set to come “under pressure”.
According to data from the Office of National Statistics gathered via their February Business Insights and Conditions survey, about 60% of businesses in the accommodation and food services activities expect their staffing costs to rise in the next three months.
Most of them cited the need to increase prices to offset costs, while about a quarter will reduce the number of employees. However, the picture differs slightly between hotels in London and those in the Regional UK markets.
CoStar noted that labour costs account for a lower share of revenues in London as room revenues account for a greater proportion of total revenues, requiring less headcount, with higher ADRs also contributing to greater profitability.
Conversely, hotels in the regions tend to have greater food and beverage requirements, especially those with ample conferencing facilities, requiring additional staff. As a result, food and beverage profit margins tend to be lower depending on the operation.
Additionally, CoStar’s data suggested that payroll expenses are expected to be one of the main headwinds for UK hotel owners in the year ahead from a cost perspective.
Labour-intensive properties at the upper end of the class spectrum are likely to experience a “greater impact” from the employer’s national insurance contributions increase, while those at the bottom end will also feel a “bigger effect” from national living wage rises.
CoStar said: “Increases to those in the lowest wage brackets pose challenges to operators, as middle management employees may also require a bigger salary increase to ensure that there is a big enough gap between a waiter’s salary and that of a restaurant supervisor or manager, for example.
“Hoteliers must, therefore, continue assessing operations carefully, driving efficiencies where possible, albeit in a way that does not sacrifice service levels and ensures that talent can be retained.”
