LONDON — Energy cost increases are causing pain in the United Kingdom hotel industry, and with domestic residents who face less discretionary income because of inflation-linked, higher gas and electricity prices.
On Aug. 26, the Office of Gas & Electricity Markets, known as OFGEM, a statutory body set up by Parliament to regulate energy prices, best practices and instigate greener industry methodology, increased the energy price cap to 3,549 pounds sterling ($4,160) per year, an increase of more than 80%, starting in October.
The government predicts this increase will affect 22 million customers.
The cap also was raised in April 2022 from 1,277 pounds sterling ($1,493) per year to 1,971 pounds sterling ($2,304) per year, an increase of more than 54%. From April to October 2022, the overall price increase has been almost 180%, and there are more increases due in 2023.
OFGEM blames inflation, the Russian invasion of Ukraine and the subsequent geopolitical changes to European energy provision for the increase.
Hotels will be hit by increased costs on their businesses and on reduced discretionary spending from guests.
“With inflation at a 40-year high, throughout my career I have never experienced the cost increases we are facing today. … As the U.K. workforce experiences the pain of inflation and soaring bills, unnecessary expenses will be cut to compensate on covering essentials,” said Lionel Benjamin, co-founder of AGO Hotels, which operates 12 hotels in the United Kingdom.
Kate Nicholls, CEO of the U.K.’s principal hotel and hospitality membership organization, UKHospitality, said these steep cost increases will result in consumers cutting back on spending in the hospitality industry “or, worse still, stopping going out altogether."
“Higher energy prices also affect our sector’s employees, who now face even higher energy bills,” she said.
Tom Magnuson, CEO and co-founder of Magnuson Hotels, which operates more than 1,000 hotels in the U.K., U.S. and Canada, said this is just the latest in a string of hurdles for U.K. hoteliers.
“Sadly, energy industries are the latest mega-bosses to extract money from already suffering hotel owners,” Magnuson said.
According to the BBC, energy companies have made record profits, which has caused anger among those paying energy bills, including some politicians.
For example, on Aug. 1, BP announced a $9.3 billion profit in its second-quarter 2022 earnings report.
“While hotels were spending an average of 6% of all operating costs on energy, that has doubled in the U.S. and parts of the U.K.,” Magnuson said.
Always Greener
Energy cost increases will affect different segments differently.
Benjamin said he expects little change in both the luxury and budget ends of the hotel industry.
“The high-end hotels will retain their guests, who will still be likely to afford to travel. Budget economy hotels should see increased demand as a shortage of cash flow will entice some to reflect on booking more affordable accommodations,” he said.
He said success will come down to a hotel's ability to provide "service, experience and value."
“Regardless of whether the hotel is an independent or part of a brand, today’s guest is far more aware of what they can experience for their money,” he said.
While high costs will likely lead hotels to reconsider some costly amenities and lower profit areas such as food and beverage, Benjamin believes there are some reasons the U.K. could remain a favored travel destination.
“A weak pound sterling could drive tourism, and competitively priced manufacturing and exports may attract more foreign business travel to the U.K. If so, this would bring necessary support to our U.K. hospitality and leisure industry,” he added.
There are opportunities, he added.
“Hotel owners can survive the rising costs of energy, online travel agencies and standardization demands from brand franchisors by making new choices. How can I be more efficient with energy, how can I look to local non-seasonal business sectors to drive direct traffic, and what alternatives do I have to costly rising franchisor demands?” Magnuson said.
Benjamin said energy cost pressures might lead to innovative change in sustainability and efficiency, as guests become more environmentally conscious. This could include greater use of ground water pumps and combined heat and power units.
He added he expects “zero support from government, so we must rely on our own resources and initiative.”
The U.K. government is in the process of selecting a new leader following the resignation of Boris Johnson, with the two candidates, Liz Truss and Rishi Sunak, saying no policy to offset energy costs will be made until one of them has been chosen, likely to be on Sept. 5.
Benjamin said hotel brand executives should support owners with whom they have long-term agreements.
“Brands should reflect on the value they bring in these dire times. Is the priority insisting on brand standard implementation? Perhaps brands can reduce fees to facilitate cash flow and use the brand balance sheet for the longer-term benefit of the industry?” he said.
Real Pain
Some businesses will not survive, sources said.
“Without an urgent and comprehensive government support package that helps both households and businesses, many hospitality venues are contemplating reduced trading, resulting in lower wages or lost jobs for staff who need their jobs more than ever if they’re to heat their homes,” UKHospitalty’s Nicholls said.
“We are living through a major storm, and for those who do manage to survive — undoubtedly some won't, once it subsides and a new norm has settled — we will be wiser from the experience,” said AGO’s Benjamin.
“The one constant is there will be winners and losers, and long-term hospitality and leisure investors will realize the opportunities this presents,” he said.