Features

UK hospitality insolvencies the worst in seven years

Statistics for hotels and hospitality distress

According to the official statistics from the Insolvency Service on Industry Insolvencies to September 2019 (table A1c, lines 243-248) the industry as a whole in the UK is taking a gradual turn for the worse. 

144 hotel operators became insolvent in the 12 months to September 2019, the worst figure since 2014, a rise of 60% on the year before.  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. 

Revenue from overseas visitors not the cause

Oddly, the fall in profitability and corresponding increase in insolvency is not caused by any fall in overseas visitors. The recent ONS Overseas travel and tourism provisional results to September 2019  show 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

The ever-reliable Hotstats gives a clearer picture of the cause of hotels’ falling.  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 the growth in total revenue.

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.

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

Having identified cost as the main culprit, non-rooms revenue has also been hit, possibly as a result of a fall in confidence by businesses and consumers which has made them more cautious about discretionary spending.

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

Minimum and Living Wage increases to ramp up costs from April 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 increasing the National Minimum Wage from 1 April 2020, which will see lower-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%. Full-time workers aged 25 or over on the National Living Wage will receive a pay rise of approximately £930.

Workers below 25 years old will also receive an increase to the national minimum wage of between 4.6%and 6.5% 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. All other European countries (except for Denmark and Slovakia) charge a lower rate of VAT for hospitality, the reason being that it drives tourism revenue and improves their invisible export position. The UK still applies a flat rate of 20%. 

According to the UK Hospitality Cut Tourism VAT Campaign:

Independent research carried out by a Treasury adviser using the Government’s own economic model has concluded that lowering the rate of tourism VAT to 5% is “one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the Exchequer that we have seen with the CGE model”. Additional research by Deloitte/Tourism Respect found that such a reduction would contribute an extra £4.6 billion to HM Treasury over ten years and create 121,000 jobs.”

Key statistics are reported in the CTV summary report from 2018.


Ed John, Partner and head of hotels at Howard Kenenedy

Back to top button