1,800 UK hotel companies are at risk of going bust

The advantages of the fall in the value of sterling post-Brexit may not be able to overcome the other strong headwinds the sector faces, resulting in 1,800 UK hotel companies having at least a 30% chance of going insolvent within the next three years.

While a weaker pound may encourage more tourists to visit the UK, and tempt more Britons to take ‘staycations’, visitors are likely to focus on key tourist hotspots, leaving hotels in other less popular locations struggling.

At the same time, food and beverage costs are set to increase as unfavourable exchange rates push up import prices, adding to already-rising overheads tightening profit margins.

The introduction of the living wage could lead to further financial strain for small hotels outside cities. Many hotel workers are over the age of 25, and so the living wage affects almost half of the hospitality workforce*.

In addition, internet comparison websites have helped to increase price transparency in the sector and often charge hotels a significant commission to be advertised on the site. This additional cost and pressure to price competitively can put further financial strain on smaller hotels, which often operate on tight profit margins.

Competitors, Airbnb and similar apps have increased this strain, providing lower price options in a wide range of locations. Unlike hotels, Airbnb users do not need to charge VAT, and so can keep prices low.

The popularity of budget hotel chains such as Premier Inn may have also had a negative effect on smaller hotel chains. Tourists will often choose hotel chains due to low prices, and the familiarity and reliability of the facilities.

Uncertainty and a lack of confidence in the economy since the referendum vote has also placed some financial stress on hotel companies. A casualty of this uncertainty is the business travel sector, which has slowed down due to corporate budgets being squeezed. This has resulted in a substantial chunk of hotel custom being cut out.

Jeremy Willmont, Head of Restructuring & Insolvency, says: “Greater costs across the board as a result of the Brexit vote and competition from Airbnb are putting some hotels at risk of insolvency.

“The drop in the pound, and the increase in staycations since the Brexit vote has the potential to be a boon for the hotel industry, with more foreign tourists choosing to visit the UK. However, the benefits have yet to reach hotel companies right across the country.

“Much of the hotel business in the UK comes from overseas tourists and those travelling for leisure. In order to combat any loss from the business sector, hotels should look to attract more custom from tourism, particularly those higher spending foreign tourists, such as Americans and Europeans.”

Joanne Allen, Head of Hotels & Leisure, says: “Staff shortages have the potential to get worse if immigration tightens after the implementation of Article 50.

“In addition to this, small hotels have tighter profit margins, and are often more reliant on seasonal trade. This can make it difficult to budget for the whole year, whilst also putting cash aside for renovations and updates.”

*Source: Resolution Foundation

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