While the economic outlook for the catering sector remains tough, there are reasons for operators to be optimistic through and beyond the Olympics. Carl Paraskevas and Tony Burnell report
The UK hotel and catering sector is set to outperform the wider economy over the next two years. While the Olympics will, quite evidently provide a boost to the sector, this should not distract from an underlying improvement in marketplace fundamentals.
Despite significant headwinds in the UK economy, output in the sector is forecast to grow by an annual 2.3% in 2012 and 2.5% in 2013.
The key driver behind this growth will be the hotels sector. While catering organisations continue to struggle with the ongoing squeeze on the UK consumer's purse, hotels should benefit from two trends - the increase in foreign visitors to the UK, particularly from emerging market powerhouses, and the tendency for cash-strapped British families to holiday at home.
Both these trends have been exacerbated by the 20% depreciation in trade-weighted sterling since 2007, making the UK a cheaper place for foreign visitors and more expensive for residents to travel abroad.
Tourist numbers from "traditional" visitor countries - USA, Australia, Germany and France - have declined, but this has been offset by increasing levels of spend per visitor.
Based on Lloyds Bank's forecasts, we expect both total leisure and business travel spending in the UK to rise by an annual average of 5% and 4% respectively over the next five years.
Leisure will likely continue to account for the bulk of that spending over the period. However, in 2011 alone, £9.3b or 53% of all in-bound visitor spending was in London, and unless further efforts are undertaken to promote tourism outside the capital, it will continue to take the majority of the spoils.
In the immediate term, all eyes focus on London and the Olympic Games. Estimates about the impact of the games vary. At Lloyds Bank Wholesale Banking & Markets, we predict that there will be £1.62b worth of tourism spending during the course of the games and this, along with the Diamond Jubilee earlier this year, will drive a surge of short-term activity.
One area where the Olympics has had an impact is investment. Investment spending in the hotels and catering industry shot up to 14% in 2011, from -1.5% in 2010, when 6,000 additional hotel rooms were opened, largely in and around the capital, and an additional 4,000 planned for completion before the games.
We expect a pull back in investment growth to about 3.2% in 2013, as capacity concerns put downward pressure in hotel revenues per room in Q4 2012 and into 2013.
This dip in demand fits the experience of previous host cities. But, our experience of working within the sector indicates that if anyone can buck this trend, London can. Weather permitting, the Olympics provides an opportunity to show London off in its full glory and build on existing demand and underlying market fundamentals into 2013 and beyond.
Carl Paraskevas is director of sector economics at Lloyds Bank
Tony Burnell is relationship director, hotels, at Lloyds Bank