Flexibility is key to success

21 September 2006
Flexibility is key to success

There are still hazards to be negotiated, but the way ahead for the hotel sector seems to show promise for improved profitability. Daniel Thomas reports

The years since the turn of the millennium have not been kind to the hotel sector, with terrorist attacks in 2001 and 2005, fears over bird flu and foot-and-mouth, and rising energy costs all conspiring to hit hoteliers in the pocket.

But new research suggests that the UK hotel sector could now be seeing the light at the end of the tunnel, with this year predicted to be the best since 2000 and steady growth expected for the next three years.

The Hospitality Directions Europe - UK Hotel forecast report, from consultancy PricewaterhouseCoopers (PWC), predicts that average revenue per available room (revpar) will hit £56.18 this year, £58.69 in 2007 and should reach £61.53 by 2008.

Driving demand

Better-than-expected economic growth, a sustained recovery in corporate and leisure travel demand and few oversupply concerns have all contributed to the forecast.

Liz Hall, head of research for hospitality and leisure at PWC and author of the report, said London hotels had been driving the demand.

"The current boom is very much a case of London having the year it should have had in 2005," she said. "Occupancies are at their highest for almost 10 years and robust room rate growth has pushed revpar to 12.9% in 2006."

And while the picture outside London has been "mixed", there have been some strong performances in other cities, according to Hall.

"This reflects the regeneration of some of our historic destination cities and the buoyant short-break market, as well as new concepts opening and strong midmarket performances," she said. "We expect good revpar growth in Birmingham and Edinburgh this year, and further solid growth over the next two years."

Despite this encouraging growth, Hall warned that risks for travel demand remain significant in an industry that is both cyclical and vulnerable to external events.

"Last year we saw a very resilient hotel and travel sector bounce back quickly after the July incidents, and we anticipate few long-lasting impacts from the recent events at UK airports," she said.

"But a harder than expected economic landing, rising oil and energy costs, terrorism, bird flu fears, and a discretionary income squeeze, as well as the spectre of a bed tax, could all impact travel demand and shift performance off-course."

Robert Milburn, UK hospitality and leisure sector leader at PWC, said hotels that moved with the times would perform best in the future. "Location may remain king," he said, "but hotels that can differentiate themselves through brand, product and guest experience will benefit most from anticipated rate growth levels. For others, the going may prove tougher."

Example set

For lessons on differentiation, hotels across the sector would be wise to look at the example set by boutique or lifestyle hotels, which have led the way in innovation - particularly the smaller operators, according to Hall. "While many larger hotel chains continue to try to emulate lifestyle hotels' distinctive offer," she said, "we found the real action in terms of innovation and value for money is still being driven by the smaller operators, particularly in the up-and-coming branded budget lifestyle segment."

Evidence of the success of the boutique sector is the increasing investment from venture capitalists and private equity firms, Hall said. In the past, lack of scale has tended to make returns insufficient to attract investment groups.

"It's always going to remain a niche sector," she said, "but we found some evidence that new, quality products with potential to be rolled out as small branded groups are attracting growing interest from venture capitalists and private investment groups. Investors are seeking replicable concepts that could build critical mass in emerging markets."

More demanding

Moving forward, the major challenge for hoteliers will be to meet the requirements of consumers of the iPod, Blackberry and videophone generation, who have become increasingly demanding.

Sharon Stotts, director of performance improvement consulting at PWC, said: "What we're seeing is a revolution where consumers will soon overtake businesses in demanding what they want, when they want it, in a way they want it. The challenge for hoteliers is to develop business models that are flexible enough to deal with the technologically driven consumer while focusing on new revenue streams."

And while boutique hotels are prospering at the moment, it will soon be another format that's proving successful - it's just a case of getting there first.

"Consumers are fickle and fashions change ever more quickly," Stott said. "For hoteliers with a highly perishable product, this presents real challenges in keeping up with and staying ahead of the game."

UK hotel sector predictions

  • 12.9% predicted revpar growth for London hotels, 2006.
  • £61.53 predicted revpar for UK hotels, 2008.
  • 7% predicted revpar growth in boutique sector, 2006.
  • £126.17 predicted revpar for boutique sector, 2008.

Source: PricewaterhouseCoopers

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