Full but failing: the quiet crisis in boutique hotels

Andy Murray’s Cromlix Hotel is beautiful. Award-winning, fully booked, and sitting on 34 acres of private grounds in the Scottish countryside. It was crowned AA Hotel of the Year Scotland 2024. It has a Michelin Key. Guests write glowing reviews. And yet, it's losing money. In the year to March 2024, Cromlix reported a loss of £369k. That followed an even steeper loss of £919k the year before. Two years ago, the business had £1.1m in cash. That’s now down to £242k. Net liabilities are up, too – from £1.4m to £1.8m. It’s a striking reminder that in the boutique hotel business, beauty, buzz and bookings don’t always equal profit. Costs are rising – staffing, energy, food and materials – and the pandemic might be years behind us now, but recovery has been slow. Even high-end properties like Cromlix are struggling to find the right balance between occupancy and profitability. A full house doesn’t always mean a full wallet. Many boutique hotels boast high occupancy rates, but that doesn’t always mean the cash register is ringing as loud as it should be. Filling every room sounds like success, but it can hide some deep-rooted financial issues. The problem lies in the price: if you’re not selling at the right rate, your guests might be filling rooms, but at a cost to your bottom line. Michael McCartan, VP of EMEA at IDeaS Revenue Solutions, notes that an overemphasis on high occupancy can be misleading. "High occupancy can actually mask underperformance, especially when it comes at the expense of optimal pricing," he explains. Boutique hotels, often smaller and with tighter margins, face a unique challenge. They don't have the same scale as larger properties, so every pricing decision carries greater weight. Sell too low, and the cost of each room doesn’t meet the expectations of profitability. Without proper demand forecasting or pricing flexibility, these hotels miss out on substantial revenue potential. What’s worse is the effect of seasonal demand. A hotel may be running at 95% occupancy during peak times, but if room rates are underpriced or discounted to fill beds, RevPAR takes a hit. "Profitability is driven by RevPAR and overall contribution margins, not just by how many rooms are sold," says McCartan. This becomes a balancing act: high occupancy is only a success if it's paired with the right price. And here’s the catch: pricing isn’t just about filling rooms quickly. A deeper strategy, based on data-driven insights, is what sets a boutique hotel apart. For instance, many boutique hotels fail to adjust rates during high-demand periods. "Filling rooms isn’t a win if those rooms are sold well below market value, particularly during peak demand periods when travellers are willing to pay more," McCartan warns. Without proper demand forecasting or pricing flexibility, these hotels miss out on substantial revenue potential. Hafiz Shariff, founder of Owl + Lark, echoes this sentiment. "A full house doesn’t automatically translate to prosperity," he says. “Boutique hoteliers can sometimes fall into financial traps due to poor forecasting or overly romanticised visions. I’ve seen proprietors lose sight of ROI, indulging in expensive items like bespoke furniture without considering replacement costs during renovations. It’s important not to let a beloved brand obscure practical cash flow considerations.” For boutique hotels, relying solely on room rates to generate revenue can be limiting. The key to building a sustainable business model is diversification, and many boutique hotel owners are starting to see the value in expanding their offerings. Hotels that host local art exhibitions, offer cooking classes, or work with artisans for bespoke in-room products can also enhance their reputations while boosting their bottom lines. Shariff points out that diversifying revenue sources can significantly impact profitability, citing an example from one of the properties he has collaborated with: “We worked with a Dorset property that boosted its profile, both locally and beyond, through culinary events and wine tastings, enhancing its brand while increasing profits." Such events can create a stronger connection to the local community while introducing an extra layer of appeal for guests. Hotels that host local art exhibitions, offer cooking classes, or work with artisans for bespoke in-room products can also enhance their reputations while boosting their bottom lines. The key, however, is ensuring that these initiatives are aligned with the hotel’s identity. The charm of a boutique hotel lies in its ability to offer something different, so these additional offerings should feel like an organic extension of the experience, not just a commercial add-on. As Andy Turner, partner at Mercer and Hole, notes: "Many boutique hotels are reinventing themselves. For example, one of my clients has successfully introduced a jazz night with a hotel stay." This type of packaged offering makes the hotel a destination, turning a simple room booking into a unique experience that appeals to a wide range of guests. Ultimately, diversifying revenue streams can buffer a boutique hotel from the volatility of the market. When one segment slows down, others can fill the gap. Running a boutique hotel isn’t just about hospitality anymore, it’s about risk management. And in today’s climate, those risks are multiplying. Nadia Milligan, hospitality partner at Keystone Law, lays it out plainly: "Legal challenges include data privacy and cybersecurity, employment, rising operating costs, and insurance." Smaller teams often mean lighter tech infrastructure, and that’s exactly what makes boutique hotels vulnerable. From cyberattacks targeting customer data to the impact of changing employment law, operators are exposed on multiple fronts. Brexit and the recent Budget changes haven’t helped. Staff shortages continue to bite, and new rules around holiday pay and zero-hour contracts have added complexity. As Milligan explains, "UK courts and legislation have clarified and, in some cases, tightened rules around rolled-up holiday pay and the treatment of workers on flexible contracts." There’s also the danger hidden in the small print. Lease structures and management contracts often put the hotel at a disadvantage unless rigorously negotiated. Then there’s the issue of cost. A 7% rise in minimum wage, increased National Insurance contributions, and shrinking business rate reliefs all hit the bottom line. Boutique hotels can’t rely on economies of scale to offset those hits. And when it comes to physical risk, climate change is making some properties harder – or impossible – to insure. "Insurers are raising premiums, increasing deductibles, and reducing coverage in high-risk areas," says Milligan. Some hotels, particularly those near coastal cliffs, are already becoming near uninsurable. There’s also the danger hidden in the small print. Lease structures and management contracts often put the hotel at a disadvantage unless rigorously negotiated. Take turnover leases, for instance. "Operators should seek to exclude as much as possible from the definition of ‘Revenue’," Milligan advises, including service charges, tips and discounted rates. Otherwise, a staff stay sold at 50% off could still be counted as 100% revenue when calculating rent owed to a landlord. The same goes for hotel management agreements. "Agreeing to pay a higher level of base fee and a lower incentive fee does not align the operator with the owner’s financial goals," Milligan says. For boutique owners, staying in control means paying close attention to contractual details. For some hotel owners, sustainability is a buzzword. For others, it’s a survival strategy. It’s no longer just about swapping plastic straws for paper ones. Milligan sees the shift playing out in hard numbers: "ESG has become inseparable from a hotel’s ability to obtain investment and/or financing." According to Milligan, lenders are already setting minimum Energy Performance Certificate (EPC) standards. Hotels will need a rating of C by 2028, B by 2030 – or risk getting cut off. For any property that needs major upgrades to meet those benchmarks, the time to act was yesterday. But this isn’t just about compliance. Done right, sustainability can boost margins and guest satisfaction. Unsurprisingly tech plays a key role here. Milligan adds, “AI advancements enable cost reductions and operational efficiencies – linking sustainability to growth and enhanced guest experiences.” Then there’s the guest side. Eco-aware travellers now want evidence of sustainability – right down to the receipt. She’s also seeing more hotels repurposing old buildings, a move that’s both cost-effective and carbon-conscious. Adaptive reuse reduces demand for high-emission materials like concrete and steel. It also often comes with planning advantages. Then there’s the guest side. Eco-aware travellers now want evidence of sustainability – right down to the receipt. According to Turner, eco-friendly guests are “increasingly requesting an ‘ESG receipt’ with details about their carbon footprint regarding their stay." Tim Ross, the commercial director at Advantage Utilities, echoes the idea from earlier that boutique hotels must embrace innovative ways to capture additional revenue – and incorporating sustainability into operations ties into this. He says: "Sustainability can elevate the guest experience and strengthen brand perception, especially among today’s environmentally conscious travellers." But measuring sustainability isn’t a marketing gimmick anymore. With the EU’s Corporate Sustainability Reporting Directive (CSRD) coming into play, large companies – including banks – must account for emissions tied to their financial activities. This means that hotels, as borrowers and investments, are under scrutiny. Plenty of operators sink money into design, thinking beauty alone sells beds. Meanwhile, growth looks good on paper… until the bills land and the rooms don’t fill. Manoj Bhardwaj, fractional CFO at The CFO Centre, has seen it too many times: "One of the main pitfalls that boutique hotel operators face is underestimating the capital required, as returns often take longer than expected." Scaling without a grip on working capital is like driving blindfolded. The costs – refurbs, staff, systems – all hit before the revenue does. Miss your occupancy targets, and suddenly you’re overleveraged with nowhere to turn. The branding trap is real, too. Plenty of operators sink money into design, thinking beauty alone sells beds. But without a clear link to pricing power or ROI, that investment starts looking like vanity. And as the team scales, service consistency gets tested. Cut too many corners and the brand erodes. Boutique means intimate: lose that feel, and you lose what makes you special. The lesson? Scale with purpose. Not just to grow – but to get better, tighter, and more profitable. For boutique hotels, survival doesn’t always mean cutting costs: sometimes, it means rethinking the product. More operators are learning to make cash flow a habit, not a hope. Dynamic pricing, rolling forecasts, cost tracking in real-time – it’s not glamorous, but it’s how you stay alive. And above all, boutique hotels that thrive keep one eye on the guest and the other on the spreadsheet. As Bhardwaj puts it: "Maintaining service standards without eroding margins becomes increasingly challenging with scale, whilst brand positioning must remain consistent to retain customer trust."