Recovery is finally underway for the UK hospitality sector.

Despite some bumps along the way, 2021 saw some of the best performance metrics ever, with room prices reaching levels never previously achieved in some markets.

While the industry has reaped the various benefits from reopening as demand surged back, it has come with various challenges, including staff shortages, supply chain issues and rising costs.

The past year has been a year of two halves and two destination types. During the first half of the year, the UK endured strict lockdown measures while in the second half of the year, from summer in particular, restrictions had mostly been lifted and hoteliers could finally reap the benefits of reopening and look forward to their recovery.

Recovery has not been uniform, however. Coastal and rural destinations outperformed while major cities lagged. Pent-up demand flocked to locations like Cornwall, Devon, Dorset, Brighton and the Lake District, during the summer, with revenue per available room reaching record levels, thanks to strong pricing power from hoteliers on the back of robust demand.

For urban centres, like Manchester and Birmingham, things started to improve once children went back to school and many workers returned to the office from September. While much of the resurgence in performance was weekend-led, midweek business started to pick up as some business travel, mostly domestic, returned. Some larger conferences also started to take place, indicating that appetite for gatherings remains as many seek to connect with others in person. Birmingham’s National Exhibition Centre, for example, was able to host major exhibitions, such as the Autumn Fair, while Glasgow saw the much-anticipated COP26 boost RevPAR performance for the first two weeks of November.

The emergence of omicron affected performance during the latter part of December, the year ended on a high and in a much better position than the prior year, when the UK was in strict lockdown restrictions. The upcoming year is set to be a strong year for recovery as the pandemic, hopefully, recedes.

While demand has begun to recover, it has been difficult to accommodate its surge due to staff shortages. As the pandemic took hold, around 1.6 million people were furloughed in the hospitality sector, 25% of total furloughed staff, and since the scheme finished in September, many have not returned to the industry. The theme has dominated the hospitality sector as it continues its battle in re-hiring, retaining existing employees and attracting new talent following the pandemic.

Day-to-day operations have been hard hit by staff shortages. Hotel managers have had to cap occupancies to meet demand requirements, such as housekeeping, while some have had to shut operations altogether. Rising COVID-19 infections exacerbated the issue due to absences. According to the Office for National Statistics, the accommodation and food services sector has the highest rate of businesses being affected by staff shortages with 38% reporting that they had had disruption to trading or stopped trading altogether in October.

And this issue is not going away any time soon. The pandemic accelerated the exodus of the European workforce, which had started because of Brexit, with Bloomberg reporting that around 200,000 EU nationals left the country in 2020. Most are unlikely to return. With 63% of hospitality workers being low earners, according to the ONS, the industry has a few hurdles to overcome to attract new talent and make it an attractive long-term career proposition.

Cost increases continue to put downward pressure on profitability. With some of the highest inflationary increases in the past decade, rising costs will start to squeeze profit margins. Energy prices are soaring and increasing food and beverage costs will directly affect profit and loss accounts. Indirectly, increasing suppliers’ charges due to growing costs at the source means that hoteliers are left to take the hit.

Supply chain issues have also had a knock-on effect on hospitality. Delays to deliveries such as food and beverage stock as well as linen meant that operations were challenged and hoteliers had to think innovatively on how to overcome these obstacles while being cost efficient. Stories of hotel managers having to scramble for linen from competitors or having to buy crockery from local shops due to deliveries not arriving, is not unheard of. And while demand in some cases may not have fully returned, these challenges are not dissipating until the middle of the year, according to Oxford Economics, and therefore hotels will continue to face headwinds from such pressure in the short term.

The outlook is positive, despite the many challenges facing the sector. Demand is expected to return stronger this year, with the “staycation” sector leading the way. Competition from European destinations, in particular, could impact pricing to some extent as Brits return to holiday abroad. Corporate demand is likely to start bouncing back once restrictions on work-from-home guidance end and once any potential threat from the omicron variant recedes, reassuring businesses to start travelling and meeting once again.

Cities will rebound stronger this year. Large-scale events are likely to support growth across many key cities in the UK, such as Edinburgh, Manchester and Birmingham, while London’s recovery will speed up once travel restrictions ease and confidence for international tourism improves. Though the capital remains an attractive destination for domestic visitors and it will benefit from the return of the corporate sector as well as some conference business. With the omicron variant now peaking and slowly retreating, there are hopes that normality will soon make a return, and our desire to travel will keep the industry afloat with the latest forecasts expecting RevPAR to return to 2019 levels by 2023-24. While there is downside risk due to new possible variants, at least the better half of last year showed how quickly improvements can be seen and how strong the domestic market is.

The year will not be free of challenges, nevertheless. New supply will be at record levels as many delayed projects come to fruition. Markets with significant pipelines, such as Manchester and Glasgow, may feel some pressure on performance which could impact the pace of recovery. Operationally, labour shortages are likely to be the industry’s greatest issue this year, while rising costs and the VAT rate increase back to 20% in April will add further strains to profitability, squeezing margins and the bottom line. Hoteliers will need to be innovative in the way they operate whilst being attractive as an employer with long-term prospects for new hires and existing staff.

cbalekjian@costar.co.uk