Tips on Thriving During Inflation

Many publicans with grey in their hair are philosophical about increasing inflation.

Having successfully traded through decades of high, double-digit inflation, they know what has to change to stay profitable.

A large part of that change is a mental shift.

“We’ve got accustomed to zero inflation, wages remaining stable and costs being steady,” said one publican.

Now most cost inputs are rising. Everything from electricity and insurance to food and beverage.

“We will see enduring inflation. It will have pluses and minuses but you can do very well.

“I’m old enough to remember having to learn to trade with inflation and then with zero inflation.

“But inflation does not have to hurt profits.”

THE SOLUTION

The obvious change in strategy is to increase prices to keep pace with rising costs.

For example, the average daily rate for rooms will go up, providing a higher return. (In the US, hotel rates rose by 1% to 3.7% each month in the first four months this year.)

Increasing prices can have a negative impact if patrons respond by staying away – but history suggests this need not be the case.

In Australia during the last inflationary period, quarterly cost of living adjustments to wages meant people were getting a pay rise every 13 weeks – and they tended to spend. In 2022, the new Federal Government is committed to a “real increase” in wages.

People forget that spending during the 1980s was quite strongly.

Another hotelier said it was important to lock in lower prices where possible, such as long term electricity contracts.

Ask for advance of warning from major suppliers, enabling you to buy in bulk at the lower price and stockpile.

...inflation does not have to hurt profits.

Other points:

• For those carrying debt, remember that inflation dissipates the real value of your debt.

• As the rest of the world is experiencing inflation, it could be argued that it’s best for Australia to be “in step” to keep down the cost of imports.

• Construction costs are rising. This requires a much tighter focus on input costs, tight documentation and rigorous project management.

PROFESSIONAL VIEWPOINT

In a recent report, commercial real estate company CBRE had this to say about accommodation hotels: “Most hotels’ returns are not sensitive to low-tomoderate inflation.”

“Due to the uniquely short lease periods (room rates), measured in days rather than months or years, hotels have been debated as a hedge against inflation.

“In theory, hotel managers could rapidly adjust prices to account for any short-term variations in inflation. Can hotels use this approach to hedge against inflation?”

However, the CBRE report says history provides a caveat to this.

“Avner Arbel and Robert H. Woods (1991)1 examined the performance of hotels between 1975 and 1989, an era of high inflation.

“They concluded that adjusting prices too closely to the rate of inflation decreases returns over this period, as the higher prices also lead to reduced occupancy in times of high inflation.

“Since inflation does not affect all prices equally, consumers often shy away from travel when faced with a higher cost of living.”

You can read the report here: https://www.cbre.com/insights/viewpoints/are-hotels-a-hedge-against-inflation-in-the-modern-era

Bloomberg cited hospitality consultant Bjorn Hanson, who said labour shortages would impact room rates.

“Hotels are unable to find and hire people, even with cash incentives for simply showing up at an interview and hourly wages that have grown 30% to 50% since 2019.

“A recession could draw more people back into jobs, but for now, hotels have to hope leisure travellers are more flexible when it comes to room service or cleaning schedules, and they’ll continue to run with fewer backof-house staffers to avoid driving up payrolls.”