What Are the Effects of Global Inflation on the Hospitality Industry?

Posted by Rick Yvanovich

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As we are entering our third COVID year, travel restrictions are starting to ease to prepare for the full reopening of the economy. But skyrocketing inflation, supply chain bottlenecks, and the looming threat of new coronavirus variants all pose great challenges to the outlook of the hospitality industry.

Global consumer price inflation reached 5.2 per cent year on year in November and December 2021, the highest level since 2008. According to IHS Markit1, inflation will remain high in 2022, hovering around 5%, before falling to 2.8% in 2023. Most regions’ growth will experience a halt in 2022. IHS Markit also forecasts that global real GDP growth will settle at 3.4 per cent in 2023 and 3.1 per cent in 2024 as fiscal and monetary policies tighten and suppressed consumer demand is satisfied.

Read more: Hotels in a Cloud-first, Mobile-first World

What Are the Effects of Global Inflation on the Hospitality Industry?

How is inflation impacting the hospitality industry?

Undoubtedly, rising inflation impacts practically every business in every vertical, though some are more severe than others, particularly small businesses in the food, restaurant, and hospitality sectors. This inflation, coupled with the recent global health crisis, has left many small business owners with no choice but to cease operations completely.

84% of US small-business owners2  in these delicate sectors are concerned about the continuously increasing impact of COVID-19 and the rising infection rates on businesses. They have urged lawmakers to act quickly and replenish the Restaurant Revitalisation Fund, which was quickly depleted due to high demand.

As one of the sectors that have been directly impacted by both economic and socio-political developments, hospitality needs to act faster to fight back pressures from rising food costs, commodities, wage costs, and labour shortages.

But the tourism news and research site, Skift, thinks a little bit of inflation might not be that bad. It quoted Frank Del Rio3, President and CEO of Norwegian Cruise Line, saying, "Inflation means prices go up, and it’s good to see that we, too, are seeing the positive side of inflation, which is pricing power."

Added to this, Seth Borko, Senior Research Analyst at Skift Research, pointed out that though airline and travel lodging prices are still down compared to pre-pandemic rates, statistics show that demand is gradually returning. Borko also believes that this inflation is anything but good for the travel industry.

Economy hotels have leveraged this opportunity to win price-sensitive travellers as they switch to more affordable stays. Interestingly, luxury hotel chains, upper-midscale and upscale hotels also seem to benefit from this inflation, perhaps as an excuse to raise prices for a less price-sensitive clientele.

Read more: Hotels in a Cloud-first, Mobile-first World

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The real headache is labour

Labour shortages also contribute to rising prices. They are accounted for more than 40% of the total operating expenses in hospitality businesses and are the single largest operating expense. Labour costs can easily exceed 56% of the expenses at full-service properties and 48% at limited-service properties.

Read more: Strategically Retain and Develop Your High Potential Employees

In places like the US and UK, a sizeable portion of the hospitality workforce is migrant workers who, when the pandemic hit, lost their jobs and returned home. Moreover, COVID-19 has disrupted migrant labour flows as countries such as China impose a zero-COVID policy, which immensely limits the labour supply.

In addition to that, many decided not to continue working in the industry for good. Besides health concerns, there are other reasons to explain why many workers choose not to come back:

  • Unemployed people may benefit more financially from the government's stimulus funds; in some cases, these grants may be higher than their salaries.
  • Hospitality is notoriously known to harbour one of the most hostile environments, with plenty of aggressive guests and ever-changing regulations. Many service workers have been in the industry for as long as they can remember, and it only took a pandemic for them to reflect on the meaning of work-life balance. As a result, the industry is losing a huge number of front-office staff, chefs, housekeepers, and even managers.
  • The unpredictable patterns of new COVID variants and local travel restrictions result in uncertain occupancy rates for hotels, which makes it difficult to secure a consistent schedule and fixed hours for staff and those with kids.

Reduced and limited service as a result of the staffing crisis certainly could lead to sustained margin growth and, of course, customer dissatisfaction. Though the number of job vacancies is on the rise, the industry still struggles to find workers. Employees are being paid now more than ever, but money alone is not enough to retain them.

How are rising energy prices affecting the hotel industry?

One of the concerns of hospitality businesses is the creeping oil prices, which directly impact travelling costs. Surging oil prices are predicted to reach even higher levels for months in 2022. Airfares have yet to reach the all-time high-level set in 2008, but the current trend indicates a gradual increase in the coming months. After factoring in all of these elements, travellers might rethink their next vacation destinations and any additional rental services.

When will oil prices go down? The answer is complicated as it depends on many factors like the retraction of the Russian troops from Ukraine, the increase in production from OPEC, the drop in demand, etc.

Some technology costs are also rising faster than expected. Companies that are lagging may need to spend more on specialists, such as data scientists, for their projects.

Can technology help reduce the impacts of rising inflation?

With the highly unpredictable and volatile future ahead, now might be the time for hoteliers to consider revenue management solutions and leverage their advanced capabilities to:

  • Optimise hotels' pricing power and adjust room rates to reflect labour and productivity expenses
  • Review and adapt pricing to maximise the length of stay and day of week trends
  • Examine the total revenue potential of group bookings versus short-term guests willing to book higher room rates plus ancillary spending earlier in the booking window
  • Review and control the buying down options on booking channels, especially when approaching the 30-90 day booking window
  • Optimise earnings by increasing rates for upgrading rooms at the time of purchase or upselling at check-in to protect prospects

Read more: Revenue Management at the Touch of a Button: the Success Story of Vienna House

The role of revenue managers is becoming increasingly important. In small hotels with limited budgets, the position is often combined with the general manager, and thus, the responsibilities of both roles fall on just one individual. However, general managers may have limited training in the science of demand forecasting and price optimisation, which inevitably leads to suboptimal results.

Dedicated and specialised revenue managers understand all there is to inventory management, length of stay control and more. Thus, they want a solution that can provide them with the needed visibility to look under the hood and dive into price sensitivity data to observe decision models in great detail.

In terms of a suitable revenue management solution, it needs to embrace the concept of "total revenue management", which enables hoteliers to apply revenue management tactics in ancillary as well as other non-room revenue categories and optimises these multiple revenue streams to achieve optimal financial results. These categories could be restaurants, bars and cafes, spas, golf courses, ski lifts, meeting rooms, event spaces, equipment rentals, etc.

This next-generation revenue management concept allows revenue managers to focus more on strategic tasks that yield better results. Next-gen solutions can provide more than just visibility. They are packed with advanced capabilities that can help automate mundane or complex activities, such as pricing and distribution decisions.

Additionally, leveraging the right solutions can improve hotels’ RevPAR and other key performance indicators while enhancing marketing and sales effectiveness, generating a competitive edge, gaining insights into market trends, positioning, channel profitability and more.

To learn more about revenue management software as well as other hospitality-specific solutions, check out our resource portal here.

Analytics in Hotel Revenue Optimisation

Sources:

1. https://ihsmarkit.com/research-analysis/global-economy-disrupted-higher-inflation-slower-growth-2022.html
2. https://www.cnbc.com/2021/09/17/inflation-labor-and-delta-variant-hit-restaurant-owners-goldman-sachs-data-finds.html
3. https://skift.com/2021/05/27/why-a-little-inflation-could-be-good-for-the-travel-sector/%22%20/t%20%22_blank

Topics: Hospitality solutions

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Rick Yvanovich

 Rick Yvanovich
 /Founder & CEO/

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