Minimum wage rise and wet weather hits UK hotel industry

Hotel workers were boosted by a rise in the minimum wage earlier this year, but now their employers are feeling the pinch.

Cost pressures including the minimum wage increase have hit the profits of UK hotels, despite a surge in the price of rooms since the pandemic, according to research by consultancy RSM.

Labour costs per available room rose to £16.62 in April, up from £15.32 in March. But operating profits as a percentage of overall turnover remained flat, pointing to a direct impact of the rise in minimum wage, RSM said.

In April, workers’ groups welcomed a 9.8% rise in the national living wage (NLW) to £11.44, bringing lower paid workers relief after steep increases in the cost of living over the last two years.

The rise also brought the NLW to equivalent to two-thirds of median earnings, lifting it above the Organisation for Economic Co-operation and Development’s threshold for what qualifies as low pay.

But for hoteliers – already squeezed by the impact of Brexit, Covid lockdowns and the cost-of-living crisis – it has piled yet more pressure onto an already struggling business model.

Operators have responded by hiking the cost of hotel rooms since the pandemic, with average daily rates of occupied rooms measuring £139.51 in April, up from £110.24 before lockdowns hit in 2020.

Occupancy was flat year-on-year in the UK at 74.5% in April, compared to pre-pandemic levels of 77.6%.

But it has not filtered through to hotel firms’ bottom lines. Operating profits of UK hotels remained flat month-on-month at 31.4% of revenue, and are lagging behind pre-pandemic levels, RSM said.

Chris Tate, head of hotels and accommodation at RSM UK, said: “While UK hotels have been able to charge higher room rates when compared to pre-pandemic levels, they’re seeing little of this making its way through to the bottom line.

“Ongoing cost pressures, the latest being the increase in national minimum wage, are chipping away at their operating profits.”

Hotels have been further hit by an unusually rainy Spring, putting even more pressure than ever on their peak summer trading periods.

April brought 111mm of rain across the UK, compared to the average of 72mm, making it the sixth wettest April of the last 189 years, according to the Met Office.

Thomas Pugh, economist at RSM UK, added: “April was a tough month for consumer businesses with miserable weather keeping them out of shops and putting them off house viewings. It seems a similar picture for the hotel sector as well.

“However, there are good reasons to expect spending on hospitality services to grow from here.

“First, households’ real disposable incomes are set to rise rapidly from April as inflation drops back to near 2% and tax cuts kick in, which will boost overall consumer spending.

“What’s more, consumer confidence should continue to rise, ensuring that households spend most of their new income.”