Soaring costs hitting profits at Scottish hotels hard
SOARING costs are hammering profits at Scottish hotels – despite sterling’s weakness since the Brexit vote sparking a dramatic rise in visitors to the country.
Hotel owners across Scotland have revealed the industry is struggling with a high tax burden and surging overheads such as wages, raw material costs and utility bills, which they say is undermining their ability to invest in the future growth of their businesses.
The hoteliers cite the effects of unfair competition from rivals such as Airbnb, whose services are exempt from valued added tax (VAT), and increasing commission costs from third-party booking providers. They also fear the introduction of a tourist tax will reduce Scotland’s competitiveness as a global visitor destination.
The concerns are laid bare in interviews carried among its membership by industry body the Scottish Tourism Alliance (STA).
Despite international visitors to Scotland rising nearly 50 per cent year-on-year in the first quarter to 637,000, and early signs of another busy summer thanks to the hot weather and events such as the European Championships in Glasgow, the survey shows margins are continually being eroded by the increasing cost of doing business.
Calum Ross, who has owned the Loch Melfort Hotel at Arduaine, by Oban, for 10 years, said: “It gets more difficult, rather than easier every year, principally because, while numbers are booming, it does not necessarily mean the rate we get for the service and room are growing at the same rate.
“We have doubled turnover in the 10 years, the number of people we can accommodate has expanded because we added extra rooms in the last couple of years. But the rate of growth in terms of what people are spending is not keeping pace with the headline numbers (of visitor numbers). At the same time, costs have risen dramatically in the last 10 years.”
Mr Ross said the hotel’s wage bill has spiralled in the last decade. He noted the cost of labour as a proportion of turnover had been in the region of 28% to 30% 10 years ago. Now it is running at 38%. Some hotel owners that responded to the STA survey reported their wage costs had risen to up to 48% of turnover.
Alongside the rising cost of pay, which has been driven by the advent of the National Living Wage, the hospitality sector has, on average, faced massive increases in business rates.
Mr Ross said the rateable value of the Loch Melfort Hotel, which is used to calculate business rates, surged from £38,000 to £82,000 “overnight”.
Added to that, the collapse in sterling following the Brexit vote has pushed up the price of imported foods. Dairy costs at the Melfort have gone up by 20%. Mr Ross said: “The picture is, yes you are continuing to grow, but not at a rate that allows you to grow our profits. Our profits are still falling based on the cost increases.”
Stephen Owen, general manager of Rufflets in St Andrews, said he is facing similar challenges. He noted that attempts to continue to expand and offer a high quality at a hotel, which has been owned by the same family since 1952, are proving to be difficult to achieve year on year.
Mr Owen said: “For us, our top line figures are growing, it is all the other things, in terms of the increases in our costs to operate, [which are] slowing down any growth in net profit. If anything, it is declining.
“As a business, we are always looking to generate profit. For an independent business like us, the level of profit we generate has an immediate knock-on effect as to the capital expenditure programmes we are going to be doing in the next year. It is the other costs that sometimes don’t
get talked about that are challenging.”
A spokeswoman for the STA said: “Over the past two years particularly, the STA has been made aware of a seismic shift from tourism businesses trading healthily to a decline in profitability. The STA represents around 75% of Scotland’s tourism industry and with a regular flow of concerning information in relation to business profitability and viability reaching us from tourism businesses earlier this summer.
“With the inference in numerous media reports that our tourism industry is thriving and well able to absorb a tourism tax, we believe it is necessary to counter this view with evidence that shows the economic reality for tourism businesses.”