Housekeeping steps to build operational resilience
Tuesday November 29, 2022
Ian Corfield, Restructuring Advisory Partner, explores how the hospitality sector can streamline their operations against rising costs
The next few months represent a pivotal time for the UK hotel sector, as well as the wider hospitality and leisure sectors. Energy prices are rising in tandem with wider inflation, and the cost-of-living crisis is curbing consumer confidence. Compounding these challenges are long-term supply issues, labour shortages and food inflation, which hit 15% for Britain’s pubs and restaurants, according to the latest CGA Prestige Foodservice Price Index.
The UK’s hotels, pubs and restaurants, which currently generate £130 billion in economic activity, according to UKHospitality, could soon see a significant change in demand as consumers rein in discretionary spending. Consumers may choose to swap to low-cost operators for overnight stays, or cease spending altogether.
For hotel operators already struggling with debt, and perhaps some that are not yet but could soon be, this could cause cash flow problems and tip the most financially vulnerable into serious financial difficulty, and even insolvency. Added to this, there’s evidence that capital markets are beginning to slow, with debt and equity providers keeping their sizable powder dry until the economic landscape improves, or more appropriately priced assets become available.
Indicative of these collective headwinds, in the three months running up to June 2022, insolvencies across all sectors in England and Wales reached their highest level since the 2008/9 global financial crisis, according to the Office for National Statistics. This included the accommodation and food service industry, where insolvencies reached their highest level in the last decade, at a time of peak trading.
Similarly, the latest data from the insolvency service shows that, between January and August this year, the number of insolvencies in the hotel and holiday let sector has increased by 41% when compared to the same period in 2021.
As we’ve seen previously, certain parts of the market are likely to fare better during an economic downturn. Long-established and luxury hotels that are situated in popular tourist destinations, as well as large players with substantial capital bases, are typically more resilient. But for others, including regional hotels, mid-tier operators, or hotels that rely on corporate travel as businesses tighten their belts, challenging times lie ahead.
As such, hotel operators and owners must urgently build a credible and flexible business plan in readiness for the months ahead. All too often, businesses hesitate when faced with emerging difficulties and put proactivity on hold, and while it’s easy to understand why directors opt for a more cautious ‘wait and see’ approach, the savviest businesses will instead look to add flexibility and contingencies to their financial forecasting, proactively taking steps to help shore up their business’ operations and finances.
As a first step, they should set out their target market positioning for their hotel or portfolio of sites, taking into account its brand-positioning, where it is located and predicted consumer spending trends. This will help to draw up a picture of projected trade for the months ahead and highlight where improvements could be made if needed. Cash flow is critical, and can buy time and choice. For this reason, it’s important for hotel operators to build a detailed and accurate understanding of their business’ cash position, and map out how this could change in the weeks, months and years to come, as they seek to build a stable capital base to manage, invest in and grow their business. Business owners should ensure that they have a sound understanding of their working capital requirements, and consider the capital needed to support the hotel in reaching its target offering. This includes how the cost base can be reduced or be made more flexible.
Mapping out a rolling 13-week cash flow forecasting model that is conducted at a granular level and updated on a regular basis, is a good starting point as it can help business owners to understand and anticipate pressure points, and rapidly identify solutions accordingly. Once this is in place, business leaders should look to build longer-term, integrated financial models that incorporate profit and loss, balance sheet and cashflow information. Then, they should consider scenario planning and stress testing to determine how their cash flow and working capital requirements could be affected by future conditions, whether this is buoyant or more challenging.
When a hotel operator has a better understanding of its cash position and requirements, it can then consider the steps to take to give itself extra headroom or meet any anticipated shortfalls.
Stakeholder management can also not be stressed enough. Suppliers will be far more likely to agree to new concessions if they are confident a business has a realistic plan to resolve issues. At the first signs of difficulty, businesses must seek the support of specialist hospitality consultants and financial advisers to prevent issues snowballing.
To get ahead of rising prices, three strategies to consider include fixing costs, passing on costs and reducing costs. There are a number of options to fix costs and lock them in. One option is to enter into a ‘hedging’ agreement which means agreeing a price today for a purchase to be made in weeks or months to come in order to spread the risk.
Hotel operators can also look to defray their costs by joining a buying group, a group where businesses work together to handle payments, sourcing, contracts and supplier management, which helps to leverage their collective purchasing power.
For passing on costs, there’s no straightforward answer, but providing excellent service, mining specific areas of offering or delivering outstanding product quality can all be powerful means of adding value to a hotel’s customer relationships.
To reduce costs, hoteliers can look to streamline their operations and make changes that would make them more agile in the long term, such as consolidating their offering or closing unused floors. Other options include dropping less profitable areas to focus on the most resilient products and services that drive the best returns, or by introducing methods of automation to drive new efficiencies.
To succeed in the long term, hotel operators must first recognise that the current bout of inflation is one symptom of the volatile economic environment that has been gathering strength over recent years. Being prepared to take bold but considered decisions might prove not only to be the key to survival, but also to long-term success. It is vital that hotel operators continue to plan ahead for macro issues, such as ESG, the ability to refinance and future investment in capital expenditures, to make their business volatility-proof.
The leisure and tourism sector is hugely important for the UK economy and it is vital that we collectively do everything in our power to protect it. For many owners and operators, this may mean embracing some difficult conversations sooner rather than later, which holds an understandable fear of loss of influence or economic interests. However, these conversations are coming and it’s always better to proactively embrace them in order to protect everyone’s interests.
First published in Hotel Owner November 2022.