Cover Story

Indian Hospitality Through The Eyes Of The Big 10

While there is enough lip service being paid to Indian hospitality's longest robust run in memory, how much of it is above the speculation about a market that still rates as one of Asia-Pacific's most complicated? Bhisham Mansukhani asks head honchos of ten of the most relevant leading hotel companies - five home-grown Indian brands and five international brands with a strong Indian presence - to share their perspective on the Indian hospitality industry.

The last two years have been an unabated party for Indian hospitality which has caught off-guard and busied Indian and international hoteliers, real estate developers and even towel makers into investing in new properties to meet a cavernous demand that is occupying all metro room nights in sight. Yet, the only thing that has really changed in these last three years is healthy occupancies, robust ARRs and promising forecasts for the same. Land prices remain high and soaring still, access to credit in the banking domain is at bay or scant at best, complementing infrastructure like airports and road are abysmal and project length still protracts gestation in spite of invariable profits once the hotel opens for business. So while Indian and international hoteliers cannot ignore the Indian market, they can't escape its unique problems either.

The Great Indian Hotel Story

Capt Krishnan Nair Chairman, Hotel Leelaventure Limited

The year 2004 has been the best year till date for inbound travel, with foreign visitor arrivals reaching a record 3.40 million, resulting in international tourism receipts of US$4.8 billion. WTTC pegs Indian tourism's growth at 8.8 per cent consistently for the next decade, making it the planet's second-fastest, above China. Sceptics need not even regard the above. They can merely consider the occupancies and ARRs. For the second consecutive year, most markets across categories witnessed robust increase both in terms of occupancy and average rate. ARRs rose at an industry average of 20.7 per cent and occupancy showed growth of 7.1 per cent.

The year 2004-05 was marked by an improvement in average rate - spurred by strong rate growth trends in the budget and mid-market segments. The highest annual growth in average rate, in Rupee terms, was witnessed in the four-star (25.7 per cent) and five-star (24.2 per cent) categories followed by the five-star deluxe category (19.2 per cent). The average rate for three-star properties showed a lower increase (12.5 per cent). It may also be noted that, over a ten-year period, the compounded average rate growth in Rupee terms has been the strongest in the four-star category followed by five-star and three-star hotels.

The story on the RevPAR (Rooms Revenue Per Available Room) front has been no different. Five-star hotels experienced the maximum growth in Rupee terms (33.3 per cent) followed by four-star hotels (32.9 per cent) and five-star deluxe hotels (29.7 per cent). The three-star segment witnessed the least improvement (15.5 per cent).

Recently, the biggest of all mutual fund houses like UTI, Franklin Templeton and Tata acquired major stakes in the three Indian hospitality mainstays - Indian Hotels, EIH and Hotel Leelaventure. As on January 1, 2005, the total MFs investments in hospitality stocks amounted to Rs 213 crore. At the end of June 2005 that amount rose to Rs 475 crore. Further, India is set to witness the entry of multiple brands from the stable of international hotel business houses like Hilton, Marriott, Starwood, Shangri-La, Carlson, InterContinental, Accor, Hyatt and Choice totalling at least 41. Starwood is among the most prolific with Sheraton, W, Westin, Four Points, St Regis, Luxury Collection followed by Carlson with Radisson, Regent, Country Inns & Suites, Park Plaza, Park Inn and Hilton bringing in Hilton International, Hilton Residency, Conrad, Scandic by Hilton.

Show Me The Money

Paul Kirwin President - Asia Pacific Carlson Hospitality

Though India is slowly and steadily emerging as a prime market for foreign hospitality brands, most international hotel companies are yet apprehensive about bringing in the greenbacks into the Indian hotel sector. Reasons attributed to this conundrum are the policy frameworks, procedures and infrastructure. Koos Klien, president - Middle East and Asia Pacific, Hilton International, expressed, "All investments, foreign or domestic, are under the expectations of future profits. A good economic policy fosters competition, creates well functioning modern regulatory systems and discourages 'artificial' monopolies created through entry barriers. If India begins to recognise and understand the necessity of good economic policies especially pertaining to the tourism and hospitality industry, fostering investments within the sector will not be a concern.

Voicing a similar concern, Miguel Ko, president - Asia Pacific, Starwood Hotels & Resorts Worldwide, asserted that while bureaucratic restrictions initially had been a hurdle to hotel companies looking at investing in the Indian hotel market, over the last few months the government has taken active interest in garnering investments into the sector by easing bureaucratic restrictions. However, most hotel companies might still not opt for investing in India purely because most corporate strategies of both Indian and International hotel businesses have changed and many are opting out of the investment into the hotel development route and choosing to walk the path of management and franchising. However, Starwood as a company is open to investing in India on a case-to- case basis.

"Escalating land costs and non-availability of land are leading many hotel companies to rely more on realtors to develop hotel properties - a fast paced trend in the Indian market - while many have decided to stick to their core competencies which are managing and running hotels. This business model also paves a way for Indian hotel companies looking to foray into global markets - most companies opt not to invest in international markets due to high hotel developmental costs," expressed Raymond Bickson, managing director, Indian Hotels Company.

While investments coming from hotel companies seem grim, hope floats in the form of real estate funds and Indian realtors - an option most Indian and international hotel companies are adopting to further penetrate the Indian market.

Management v/s Franchising

Nakul Anand Divisional Chief Executive - Hotels, ITC LTD

Management contracts must augur well for developing markets and so does franchising. It has to! All of the international, and most of the Indian hotel companies, featured herein are blooding it up ahead. Paul Kirwin, president-Asia Pacific, Carlson Hospitality Worldwide, points to hindsight as far, saying, "Our initial strategy for the region was to opt for the franchising route. That worked well until Asia's 1997-99 financial crisis, but when we looked again, we decided to come back as a manager rather than a franchiser. We should have done that a lot earlier."

Accor has chosen the JV route with InterGlobe Enterprises to invest in and develop at least 25 Ibis economy hotels across India and South Asia over the next 10 to 12 years through the newly formed entity InterGlobe Hotels. "The company is pursuing management opportunities in the sub-continent and actively negotiating various management contracts," elucidated Michael Issenberg, president-Asia Pacific, Accor.

According to Anil Madhok, managing director, Sarovar Hotels, "Most hotel companies have and will take the management and franchising route with a few opting for complete ownership. It is not possible to expand one's portfolio extensively without taking the management or franchising route. Most large hotel chains own very few properties and grow via the management or franchise route."

Premium Hotels Or Budget Hotels

Anil Madhok Managing Director, Sarovar Hotels

Budget hotels on most counts are also being favoured as part of an overall India-centric approach. Bickson's endorsement of the management contract route is unequivocal. "We want to be more nimble, take on more management contracts, and expand our reach. We are in practically every corner of India right now. We need to strengthen our balance sheet by taking idle assets that are unproductive and re-deploy them to make the company more manageable."

Emphasising the business logic powering indiOne, "The dynamics of the entire hospitality industry has changed over the last few years. A category such as the smart basic hotel has emerged as a compelling business opportunity. We do believe that significant demand exists in the metros and in secondary and tertiary cities across the country," he says.

Klien concurs, "I think the growth will be driven by a two pronged approach - the upscale Hilton hotel and the mid-market Scandic by Hilton brand. We hope to have more of these in gateway cities that are hubs for MNCs as well as in destinations with leading cultural sites and tourist attractions. International branded growth will be via management or franchise models rather than direct ownership."

India's informal champion of mid-segment hotels, Madhok's opinion is much the same. "We are looking closely at the domestic story in line with which we are focusing on smaller towns and cities. We are in the process of introducing an all-new no-frills brand - Hometel. These would be basic hotels and will provide a combination of value and convenience for the business traveller. The cost of operation overall would be low, thereby taking away any pressure on the tariff structure."

Paul Kirwin, president-Asia Pacific, Carlson Hospitality Worldwide, points to hindsight as far, saying, "Our initial strategy for the region was to opt for the franchising route. That worked well until Asia's 1997-99 financial crisis, but when we looked again, we decided to come back as a manager rather than a franchiser. We should have done that a lot earlier." In light of the status quo of its long franchise association with ITC Hotels, Starwood has also opted for the management contract route. "We are look at increasing our presence in the Indian hotel sector through the management route with a maximum of 26 per cent equity participation depending on the viability of the projects, as that will be the route most international companies will opt for in their foray into the Indian market," Ko says.

Issenberg is of the opinion that both luxury and mid-market economy hotel segment in India will witness tremendous growth in the coming years. "We are pursuing management opportunities in the sub-continent and actively negotiating various management contracts."

P R S Oberoi Chairman, EIH LTD

According to Nakul Anand, divisional chief executive - hotels, ITC Ltd, "Over the years ITC has taken pride in its market intelligence prowess and utilised it to its optimum. From our concentration on premium and luxury hotels, we have moved on towards business hotels, budget hotels and heritage hotels as that is the future of the Indian hospitality market.

EIH, long considered the only other part of Indian hospitality's unofficial duopoly, matches its counterpart with much the similar course. The group's strategic alliance for Trident Hotels with Hilton International Co is another motif of the companies' inclination for international standards. P R S Oberoi, chairman, EIH Ltd, comments, "As a result of the boom in India, we are going witness an unprecedented growth in the Indian hospitality business. Not only will metros be areas of hotel development but also emerging tourist and business destinations of the country. This will surely lead to Indian hotel brands entering international markets, especially the Middle East and Far East."

Ifs To Butt Out

Michael Issenberg Managing Director, Accor (Asia Pacific)

That complex landscape of Indian hospitality alluded to earlier still threatens to ambush the gathering unanimity of optimism. The trouble is most of the problems that the hotel industry faces in India are in the public domain and these haven't changed, if only, exacerbated in recent times. Road infrastructure in Mumbai and Bangalore is at a nadir. Mumbai and Delhi's international airports are awaiting privatisation without the requisite urgency, considering the forthcoming additional capacity, it will not be able to handle without comprehensive upgradation.

According to Centre for Asia Pacific Aviation (CAPA), the Indian commercial aircraft market will increase from 190 to over 450 by 2010. The domestic passenger market size will increase from 19 million to 45-50 million by 2010. However, infrastructure limitations and skilled manpower shortage loom as serious potential constraints. On the domestic front, the problem is equally grave. India's overall count of aircraft on the domestic front is 200, serviced by 214 parking sites. With that figure rising to 402 in the near future, a mere 18 additional slots have been factored in so far.

Government apathy towards the aspect of land prices which affect the fundamental business model of a hotel, particularly the mid-segment, is inhibiting enough and financial institutions do not rate hotels as the most favourable of lending prospects.

Soaring ARRs and occupancies themselves hide within an incalculable opportunity loss, reflected in the aversion to India owing to tariffs overshooting the regional benchmark.

Delhi requires at least another 5,000 star category rooms more so in the mid-market segment as it has only 300 rooms in the four-star category compared to 4,299 rooms in the five-star segment. Delhi does not have even the concept of a free land zone for hotels while Mumbai is presently reeling from a shortage of land coupled with invariably high prices. Mahajan & Aibara (M&A) Management Consultancy Division reveals that land cost forms a major part of the overall investment in a property. To cite an example, in Mumbai land cost is approximately 40 per cent - and sometimes even more for prime locations - of the entire project cost and it takes a minimum of six to seven years to break-even.

Suddenly, the market seems uninviting. Capt Krishnan Nair, chairman, Hotel Leelaventure Ltd is justifiably critical. "The government has only woken up fairly late to the true potential of tourism and hospitality, which is why we are witnessing policies being formulated such as FDI allowance, open sky, tax incentives in such coincidental proximity. Having said that, I still feel that the government needs to increase its focus on a prime component to the growth of tourism - infrastructure - which is still woefully inadequate."

Promising India

Robert E Riley CEO, Le Meridien Hotels & RESORTS WORLDWIDE

"India is one of the most magnificent tourist destinations in the world with a "masala" of experiences to satisfy any domestic or international traveller but as it stands now, the infrastructure lags behind other comparable economies. It is as if all the ingredients and opportunities are there but the infrastructure needs more attention - starting with the airports, Klien adds.

Issenberg, believes that the establishment of an India-wide internationally-branded economy hotel network will fill a major void in the Indian hospitality sector and cater for the extra demand that has resulted from growth in domestic and international travel.

Robert E Riley, CEO Le Meridien Hotels and Resorts Worldwide, states, "Corporate inbound to India is growing and is filling a different niche. Our India-specific properties will focus on tertiary cities and resort locations. While we might lose out on the boom of budget hotels, we believe that given the growing population as well as increasing demand, there will always be enough demand to fill four and five-star hotel rooms. In fact Le Meridien plans to follow a strategy which has become reminiscent of most Indian hotel brands. "We are considering more properties in the same city, for instance, Mumbai and Delhi," Riley adds.

Conclusion

While there is little to suggest that the afore has put the Indian market beyond the doubt of the fiercest sceptic, most of the noted commentators have propounded respective strategies to work around some of the challenges and eventually root themselves in the market. This can, in a way, be interpreted as a resounding verdict in favour of India's hotel industry and yet needs to be viewed in the context of its current performance that could well have forced some irrational exuberance. Nevertheless, room is being made for a bit of foolhardiness in the approach towards this market, and despite its eyesore of mediocre infrastructure and administrative bedlam, the hotel industry can no longer be overlooked.