Economic Downturn Effects On The Uk Hotel Industry Economics Essay

The UK hotel industry, every bit good as the hotel industry universe broad, has been hit hard by the recession which started at the terminal of 2007 and is predicted by many to last until at least 2010. In the class of a few months the UK ‘s economic system has gone from roar to crisis and by early 2009 the attitudes and beliefs of consumers and concerns in the market place had altered radically from old optimism ( Mintel Reforecasts 2009 [ online ] ) .

Prior to the ‘credit crunch ‘ which commenced in August 2007 when the European Central Bank and the US Federal Reserve put ?45bn into the fiscal markets ( Elliott 2008 [ online ] ) , Europe, the USA and the UK were basking an economic roar with lifting house monetary values and high consumer assurance ( Budworth 2008 [ online ] ) . Gross Domestic Product ( GDP ) rose to ?381,565 Million in 2007, and family disposable income per capita to ?14,321 in the same twelvemonth ( Key Note 2008, p. 18 ) . During these ‘boom ‘ old ages, loaning was high and borrowers able to raise big amounts of money due to loosen up imparting limitations by Bankss. Persons whose fortunes would hold at one clip barred them from borrowing were allowed to entree many times their salary ( Budworth 2008 [ online ] ) . Debts secured upon belongings were sold on to investors. Property monetary values therefore became immensely inflated making a ‘bubble ‘ which explosion when borrowers started to default on their loans and the value of the investings hence fell to a great extent. The immense losingss by the Bankss taking to the prostration of Lehman Brothers in the US and the close prostration of Northern Rock in the UK meant that loaning became much more hard and Bankss stricter about who they lend money to. ( Budworth 2008 [ on-line ] ) . The resulting deficit of financess due to frights about loaning and deficiency of loans has led to a downswing in the economic system, falling house monetary values and increasing unemployment with many houses traveling out of concern wholly and many more doing drastic nest eggs ( Budworth 2008 [ on-line ] ) . Further effects include a huge addition in public disbursement which is predicted to take old ages to pay off, a predicted rise in unemployment ( by the British Chamber of Commerce ) to 3.2 million, pay freezings or cuts and monolithic occupation losingss ( The Economy News 2009 [ online ] ) . The prostration in available recognition started in the USA but in these yearss of planetary trading the deductions were shortly felt around the universe with the UK rapidly confronting jobs. Germany, France and Italy – the three largest economic systems in the Eurozone – were officially in recession by late 2008, and others quickly followed suit. Both Spain and Ireland have witnessed a lodging bubble explosion and contraction in broad economic activity ( Foresight 2008, p. 7 ) .

2.2 The Pound Against the Euro and Dollar

One factor that complicates the state of affairs slightly is the lb ‘s weak position against the Euro and Dollar. Sterling has lost value quickly over the last twelvemonth or so. In July 2008, one lb would still purchase $ 2, but by November 2008 it was deserving merely $ 1.48, the lowest point for 6 old ages. Similarly at one point ?1 was about equal in value to 1 Euro. While this is bad intelligence for people purchasing goods or going outside the UK, it besides means that UK goods and services become more beautifully priced from the point of position of Eurozone or USA travelers ( O’Grady 2008 [ Online ] ) . Specifically, hotels in the UK will look comparatively inexpensive since this autumn in the value of sterling, and therefore more attractive to inbound travelers and tourers. At the same clip, it means it is less attractive for the UK tourist to go to the Eurzone or USA, and more attractive to remain ‘at place ‘ .

3. Hotel Industry Background

3.1 Introduction – The Growth Years to 2007

Hotel operators in the UK cater both to the corporate sector and consumer sector. Both are important parts of their operations and both includes non merely adjustment but besides installations such as meeting and conference suites in the instance of the corporate sector and add-on services like nutrient and drinks for both sectors. The UK has been historically an of import concern finish with the turning importance of the London stock market and fiscal sector ( Key Note 2008, p. 11 ) . In the consumer sector most activity is accounted for by vacations and short interruptions with a important minority for nuptials or party locales.

The UK hotel market grew in 2008 to a value of ?11.5 billion, which is an addition of about 20 % since 2002. This growing took topographic point against the background of a healthy worldwide economic system with the planetary travel market retrieving after the 2001 terrorist onslaughts ( BMRC 2009, p.1 ) . Factors act uponing this growing were varied and included an addition in the figure of tourers coming in to the UK in the old ages since 2002 and a variegation in the hotel market with additions in the budget sector every bit good as luxury trade names. There was an increased call for upmarket trade names as London in peculiar saw an addition in the extremist affluent market sector for which money was no object ( BMRC 2009, p.1 ) . Other factors driving growing include the growing in internationalization and planetary concern, rises in disposable income, and the development of touristry from emerging economic systems such as former East Europe and India. The growing of the cyberspace and online engagement besides paid a portion every bit good as increased selling by hotelkeepers ( Key Note 2008 pp. 19-21 ) .

During 2008 this roar came to an terminal. The hotel industry was hit comparatively late by the depression, and even during 2008 industry experts were proclaiming that the old 12 months had been a clip of overall growing ( Cater & A ; Hotelkeeper 2009, p. 6 ) . Occupancy rates were inactive in the first portion of 2008, but so hotel minutess started to worsen and during September 2008 tenancy fell steeply every bit did gross per room ( Cater & A ; Hotelkeeper 2009, p. 6 ) . Further, developments for new hotels and betterments were cancelled and budgets reduced.

3.2 Strengths and Failings of the UK Hotel Market

A Key Note study identifies facets of the UK hotel market act uponing the vulnerablity or resiliency to recession. On a positive note, the UK hotel market is a strong and sophisticated 1 with a broad scope of different options to appeal to a scope of different types of client and including internationally recognised trade names every bit good as smaller person operators. Developments in engineering and the addition of cyberspace usage over the last 10 old ages average selecting and booking a trip is easier than of all time before. The fact that most UK occupants do non utilize hotels farther offers an chance for growing, as does the potency for farther addition in internet usage. Restaurants attached to hotels and other such ‘add on ‘ services provide farther enlargement potency. Finally, the UK is sing a growing in its older population, who have more clip to go.

On the negative side, the hotel market is peculiarly vulnerable to an economic downswing as travel and trips are frequently seen as an country in which disbursement can be cut back. ( Key Note 2008, pp. 48-50 ) . Research besides suggests that despite the seemingly rose-colored mentality of the old ages instantly prior to 2008, the market had other issues to postulate with even without recession. The long-stay leisure market ( defined as those travelers remaining off for five darks or more ) has been in diminution since 2004: the figure of long-stay hotel suites booked in 2008 was half that in 2006, at 11 million ( BMRC 2009, p. 1 ) .

4 The Impact of the Recession on the Hotel Industry in the United kingdom: Specific Factors

4.1 Introduction

This subdivision looks at some of the factors which impact upon the Hotel industry, and why they are of import. The messages are assorted. Some of the factors are damaging to the industry while others have more positive impact.

4.1 Air Travel in Decline

Although long-run growing in demand for air conveyance is projected, growing rates in the short to medium-term are likely to be affected by the general lag in the economic system and by the lifting cost of air travel. A market-wide survey indicates that although long-run growing in demand for travel by air is expected, short to medium term projections are for negative growing in 2009 with the beginnings of recovery in 2010 ( Key Note 2009, p. 10 ) . This will hold an impact upon the UK hotel market as there will be fewer travelers into the state. However, it should be bourne in head that fewer UK vacation shapers will desire to vacation abroad due to fiscal considerations, therefore hiking demand for hotels.

4.2 Collapse of the Property Market

One of the hardest-hit sectors of the economic system in the recession has been constructing as house monetary values have crashed and loans to finance edifice undertakings have dried up together with the market for the finished merchandise. The UK enjoyed some of the highest periods of growing of house and other edifice monetary values, and the building industry has been peculiarly severely hit by the latest recession. Developers are unable to entree recognition to fund big scale edifice strategies, so many hotel undertakings have been stalled ( Blitz 2009 [ online ] ) . Aside from new developments, hotel proprietors who are unable to entree farther recognition are besides happening things more hard. While larger operators and branded ironss are able to look to the medium and long-run, over which a roar for hotel and travel are predicted due to emerging markets, smaller operators have less entree to the resources which will see them through the following twosome of old ages ( Blitz 2009 [ on-line ] ) .

The domestic travel country offers some possible positives for the industry as a whole. It is arguably the instance that touristry and the hotel industry in the UK are better placed to defy the consequences of a recession than either other industries or other holiday finishs. The repute of the UK as a whole is really strong as a finish, as is that of England in particular.A 2008 study by Visit Britain of 614 respondents based in the UK who on a regular basis take short interruptions reported that 9 out of 10 people consider England when taking a short interruption. The stigmatization of England has improved over the class of this tracker survey, 58 % of respondents say it is their favorite vacation finish considered. It is considered easy to acquire around and seen as holding beautiful scenery ( Visit Britain 2008, p.2 ) . Short interruptions account for about 2/3 of interruptions taken in the UK, so these findings are important for the industry as a whole. ( Bainbridge 2009, p. 1 ) .

Another consideration is the lifting concern with being ‘green ‘ and the impact of frequent air travel on the environment ( Bainbridge 2009, p. 1 ) . Consumers who want to cut down their C footmark and impact upon the environment are progressively choosing to remain within the UK ( Bainbridge 2009, p. 1 ) . What Bainbridge does non highlight, nevertheless, is that the new concern for ‘green ‘ issues is non wholly good. Tourists from abroad will be every bit concerned to cut their travel abroad, so this could besides cut down inward touristry into the UK. Research is conflicting with some screening that involvement in salvaging the environment is reasonably low precedence for the bulk of consumers and other surveies corroborating the thought that ‘green ‘ issues will go progressively of import ( Key Note 2009, p. 49 ) . Hoseasons, the self-catering leader, besides take this position, claiming that more people are taking to vacation in the UK because of a demand for a ‘green ‘ and alternate to winging abroad. Similarly, the ferry lines entered 2008 presuming that demand would increase for their services as a greener option ( Key Note 2009, p. 49 ) .

The UK has the most expensive rates for hotels in Europe, and mean monetary values rose by 12 % in 2007 to an norm of merely over ?100 per dark. London ‘s exceptionally expensive rates influence this figure ( Key Note 2009, p. 50 ) . Against this background, and bearing in head the recession, a move towards increasing the figure of budget hotels seems inevitable. Previous enlargement in the hotel industry has concentrated on the luxury terminal of the market with the growing of ’boutique ‘ hotels and the involvement in providing to the super-rich. While this seems unfortunate given the recession, it is non evidently a bad scheme as historically the luxury market has been shown to reflect the economic system more easy than the remainder of the market. ( Key Note 2009, p. 92 ) In October 2007, Marriott estimated the growing in gross per available room at between 5 % and 7 % in 2008 ; nevertheless, by May 2008, this had been revised to between 3 % and 5 % . As clients cut down their disbursement, it is likely that over-supply will be seen in the market and this will take to some trade name rationalization ( Key Note 2009, p. 92 ) .

One predicable consequence of the recession is to increase involvement in budget vacations and cheaper hotels. The Visit Britain study of UK occupants who take short interruptions reported in March 2008 that monetary value had now overtaken other factors in taking where to remain ( Visit Britain 2008, p.2 ) . This is likely to increase as the UK moves deeper into recession.

The budget hotel market was under development even before the recession set in. Established trade names such as Travelodge and Premier Inn expanded their operations, and they were joined by the ‘Purple Hotels ‘ from the Real Hotel Group. Hilton besides developed programs for a budget hotel concatenation, and CitizenM, a design-led trade name, was developed. Other trade names include Nitenite and Yotel, built at low cost utilizing prefabrication techniques. The growing in the market has led to farther cleavage in the sector with debut of upmarket grades to the budget scope ( for illustration Holiday Inns ‘Express ‘ trade name ( Key Note 2008, p. 16 )

A Key Note study written at the beginning of the recession predicted that the mid-range hotels would be the chief casualty of shriveling demand. The jobs with the economic system were exacerbated in the hotel industry by the recent addition in energy and nutrient costs ( Key Note 2008, p. 11 )

5.4.2 Business Budget Hotels

As Bainbridge points out, budget hotels have benefited by both concern and vacation clients downgrading in the recession. Some budget hotels have increased the scope of installations they offer to includes free wi-fi, breakfast and similar to suit a new concern patronage. Whitbreads budget concatenation, Premier Inn, for illustration ( the UK ‘s biggest hotel trade name ) is upgrading its suites with level screen Television, air-conditioning and Freeview, and has seen gross revenues for its concern history strategy increase 36 % over the old twelvemonth to February 2008. ( Bainbridge, 2009, p. 1 ) .

This addition in the figure of concern travelers utilizing budget hotels since the start of the recession in 2008 is corroborated by research by BDRC in 2009. They report that budget trade names are consciously taking to vie with mid-market trade names by schemes such as the 1s mentioned supra. This thrust has been rewarded by better standing in concern advertisement consciousness for the budget hotel trade names. ( BDRC 2009 [ on-line ] ) Key Note besides report that mid-market concern hotels are likely to endure as they are positioned between the value and luxury hotel options, and what they call ‘tiering ‘ , or introducing of degrees in to the budget scope, will besides impact the mid-market trade names ( Key Note 2009, p. 92 ) .

5.4.3 Consumer Budget Hotels

For the non-business traveler, adjustment quality is really of import in UK interruptions. While travelers abroad endure less than perfect adjustment because costs are low and the conditions good, within the UK they demand better quality. One issue is that bed and breakfasts and invitee houses are notoriously prone to poorly-run single constitutions, taking to name for the market to be tightened. However the budget hotel sector has grown and has mopped up some of the non-business market every bit good. The fact that there are many ironss available in this sector means travelers can be reassured sing outlooks and quality as they are purchasing into a trade name name. This is peculiarly true in London – a popular pick for consumer short interruptions – where hotels are notoriously expensive ( Key Note 2009, p. 50 ) .

5.5 Staff and Recruitment Impact

The recession has had a terrible impact on the hotel enlisting market, and it is improbable to retrieve before 2010. Job cuts look set to make 600,000 as concerns and consumers cut disbursement. The Chartered Institute of Personnel and Development warned of the toughest twelvemonth in more than 2 decennaries, and their anticipations were backed up by a study of 150+ senior direction in the hotel industry carried out by the enlisting specializers Admiral Group which revealed that over 2/3rds of those surveyed were traveling to detain enlisting determinations, and put fast-track alumnus programmes had on clasp ( Sharkey 2009, p. 7 ) . These findings are reiterated by the consequences of a survey by Deloitte in 2008 which predicted that the downswing could cut new occupations in the sector by 100,000 with a corresponding dramatic psychiatrist in the UK touristry industry. A recession could see a ?11b decrease in the economic input by visitants to the UK, presently deserving ?114b or 8.2 % of the UK ‘s GDP. The British Hospitality Association besides criticised the deficiency of aid from the Government ( Thomas 2008, p. 9 )

One less glooming anticipation is that the recession will hold less impact as the cordial reception market in general and the hotel market in peculiar is more diverse than in the yesteryear, with some chances really being created peculiarly in the insouciant and budget dining and contract catering sectors. This is reinforced by a study carried out by the British Hospitality Association which shows that the contract catering sector has grown and will go on to make so in the recession ( Druce 2009, p. 7 )

5.6 Room Occupancy and Monetary values

Room tenancy rates – the per centum of darks that hotel suites are in active usage – have been increasing since 2005. This is good for hotel operators as it allows them to refund investings and harvest more return for their money. In 2007 there was a 1 % point rise in domestic tenancy ( 61 % in 2006, with the 2003 rate being 59 % ) . This pre-dated the recession and was a consequence of the strength of sterling at this clip ( Key Note 2008, p. 14 )

Tax returns in footings of paid adjustment in the UK show a surprising consequence. Additions were still made in 2008, and a study by Deloitte showed that in the early portion of the twelvemonth gross per room grew strongly ( Caterer & A ; Hotelkeeper 2009, p. 6 ) , which is unusual as the recession started to put in during this twelvemonth for most parts of the UK economic system. However, this seems to be a map of additions made at either terminal of the engagement season. Early engagements would hold been made before concerns about the economic system set in, and late engagements made might hold been as a consequence of last-minute demand and hence monetary values paid were higher ( Key Note 2008, p. 15 )

5.7. Smaller and Specialist Sectors

The consequence of the recession can besides be traced in the smaller and specialist countries of the UK hotel market. For hotel operators, roar countries in these sectors are non needfully a good thing, as will be shown.

5.7.1 Activity Holidays

Activity vacations overseas were basking a roar in recent old ages, nevertheless for the following few old ages the market is predicted to turn less quickly, whereas activity vacations in the UK are predicted to lift. In 2010 for illustration the entire no of activity vacations in Millions taken by UK occupants was predicted before the recession at 11.5 ; this was revised to 10.8, with 2011, originally predicted to entire 12 million was revised to 11.4. By contrast, anticipations about UK activity vacations have been revised upwards: the 2011 degree was predicted at 5.0 million, and this was revised to 5.3 million. ( Mintel Market Reforecasts 2009 [ online ] ) . The impact for hotelkeepers is assorted. If the vacation involves hotel stay, so the intelligence is good ; nevertheless if the adjustment is self-catering the hotel operator will lose out.

5.7.2 Across-the-board Vacations

All inclusive vacations, a sector which has been in diminution in recent old ages due seemingly to the increasing easiness of on-line engagement and easiness of happening information, are now predicted to lift over the short-run as they allow all vacation costs to be known in progress and paid for up forepart. Both Thomas Cook and TUI are taking to increase their across-the-board capacity ( Mintel Market Reforecasts 2009 [ online ] )

5.7.3 Camping and Caravaning Holidays

This sector enjoyed a roar in the 1960 ‘s and early 1970 ‘s but with the coming of inexpensive abroad bundle vacations has been in diminution. However, Mintel predict that these vacations are an attractive option for the budget witting consumer, and will profit from the addition of households who elect to remain in the UK in 2009 and 2010 for fiscal grounds. They point out that the Camping and Caravanning nine had their best of all time twelvemonth for enlisting of new members in 2008 ( Mintel Market Reforecast, 2009 [ online ] ) . Domestic encampment vacations are predicted to make instead better over the following twosome of old ages before the long-run tendency towards decline reinstates itself. The growing in this country is non good intelligence for the hotelkeeper, as by definition a stay in a hotel is ruled out for this vacation type.

5.7.4 Others

Other sectors, for illustration yachting vacations, have besides been affected. Even where the market remains floaty – yachting and luxury vacations – growing anticipation has been downgraded and is expected to happen at a slower rate than predicted ( Mintel Market Reforecasts 2009 [ online ] ) .

Sectors of the UK market which are predicted to make good include manager vacations within the UK which are seen as a budget option and so are reasonably resilient to an economic downswing, and heritage touristry every bit good as vacation Centres like Centre Parcs. Mintel see the latter as peculiarly resilient as they are both percieved as a budget option and are attractive to the UK consumer as they offer ‘pay in progress ‘ all-in-one bundles. An addition in manager vacations is besides good to some extent for the hotelkeeper, although the majority of manager vacation operators chose low-priced hotels where monetary value borders are cut really low, as the manager vacation is seen as a price-conscious option to the consumer.

6. Lessons Learned from Previous Economic Downturns

The last clip a recession occurred in the hotel industry was in the aftermath of the 2001 September 11th terrorist onslaughts on the Twin Towers in New York. The Sept 11th onslaughts and splenic fever panic which followed caused uncertainness about the short and medium-term economic hereafters and had an impact upon travel and touristry programs taking to a decrease in hotel usage and travel. In the US these countries, along with air hoses were significantly affected in the wake of the terrorist onslaught. ( Mintel Market Reforecasts, 2009 [ online ] ) . In the recession of the early old ages of the twenty-first century, the response to the challenge was to dismiss room rates to a great extent, nevertheless this scheme was of questionable usage. The heavy discounting was intended to hike tenancy degree, nevertheless this needfully led to less profitableness and income ; it took old ages to retrieve from this as consumers became used to the lower monetary values. As Bloss ( 2009 ) points out, the maneuver is besides really easy to copy by rivals and hence a hazardous one.

7. Decision.

The UK hotel market has surely been affected by the economic downswing. The above looked at the background to the recession and how it has affected the corporate and consumer sector. While the sector has surely been impacted with occupation cuts, slower, stagnating or worsening anticipations and less edifice undertakings, there are some positives for the UK market as vacation shapers elect to remain at place instead than go abroad.