Whitepaper: How has the Leisure and Hospitality Sector changed in recent years?
There has been some fairly seismic change in the economic and business worlds in recent times. Political and economic factors have created an uncertain environment and businesses within the leisure and hospitality sector are as much affected as any other. Recent years have seen both opportunities and obstacles for the industry, with the actual impact of events such as Brexit still up for discussion. In this whitepaper we’ll take a look at how the leisure and hospitality sector has changed in recent years, what the outlook is for the future and what the most significant influencing factors are.
A focus on the hotels sector
Where are we now?
In the past 12 months the UK hotels sector has experienced positive growth, both in London and in the regions. RevPAR (revenue per available room) growth reached double figures in the regions and hit 9% in London. In London there was a 2.6% increase in occupancy, as well as Average Daily Rate (ADR) gains of 6.3%. Occupancy rates in the regions have been steadily up in the 70% band since 2011 and the forecasts for this year are similarly positive with professional services network PWC forecasting that this figure would be 76%. These numbers are not excessive with respect to other decades. However, there is certainly enough there for positivity within the sector, in particular with respect to the way it has responded to destabilising world events that have hit other industries much harder in the last 24 months.
How did we get here?
An increase in the budget sector. There’s no doubt that more budget hotel options have provided a boost to the UK hotels sector – and will continue to do so for some time. The term “Budget Hotel” now has a much more diverse range of sub-categories within it and the increase in the variety of budget hotels has enabled this type of room to attract more visitors.
The Brexit effect. Brexit has so far proven to be something of a double edged sword for the hotels industry. It’s important to remember that the UK is currently within the EU and conditions could shift dramatically once Brexit has actually taken place. For now, the impact of the results of the EU referendum has been to cause the British Pound to take a serious dip and also to potentially increase the cost of anything imported.
And speaking of the Sterling dip… Like every other industry in the UK, the hotels sector was impacted by the sharp drop in British currency that occurred immediately after the EU referendum results were announced. This instantly made UK hotels cheaper than they had been before the vote took place. Unlike some other industries though this has presented an opportunity for British businesses. As the Pound fell to its lowest value against the dollar for three decades, Britain was suddenly a much more popular location for tourists and a huge surge in interest in the sector occurred, particularly from North America.
Economic recovery. It might be shaky, but economic recovery indicated by growth of the global economy has been responsible for positive change in the UK hotel sector. Recovery has been especially marked in Continental Europe, which has been responsible for an increase in the number of tourists and visitors to British shores from the EU, particularly given that the Euro is now worth more against the Pound.
Changing tastes in holidays. There is no doubt that Brits still love to go overseas when it comes to holidays. However, the last couple of years have also seen a trend towards the “staycation.” This has particularly benefitted hotels in regional locations where there is a wide range of opportunities for entertainment and activities. However, cities such as London have seen an increase in staycations too.
A sector that has remained vibrant. Despite a global economic slowdown and the political uncertainty that has been created by Brexit, the hotels sector in the UK has remained vibrant and continued to grow. Proof of this can be found in the number of new openings – there were 8,500 new hotel rooms opened in London in 2017, for example. Growth in the regions has not matched this level but has remained constant, avoiding a fall into the negative.
Investment in UK profile and events. If there is one thing that impacts on hotel visitor numbers it’s the proximity of an event or a cultural celebration. In the past few years the UK has been in the spotlight for many reasons and some of these have helped to boost visitor numbers. It doesn’t even have to be an international event to make a difference. For example, hotels in Hull experienced a 13% occupancy lift in the first quarter of 2017 – which was the same time that the city began it’s year as the UK City of Culture.
What factors could influence the next few years?
If the above have combined to create the environment in which the UK hotels industry has thrived in recent times then what are the factors that will shape what it looks like in the years to come?
The need for better cyber security
There has been a considerable uptick in business cyber attacks that aren’t just focused on large organisations with access to huge pools of data. Cyber attacks are now one of the biggest risks to any UK business, including those in the hotels industry. Worryingly, evidence suggests that two out of three of the bosses at some of the UK’s biggest businesses have not been trained in how to handle or prevent a cyber attack. And if that’s the case for the big businesses, no doubt it reflects the levels of organistion in smaller enterprises too. Without more focused cyber protection, businesses in the hotels industry could suffer from the resulting reputational damage, and the financial costs of an attack are a serious concern.
On a more positive note, a further increase in the demand for UK hotels could come from the ongoing schedule of events on British shores, from the sporting to the cultural. This, of course, includes the wedding of Prince Harry and Meghan Markle, which is predicted to create a huge spike in visitor numbers.
Even more new hotels
The volume of projects currently under way in the UK is a positive sign and could help to ensure that the outlook for the UK hotels industry remains sunny. For example, there are currently 13 new 4 star properties with almost 2,000 rooms scheduled to open in the London luxury market and multiple projects in cities, such as Manchester, Liverpool, Belfast, Bath and Bristol. In addition, Heathrow airport will also be the site of new hotel openings in the near future, including a 433 room Holiday Inn Heathrow.
Changes to the way that we travel and stay
Staycations have been one factor in helping to shore up the UK hotels industry but it’s important to remember that overseas holidays still hold a great deal of appeal for Brits. In fact, in 2016, Brits took 45+ million foreign holidays and there’s no escaping the fact that this does present a threat to the UK hotels industry. There has also been a drop in the budgets made available for corporate travel with Brexit highlighted as one of the key reasons for this. In addition we’ve seen a notable drop in visitors from specific markets, including the Middle East.
The ripple effect of the EU referendum continues – and will do so on an ongoing basis until the mechanics for Britain’s departure from the EU have actually been put into place. It’s expected that the Pound will continue to drop against other currencies and that this will continue to fuel interest in the UK has a holiday destination. However, it could also push up labour costs as cheaper EU workers depart and importing anything from outside the UK becomes more expensive.
The broader leisure and hospitality industry
Where are we now?
The leisure and hospitality industry is the 4th largest employer in the UK and so has a significant role to play in the UK economy. In total, the industry currently represents around 10% of UK GDP. The creation of 300,000 new jobs in the past five years alone is a strong indication that the sector has been going through a period of resilience, despite the wild economic winds that have been blowing all around. In fact, industry experts tell us that spending on leisure services grew by 7.8% in 2016 and in revenue terms the sector is worth £117 billion.
What enabled this positive growth?
According to the most recent Family Expenditure Survey, UK consumers remain committed to spending out on leisure and hospitality. In fact, the average UK family commits 22% of its weekly budget to leisure spending. This may not seem like a large figure but is almost double what British homes spend on housing each week. The consistent levels of consumer spending have provided a foundation for the leisure and hospitality industry at a time when other factors could have pushed it into a decline. But what else has helped the sector to continue to grow?
The increase in visitors to UK shores has had a positive impact here too
As discussed in the specific context of the UK hotels sector, the drop in the value of the Pound has made the UK a much more attractive destination for overseas visitors, in particular those travelling from North America. The strength of inbound tourism has also provided a boost to the broader UK leisure and hospitality sector with spikes in the figures that represent spending by overseas visitors coming into the UK. A prime example is July 2016, which was the biggest ever month for inbound tourism according to VisitBritain. In that month spending peaked at roughly £2.5 billion.
How could Brexit slow down progress?
While Brexit is responsible for the currency fluctuations that have seen a rise in visitor numbers, it also has the potential to impact the leisure and hospitality negatively sector in two key ways:
• EU migrant workers. The entertainment and hotels elements of the leisure and hospitality industry could be particularly impacted by the departure of EU migrant workers.
• The cost of imported items. For pubs, bars, restaurants and clubs, importing items such as food or alcohol could become a lot more expensive as a result of Brexit, which could be very problematic for some.
What is the general outlook for the leisure and hospitality industry?
Overall, the outlook is largely positive. The sector as a whole is forecast to grow to £257 billion by 2025, which is a particularly positive figure in the light of economic issues and political uncertainty. Spending on leisure services is forecast to continue expanding by 4% every year to 2021 and opportunities for prime leisure yields are predicted to remain stable. An increase in confidence in the sector, as well as the ongoing foundation of consumer support provide plenty to be positive about for those who are working within hospitality and leisure.
What factors will influence the development of the sector in the years to come?
The opportunities presented by a weaker Pound. It’s not just the hotels industry that benefits from a rise in tourist traffic as a result of a drop in the value of the Pound. Although some small monthly drops in spending in the industry by overseas visitors have been reported, on the whole the levels of spending for the broader leisure and hospitality industry are forecast to continue to rise on an annual basis. The impact of this is simple to measure in terms of confidence within the sector itself, especially when compared to the rest of the UK economy. Across almost all UK industries, in the aftermath of the drop in Sterling, confidence plummeted. However, this was not the case for the leisure and hospitality industry. Instead, as the Pound began to fall, those within the sector recognised the potential opportunities ahead and confidence jumped from 16% to 28%.
Trends in business and corporate travel. The broader leisure and hospitality industry is as impacted by the different types of travel trends as the hotel industry is. The drop in corporate travel, for example, could have a big impact on overall figures because so many businesses are now much more cautious about how budgets are allocated and spent. However, it’s not all bad news. For example, the number of meetings and conferences held in the UK rose 8% in 2016 at a time when corporate travel was being reduced. So, it may be that priorities are shifting, as opposed to budgets being entirely cut.
Trends in personal and consumer travel. As mentioned, staycations have a big impact on the hotels industry and this affects the wider leisure and hospitality industry too. The more people stay in the UK for their annual holidays the more likely they are to spend in locations such as London or the regions. This can provide a considerable boost to leisure and tourism in local areas. And the numbers can be fairly substantial too – in the first quarter of 2016, 7.3 million people decided to stay in the UK for their annual break. As wage growth remains stagnant and the cost of living continues to rise, the staycation may become a choice driven by necessity for many Brits who are determined to have a holiday but can’t afford to go overseas.
Investment issues. One potential problem for the leisure and hospitality industry is a lack of investment. This currently has a double edge with both a lack of investable assets available, as well as a lack of investors who are willing to put their cash into the sector. There was a significant slowdown in investor interest after the EU referendum across the leisure and hospitality sector. This was probably the most noticeable in the hotels industry where – according to PWC – there was a 70% drop in hotel investments in the period to June 2016, as compared to the year before. Although there remains some investor interest, a serious shortage of potentially investable assets is a big problem.
Free movement of tourists. The lack of free movement of EU migrant workers that could result from Brexit has already been addressed. However, this also has the potential to impact on tourist free movement. No one yet knows how easy it will be for people from the EU to travel to the UK, whether to see London’s sights or to attend UK sporting attractions. Most experts have estimated that there will be an inclination on the British side to make this as easy as possible but it’s just too difficult to predict what the end outcome will be. 67% of UK visitors currently come from the EU so any drop in numbers could have a big impact.
The leisure and hospitality industry has changed significantly in recent years – and has felt the effect of the economic and political change happening all around. However, while there is still a great deal of uncertainty, the outlook for the bulk of the industry remains largely positive.
RG Group understands how important it is for construction businesses and developers to be market aware and to have a good grasp on the impact of economic and political factors on the sector. If you’d like to find out more about how we work please get in touch.