Amid high inflation and surging energy costs, United Kingdom government officials have asked business owners to not pass on higher costs to consumers. But members of the U.K. hospitality industry say that's asking too much of hotel owners and operators trying to run profitable businesses.
Steve Alton, CEO of the British Institute of Innkeeping, said his hotel, bar and restaurant members have all taken financial hits during the COVID-19 pandemic and in the first months of the inflation hike by waiting to raise prices, “but they cannot continue to be the good guys forever.”
“Our members have been absorbing price increases in every area of their business for many months now, and the harsh reality for many is that they can no longer continue to do so,” he said.
Higher wages and continued inflation, especially in food and beverage, will result in many businesses facing imminent failure, Alton said. He added many businesses won't be able weather the financial challenges without raising prices.
“The government and the Bank of England cannot ask our members and the wider hospitality community to shoulder the burden of inflation alone, especially without the energy support needed to help these small, essential businesses at the heart of their communities,” he said.
In February, U.K. inflation rose 10.4% year over year, up from 10.1% in January. The slight increase came despite the government stating inflation would decline. In October, inflation in the U.K. reached 11.1%, its highest mark since inflation reached 8.4% in June 1991.
The U.K. currently has the highest inflation in the G7 group of countries, which includes Canada, France, Germany, Italy, Japan and the U.S.
Increases in food-and-beverage costs, the supply chain and infrastructure are the major cause of this inflation, and that hits hoteliers hard. On April 1, the U.K. also government ended rebates aimed at offsetting high energy costs resulting from Russia's invasion of Ukraine.
Hoteliers have asked for more help and an overhaul of business rates, which are charged on square footage and thus also weigh more heavily on hotels.
The U.K. government said it is committed to reducing inflation and has introduced new incentives to help with energy costs, although not at the same level as the recently ended program.
The main lever of the Bank of England to temper inflation is to increase interest rates. The higher the interest rates, the lower the amount of capital investment, with hotels — particularly in the higher segments — constantly needing infusion of capital.
Andrew Bailey, governor of the Bank of England, said in a March 24 interview on BBC Radio 4 that energy prices have fallen “pretty substantially again” and there are provisions in the government’s latest budget that will help temper inflation.
“Please understand if we get inflation embedded, interest rates will have to go up further. Higher inflation really benefits nobody,” he said.
Bailey also pleaded with U.K. business owners to resist the knee-jerk reaction to raise prices in light of inflation.
“I understand [prices] have to reflect the costs that [businesses] face, but what I would say, please, is that when we are setting prices in the economy and people are looking forwards, we do expect inflation to come down sharply this year, and I would just say please bear that in mind,” Bailey said.
One hotelier, Lionel Benjamin, co-founder of AGO Hotels, said rising prices are making it increasingly difficult not to pass on higher costs to hotel guests.
“‘Affordable’ in today’s world has taken on a whole new meaning. … We are very cognizant as we operate in a sector which has a ceiling on rate. It’s balancing on a tightrope. If companies refrain from increasing prices, it may result in more businesses closing their doors,” he said.
Benjamin said the hotel industry has “seen overall costs rise significantly again in the past six months, from 36% to 43%. Recent rises in interest rates and increasing inflation continue to have a knock on for our business and others in the industry.”
Energy Boost
Despite the government unveiling its new Energy Bill Discount Scheme, the program won't adequately benefit businesses, including hotels, said Kate Nicholls, CEO of UKHospitality.
Nicholls said the law will reduce the support available to business, with the hospitality sector facing additional costs of 7.3 billion pounds sterling ($9.1 billion) in energy bills.
“Without meaningful action to rein in some profiteering energy suppliers, the sector will no doubt see thousands of venues go out of business,” she said.
Alton agreed with Nicholls’ synopsis that energy companies bear responsibility.
“The most important support that can be delivered now is for Ofgem [the government’s energy regulator] to urgently step in to fix the profiteering of unscrupulous energy suppliers who are forcing small businesses to the brink of bankruptcy with unfair contracts and prices more than double that of current wholesale rates,” he said.
The energy crisis is affecting the entire spectrum of the hotel industry, Benjamin said.
“At AGO Hotels, we have a portfolio of budget hotels, with a [unique selling point] of offering comfort and convenience at affordable prices. This is becoming increasingly challenging, not least due to the ongoing inflationary pressures of energy prices rising, staffing and the cost of goods building and building,” he said.
Nicholls said UKHospitality polled its members over energy costs, with 41% of them saying they had “been refused a quote by an energy supplier for the sole reason of operating within hospitality.” She added energy costs show no sign of falling.
“Costs now [account] for 11.4% of business turnover, up from 3.4% before the [pandemic],” she added.
A new piece of U.K. legislation, the “Non-Domestic Rates Bill” is currently making its way through Parliament, which is unlikely to apply much salve to the pain hoteliers are feeling. It appears to contain a promise of three yearly reevaluations but also high penalties for any infringement on submissions of mandatory annual accounting.