UK Hotels & Hospitality: Prospects for 201528/01/2015 By Matt Costin
28 January 2015
The defining characteristic of the British hotel sector has become change. Changes in ownership, changes in consumer profile, behaviour and mindset – by the end of 2015, nearly 25% of UK hotel guests will be in Generation Y. Further change will be driven by technology, bringing both opportunity and disruption to the established order.
This change is happening at breakneck speed. Making sense of the business implications will separate the winners from the losers. At BVA BDRC, our aim is to equip our clients with the strategic intelligence to make the right strategic choices and ensure that they are amongst the winners.
How do we expect these agents of change to shape the sector in 2015 and beyond?
UK Hotel ownership
2013 was the year in which hotels returned as an asset class. Since then we have seen the most dramatic change in ownership in recent history, with many of the UK's branded hotels now under foreign control.
There is a fairly broad consensus that we have reached the ‘end of distress’ in the sector, with value for potential buyers now more difficult to find. That said, so far there seems to be no let up in transaction activity. Already in January we have seen a number of acquisitions, including the purchase by private equity group Starwood Capital of the Town House Collection, further strengthening its UK portfolio.
We have also learned that after less than two years of ownership, another private equity group, KSL, is looking to cash in on the Malmaison and Hotel du Vin chains. When it comes to single sites, too, we can confidently predict that new owners of larger groups will waste no time in looking to offload their weaker performing units.
More generally, as the economy continues to pick up and the operating fundamentals for hotels improve further, we may see greater interest from hotel companies in bricks and mortar.
The leisure market and the impact of a weak Euro
Moving from ownership to occupancy, who is going to fill our hotel rooms in 2015?
At this point we can draw on some consistent recent trends. Aggregating six of the most significant Western European source markets and analysing the medium term trend for where travellers from these countries are spending time in hotels and for what reason, the major growth area has been international leisure travel.
Business and domestic leisure has remained comparatively flat for Western Europe as an origination market, but international leisure hotel nights have grown by more than 20% since the start of the decade – despite this coinciding with one of the most challenging periods in recent economic history in Europe.
We expect the long-term trend for consumers in developed economies travelling and staying in hotels outside their own countries to continue in 2015. A weak Euro is not ideal for UK hoteliers, but historically, currency shifts have a bearing more on longer stay decisions. When it comes to the hotel leisure market, Britain is, first and foremost, a short break destination – whether for British hotel guests or international visitors. Indeed, it is the No.1 international short hotel break destination for French hotel guests and No.3 for German guests.
Balancing the economic uncertainty that is still prevalent in continental Europe, the UK’s status as the No.1 leisure destination for US hotel guests outside North America leaves us well placed to benefit from the strong growth in household spending anticipated for that market. China, of course, also presents an excellent opportunity and we must be optimistic that Britain can finally begin to punch its weight as a front rank destination for the Chinese.
The meetings market - the challenge of rebuilding margins
Above and beyond the leisure market, another strong growth area in 2015 will be the meetings and conference market. As things stand at the moment, slightly more than one in three domestic business bed nights are by people staying for a meeting, conference or training session held in the same hotel, with residential event volumes returning to pre-recession levels.
Unfortunately, we have not seen a parallel recovery in margins. The national average quoted day delegate rate as recorded by BVA BDRC was up by about 1.8% YOY in Q4 2014, but still substantially lower, at 10%, than 2011 after adjusting for inflation. So the challenge for hoteliers and venue operators in 2015 is to convert improving demand into higher prices.
Disruptive technology and the sharing economy
Many operators want to know just how disruptive the sharing economy will be for the hotel market, and truthfully it is too early to say. Hotel company CEOs claim not to be bothered about it. On balance we think they should be, depending on the nature of the hotels they run and the markets they serve.
Certainly in valuation terms, AirBnB is now bigger than Hyatt and Wyndham. Its brand profile still has a long way to go on brand awareness. AirBnB is about on a par with newish hotel brands such as Hotel Indigo, with only a fraction of the recognition achieved by the major hotel brands.
But it is still early days. Furthermore, AirBnB has a strong profile among higher value growth potential segments, including Generation Y, international travellers and loyalty programme members - particularly elite tier members.
Perhaps most important for the debate about its potential impact, while actual experience of using AirBnB is still confined to a small share of the population, among those aware but yet to use AirBnB, most people are open to the idea of using it as an alternative to staying in a hotel – 63% for business and 70% for leisure. For longer trips and for leisure trips where there is an appetite to experience something different, AirBnB and its emulators are likely to represent a valid alternative to hotels.
To add to the anxieties of hotel owners, AirBnB in particular appears to be slowly shaking off its ‘pirate’ tag and becoming more legitimate. The biggest gripes of the hotel companies are that it doesn’t pay taxes or adhere to the same regulations as them. On the first of those at least, things are gradually changing. Amsterdam is the latest city authority to come to an agreement on taxes. There is evidence of an appetite to do the same in the UK – albeit after Westminster’s Conservative-controlled council recently tried to clampdown on AirBnB users. Furthermore, as the AirBnB brand grows, so also will the range of opportunities for strategic partnerships both inside and outside the travel industry.
New Hotel Brands
Finally, how are hotels going to respond to these changes in the competitive environment?
BVA BDRC Hotel Guest Survey data suggests that recently the major brands have been successful in improving the guest experience – stronger economic fundamentals should allow them to continue to invest in their hotels.
We believe that the recent proliferation of new hotel brands will continue in 2015 and beyond, as hotel companies see the need to offer a more individualised and closely segmented product. IHG has in a relatively short space of time launched a new brand catering to the needs of Chinese travellers and another brand, Even Hotels, aimed specifically at wellness-minded guests. Most recently, they acquired a well-established brand, Kimpton, so they can now offer their loyal guests the option to bring their dogs on holiday with them!
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