Performance improvement creates stability for hotels in an uncertain environment

Travel, Hospitality, and Leisure (THL) businesses globally have responded with resilience and adaptability to recent macroeconomic challenges. However, the current environment continues to test the industry, with significant pressure on margins. Targeted performance improvement programmes can limit the strain on the bottom-line by identifying cost-effective and ‘quick-win’ initiatives. This will allow hospitality businesses to add value from within their organisations to achieve stronger returns, helping build a financial safety net and navigate the uncertainties ahead.

At the same time, there is an increase in consumers’ appetite for travel with demand catching up or exceeding pre-COVID levels. As a result, Europe’s largest publicly listed hotel firms achieved 2022 performance levels close to 2019 trading results.¹ Despite the strong recovery of the travel sector over the last two summers and signs of corporate business returning, THL industries now have another hurdle to overcome: eroding margins. The current macroeconomic environment is contributing to this deterioration with:

• high inflation in 2022/23 (41-year high of 11.1% in the UK in Q3 2022, 10.1% in March 2023²) triggering a cost-of-living crisis, driven by supply chain issues and energy price uncertainty
• the highest interest rates in the UK since 2008 (4.25% as of March 2023³)
• surging utility and food costs due to supply shortages and geopolitical tensions / conflicts
• general uncertainty around workforce and demand for increased wages ^{4, 5}

These dynamics have increased operational and debt financing cost pressures as consumer likelihood and ability to spend weakens. The THL industry, is also in the middle of a ‘talent war’, as recruitment and retention of skilled staff remains a challenge.

Deloitte’s latest UK CFO Survey highlights that CFOs share similar concerns and priorities in the current climate, with:

1. Geopolitical tensions remaining the top risks faced by CFOs, followed closely by staff shortages and monetary tightening and;
2. CFOs continuing to adopt defensive strategies with a focus on improving cash flow as well as cost reductions.⁶

Figure 1: What are CFOs’ expectations for inflation in one years’ time and two years’ time?

Source: Deloitte

Inflationary pressures coupled with the conflict in Ukraine have heightened CFOs’ perception of economic ambiguity. Apart from reducing costs and increasing cash flow as a response to external financial uncertainty, CFOs are also prioritising asset and capital restructuring initiatives with a focus on growing revenues to hedge against the unclear times ahead. The THL industry shares similar sentiments as consumer demand is yet to prove that it will continue to drive similar Average Daily Rates (ADR) and occupancy rates in 2023 as seen in H2 2022, although, global ADR rates remained resilient through the Easter bank holiday weekend (+23.1% for the same week last year⁷)

Figure 2: What are CFOs’ top priorities over the next 12 months?

Source: Deloitte

CFOs’ top priorities can be translated into performance improvement initiatives to help prevent declining margins, which can drive healthy, sustainable cashflows and EBITDA growth (see Figure 2). Figure 3 shows an illustration of a hotel-level value bridge, with examples of performance and bottom-line improvement opportunities to achieve greater efficiency, cost optimisation and superior top-line revenue. Performance improvement initiatives offer the potential to uplift EBITDA margins by c. 5-20%, depending on the type of business, service level and location. The specific challenges and market conditions that operators face will dictate whether cost or revenue levers (or both) should be adjusted.

Figure 3: Illustrative hotel-level value bridge

Source: Deloitte

In the current climate, operators will want to find quick wins and low-capital projects to achieve measurable and notable performance improvements, with resulting synergies that can be re-invested in the business for longer-term initiatives. The following levers can typically be used to drive better results:

Source : Deloitte

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References

¹Performance of Accor, IHG and Whitbread Reflect State of Europe’s Hotel Industry, CoStar, December 2022

²UK inflation rate surprises against with March figure holding above 10%, CNBC, April 2023

³UK interest rates: What the rise means for you, BBC News, March 2023

⁴UK hospitality sector struggles as inflation soars, The Guardian, July 2022

⁵Hospitality industry staffing crisis continues, ITVNews, June 2022

⁶Deloitte CFO Survey: 2023 Q1, Deloitte, April 2023

⁷Weekly Global Hotel Performance Trends from STR: 2 - 8 April 2023, Hotel News Resource, April 2023

⁸The hotel labour crisis and how technology can help, Hospitality Investor, July 2022