Lodging Industry Can Expect Still-Squeezed Profits As Recovery Continues In 2023

By Justin Randall, HUB International

Wisconsin’s hospitality industry continues to participate in the recovery from the after-effects of the COVID-19 pandemic, but operators shouldn’t get too comfortable.

​The economy’s uncertain. Inflation — and the steady ratcheting up of interest rates in response — is keeping the pressure on costs. And then there’s the never-ending battle to fill employee ranks. Hospitality is not yet out of the woods.

Here’s what the industry can expect for 2023:

Recovery can’t offset squeezed profit margins — yet

Various trendlines have been positive for hospitality during 2022. Wisconsin continues to outpace the national average for travel spending compared to its 2019 performance as the state’s increased investment in support of the tourism economy pays off.

Still, the recovery has been spotty, with tourist centers benefiting from recreational travel gains, while business hubs have paid for a slower business travel comeback. For example, room tax collections for recreational centers such as Lake Delton and Minocqua grew 22.2% and 21.8%, respectively, in 2021 from 2019 levels. Madison and Milwaukee, though, saw decreases of 36.1% and 30.3%.

Nationally, hotel and lodging industry revenue continues the rebound and room revenue is expected to reach $188 billion in 2022, 11% ahead of 2019. Still, adjusted for inflation, it’s unlikely to sur- pass pre-pandemic levels until 2025.

What’s hobbling the industry is the combination of rising costs for labor, food, beverages, and other supplies against the backdrop of supply chain shortages. Wages alone have jumped nearly 18% from 2019 levels. The result is diminished profits.

Just as concerning is the trickle-down effect of inflation. As interest rates rise to hold it in check, many operators are scrambling to refinance their debt. More worrisome is the number of projects currently and potentially to be put on hold due to money’s cost. That has broader economic implications given the investment needed to build a new hotel or resort.

Adding to the pressure are rising insurance costs. Properties with liquor liability or live entertainment exposures, or with amenities like spa services, can expect to pay up to 20% more for insurance in 2023.

​Pain points and perils for 2023

The labor shortage will continue to be one of the hospitality industry’s biggest challenges: The nation’s restaurants are short 750,000 workers compared to 2019 levels; hotels are short 400,000
workers, as 87% of lodging operators report staffing shortages.

The industry’s best chance at counter- ing the trends is to make jobs well worth employees’ while. Wages are part of the equation, of course, but there’s more to meeting the challenge. It will include a focus on improved benefits. And more scheduling flexibility would help, too.

As employers take a hard look at their benefits packages, they should consider deepening trends around personalized benefits — designed around employees’ individual needs — that deliver a quality employee experience. That’s how hospitality organizations will create a workplace populated by loyal workers and more attractive to prospective employees.

Security is also a pressing concern — especially as technology solutions are helpful in overcoming staffing shortfalls. The hospitality industry is a top target of cybercriminals given its access to enormous amounts of personal customer data.

Many hospitality franchisers require their franchisees to have cyber insurance, but it is hard to secure, and very costly. Some observers expect the number of businesses that can’t afford it or are denied coverage to double in 2023. Underwriters will be looking for hospitality businesses to have proven cybersecurity practices in place: security audits, multi-factor authentication, and employee training among them.

Finally, those properties in areas prone to catastrophes like floods, fires, hurricanes, and tornadoes should be prepared for a tough environment for property insurance in 2023. Rates are expected to increase by 5% to as high as 20% in the most vulnerable regions.
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Ensuring building resiliency and maintenance will show that risks are being managed. Those with a proven risk management strategy, including a post-disaster recovery plan, will be best-positioned with underwriters.

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About the Author:

​Justin Randall leads the Hospitality & Real Estate Practice for global insurance brokerage Hub International’s Wisconsin Region, focusing on leading client strategy in those verticals. Justin’s 10 years of experience encompasses leading client engagements, advising clients on all aspects of insurance, risk management and overall enterprise growth. Justin works with several different franchises including clients with more than nearly $2B in revenues. Justin is an active member of the Wisconsin Restaurant Association as well as a participant in the American Hotel & Lodging Association. Mr. Randall holds a Bachelor’s Degree in Business from Edgewood College in Madison, WI.

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