With rising costs and supply chain disruptions undermining revenue growth and adding millions to cost bases, how can hotel investors protect profit margins? How can businesses buy well across energy, F&B and guest amenities, with an eye on ESG? Does buying responsibly have to cost more, and have cost rises reduced the scrutiny on suppliers?
Get on top of food inflation before it gets on top of you
Inflation in food and drink prices hit 19.9% in October, the latest CGA Prestige Foodservice Price Index recorded, after nine consecutive months of double-digit inflation.
David Read, chairman of Prestige Purchasing, suggests that inflation will “taper down” next year but that won’t mean the end of the bumpy ride for the sector – food prices are expected to continue to increase, “just not so fast”.
“[Restaurants] are measuring the price of inbound goods and how much they’re inflating over each month and year. That’s a really important element of it, because if you’re not managing that, you won’t get on top of it,” he says.
However, he says that “most” are trying to negotiate food prices “with a blindfold on” and urged operators to make use of benchmarking information: “We found that when we looked at most operators’ inbound food costs, they were running at around 7%-10% sub-optimal from the best prices in the market.”
He added: “There’s lots of stuff you can do even before you talk to a supplier and that’s looking at the leanness or the efficiency of what you’re buying. Making yourself really attractive to suppliers is a really important part of that, and the stuff that sits in there is things like how frequently you have deliveries, how well you pay suppliers, how big your range of ingredients is, how frequently you change them, what the format and specification of product is.”
Andrew Stembridge, executive director of Iconic Luxury Hotels, which has five UK properties in its portfolio including Cliveden House in Berkshire and Chewton Glen in Hampshire, highlights the labour shortage challenges that the industry is facing, and how the group is managing that: “We’re exploring dark kitchens, we’re exploring pre-prepared products, which two or three years ago we’d never dreamt of, but in terms of that consistency, some of the products out there on the market are incredible, especially as they can be made to our spec…
“Although that probably has a negative impact on the food cost, from a labour perspective, at a time when we’re all struggling to fully staff our kitchens, frankly I think that’s going to be the way forward on certain things.”
Inflated hotel build costs
At the same time, the market is also seeing inflated build costs. Part of that, says Maurice Petignat, vice president, design and construction at Cedar Capital Partners, which invests exclusively in the hospitality sector, has been due to pandemic tax incentives and support schemes which “pushed every man and his dog to do capex upgrades – oftentimes ESG-related capex upgrades”.
“It’s just flooded the construction market with demand to the extent where the likes of ourselves have really struggled to procure solid contractors because they’re just so busy,” he explains.
He suggests that the market has peaked in this regard as government incentives and interventions fall away and, as recession and uncertainty loom, development projects are now being postponed or dropped altogether. Despite this, prices remain high: “Sadly our business plans were done three to four years ago for most of these projects, our capex budgets got set then and the tender prices we’re getting back from the market now are 30%-40% higher than we were expecting,” he says.
Additionally, the availability of FF&E is “as hard as ever”, says Ashley Mooney, managing director at Blue Moon Procurement. She says lead times have been inflated by the availability of raw materials and shipping, the latter of which is even more challenging if you’re sourcing from further afield. While there has been a push to explore more local options, “there are certain areas geographically for the type of FF&E that we’re buying [where] it’s just the best place to make it”, she explains.
“If you’re working on a UK project, a UK supplier should absolutely be on that tender list, but I don’t think it’s the only place that should be considered for that project,” she says.
“It really depends on the price point of where you’re looking to position your asset… if you’re building an ibis vs a Hoxton it’s very different in terms of where you procure your stuff,” suggests Petignat.
Stembridge points out that if a hotel’s strategy is to buy and fit out with exclusively British-made products, it’s “a really good story” to communicate to the guest, if you can get the quality, supply chain and pricing right locally.
Meanwhile, although leading hotel investors have expressed hope that energy prices will settle next year, investors are searching for efficiencies in this area for both environmental and cost reasons. Cedar, for instance, is finding efficiencies through AI analysis of gas, energy and water usage, which Petignat says has been “massive” for the business, replacing “outdated” human analysis.
Does buying responsibly have to cost more?
In the background of all the challenges the hotel sector is facing is of course Environmental, Social and Governance (ESG).
“When you think about the supply chain disruptions that we’re all dealing with, whether it be logistical, being able to get product, labour shortages, the materials that are available – all of this ties into the world of ESG and it’s what ESG is about. It is a measurement system to reduce risk and implement methodologies and processes that will mitigate that risk,” argues JoAnna Abrams, CEO of MindClick, which rates the environmental performance of manufacturers and their products.
“There’s a lot more opportunity than people realise to achieve ESG goals without cost increases.”
Stembridge agrees that switching to larger toiletries has generated savings at Iconic Luxury Hotels, which have been reinvested into better quality and more environmentally friendly slippers, for instance. “You can offset one against the other,” he points out.
Abrams says that to address supply chain carbon emissions, hotel owners, investors and operators will need to collaborate with manufacturing partners to explore how each phase of a product’s life cycle can be more efficient.
“The less energy you use, the less cost there is. The less packaging you use, the less cost there is, the less waste there is,” she points out.
Although Petignat says more costly environmentally friendly investments can be “a very hard case to make”, he believes ESG is something that will “regulate itself over time” as taxation increases on polluting business practices.
“It will matter what you’ve done in this repositioning phase – if you’re the owner of a building, you will most likely not be able to sell the building or sell it very poorly if you haven’t taken into consideration ESG as part of your refurbishment,” he says.
“There are people that are going to want to see how much landfill did you create, what was your waste management strategy as part of the construction – and that’s post-completion. It’s not just about ‘here’s your pretty new hotel’, it’s how did you get here? And what’s your future plan? What can we do as new owners? All these questions will be asked.”
All those quoted in the article appeared on stage at the Annual Hotel Conference held in Manchester between October 3 and 4, in a session called: Supply Chain Reaction: How to Source Smarter?