UK provincial chain hotels' profit margins are suffering from sharp increases in payroll and other costs according to a survey by TRI Hospitality Consulting.

In the seven months to July 2008 the average profit margin – based on a sample of 401 chain hotels – was 32.1 per cent of its total revenue, a 1 per cent drop on the same period in 2007.

According to the survey, total revenue dropped by 0.2 per cent to £98.99 per available room (PAR), daily payroll PAR increased by 1.1 per cent to £31.73 and other charges such as food and utilities rose by 1.5 per cent to £35.50 PAR. These combined factors resulted in a 3.1 per cent year-on-year decrease in IBFC (income before fixed charges) to £31.76 PAR.

Jonathan Langston, managing director of TRI Hospitality Consulting, said: "In these challenging times, relying on RevPAR alone will give operators, investors and developers a partial and distorted picture of trading. What matters most to any business, after cash, is profit. Only by looking at the movement of total revenue and costs can we gain a truely accurate picture."

The cost of food and utilities, in particular, are causing pressure. In July annual food inflation leapt to 13.7 per cent and electricity and gas rose by 16.1 per cent according to the Consumer Prices Index.

Langston said: "Hoteliers have to perform a balancing act between cost-cutting measures and maintaining the appeal of their food offer. We understand that room service and bar snacks are selling better than three-course meals."

The report uses Liverpool as an example of how rising costs are overshadowing what would normally be a strong performance. As Capital of Culture 2008, Liverpool has experienced a 4.1 per cent increase in hotel occupancy and an increase in demand has caused a 9.3 per cent rise in total revenue to £106.26 PAR.

However, daily payroll costs increased by 5.1 per cent to £30.76 per available room and other charges rose by 14.4 per cent to £38.49 per available room, leaving £37.01 PAR in profit.

"Liverpool is reporting impressive revenue growth thanks to a number of long-term regeneration projects coming to fruition. If it wasn't for the sharp spikes in costs, profit margins would have undoubtedly increased," said Langston.

Out of all the UK's largest cities the only locations not to suffer from a slump in profit margins are London, Birmingham and Liverpool which improved as of April 2008 when Capital of Culture events kicked off.