Profit conversion hit at London hotels as costs creep up
Whilst hotels in London were once again able to achieve a year-on-year improvement across all headline performance measures this month, rising cost levels negatively impacted the conversion from total revenue to profit, according to the latest HotStats survey of approximately 560 full-service hotels across the UK by TRI Hospitality Consulting.
For a second consecutive month, growth achieved in Revenue per Available Room (RevPAR), was as a result of an increase in both room occupancy (+1.1 percentage points) to a lofty 75.4% in what is typically considered a ‘low period’ of demand, and a 2.0% increase in achieved average room rate to £124.77, once again illustrating the ability of London hoteliers to effectively manage volume and price.
However, the 2.5% year-on-year growth in Total Revenue per Available Room (TrevPAR) achieved by London hoteliers in February was negatively impacted by an increase in costs across a number of departments.
In the rooms department, direct expenses increased by 5.0% to £13.98 per room sold, which was primarily as a result of a 13.8% year-on-year increase in costs associated with third party travel agents.
In the food and beverage department, beverage costs suffered a year-on-year increase of 0.7 percentage points to 21% of beverage revenue. And energy costs at London hotels went up by a substantial 0.4 percentage points to 3.4% of total revenue.
As a result, the growth in TrevPAR of 2.5%, or £3.16 per available room, at hotels in the capital during February dropped to a profit per room increase of 1.7% or just £0.91. That said, at £54.30, profit per room at London hotels in February was more than triple the level achieved in the Provinces.
“It is clear from their recent performance levels that there is now a complete disconnect between the revenue performance of hotels in London and the rest of the UK. However, in the same way that London hoteliers have successfully managed revenue levels throughout the economic downturn, it is now essential that they manage rising costs, as in the current climate this may be the biggest threat to continued profitability growth,” said Jonathan Langston, managing director, TRI Hospitality Consulting.
Provincial hoteliers suffer second consecutive month of huge profit decline
The poor start to 2012 continued for hotels in the Provinces with a second consecutive month of double-digit profit decline, according to the latest HotStats survey of approximately 560 full-service hotels across the UK. In stark contrast to the performance of hotels in London, hotels in the Provinces suffered a decline in performance across all measures. Whilst the drop in RevPAR was slight, at just 0.6% to £43.98, the decline in TrevPAR (-2.3%) was more pronounced, led by a 3.8% decline in food and beverage revenue and a 9.5% drop in meeting room hire revenue per available room.
However, the top line revenue measures understate the negative performance at Provincial hotels in February as rising costs continue to impact profit levels. This month, profit conversion was impacted by an 11% increase on a per room sold basis in the cost associated with travel agents’ commission and a 13.9% increase in energy per room sold.
As a result of the movement in revenue and costs, profit per room in the Provinces declined by 10.2% to £17.88, this is equivalent to a profit conversion of just 21.8 per cent of total revenue for the month compared to 23.7 per cent in February 2011. “Only two months into 2012 and Provincial hoteliers are 11.4 per cent below the performance achieved during the same period in 2011.
Despite the moderate decline in rooms revenue, somewhat worryingly, costs are escalating, which is negatively impacting the bottom line. Whilst for the majority of Provincial hoteliers the selling price of the product (ie bedrooms, lunch, dinner, conferences and functions) has remained relatively static in recent years, high inflation has added significant cost to a high proportion of essential departmental purchases, particularly food and energy. In addition, payroll levels, primarily at a minimum wage level, have been subject to un-avoidable year-on-year increases.
Whilst the recent ‘20.12%’ governmental campaign may go some way to boost demand for accommodation through an increase in ‘staycations’, many hoteliers will have been disappointed by the Chancellor’s refusal to cut VAT on hotel accommodation in the recent budget,” added Langston.
Pockets of positive performance were hard to find in February, but an increase in profit per room was achieved at hotels in Norwich, with a 13% growth in RevPAR. The growth was primarily led by a 9.8 percentage point increase in room occupancy to 69.5%, which contributed to a growth in GOPPAR of 0.6% to £8.19 per available room.
Whilst the corporate market in Norwich has remained resilient, illustrated by a 3.7% increase in achieved average room rate, the city’s hoteliers have also enjoyed the increase in demand levels attributed to ‘The Canaries’ return to the top flight of football with supporters visiting from Bolton, Leicester and Manchester United during February.
Guidance notes
The UK Chain Hotels sample is composed of 557 hotels with an average hotel size of 182 bedrooms.
The hotels profiled in this report are drawn from the HotStats database and reflect the portfolios and distribution of the hotel chains that we survey and which operate primarily in the three and four-star sectors.
The data samples are reviewed and rebased each year to reflect the changes in the HotStats survey base. As a result, performance ratios published last year may differ from those contained within this report.