Cover Story

Surviving the storm

Tough times don't last, only tough people do. While even the minnows profited during the boom, the downturn has separated the hospitality men from the boys. We find out what strategies they adopted to weather the continuing storm. Dinkar Farwaha reports

Unbelievable RevPars, soaring occupancies and a blistering pace of growth - the fortunes of the past seem to have now been wiped out with the current downturn. In the golden period, many who witnessed this great Indian growth story, announced plans with efficiency and enthusiasm, of scoring a century or the whereabouts within a decade or so.

The bubble has burst now, or at least shrunk in size. While the crunch will not have an impact in the short term, in the long term, projects announced will crumble under the pressure or crawl at a snail's pace. The first telling sign of panic was when hoteliers swung towards single tariffs as the dollar nose-dived.

As per the Lodging Econometrics Asia Pacific: H1 2008 Hotel Pipeline Report, the Asia Pacific total construction pipeline, at 2,226 projects (with 5,06,646 rooms) set a new high in Q2 but may start declining now.

When comparing India and China, the latter's construction pipeline contains 1,240 projects (with 3,23,956 rooms) which represents 55 per cent of all projects in Asia and 64 per cent of all rooms. Remarkably, 78 per cent of China's pipeline is already under construction, a fact that suggests that new hotel openings will heavily continue through 2010. India, on the other hand, has the second largest pipeline with 470 projects (76,304 rooms). A cause for concern is that only 35 per cent this is under construction as of now and 44 per cent is still in early stages of planning.

What this translates into is that even if financing is sourced and there is no change in project feasibility, the new supply won't be in circulation until the early years of the next decade.

Promises unfulfilled

Sanjay Sethi CEO & MD Berggruen Hotels	Param Kannampilly CMD Concept Hospitality
Peter Leitgeb President and CEO of The Claridges Hotels & Resorts	Patu Keswani CMD Lemon Tree Hotels
Chender Baljee CEO & MD Royal Orchid Hotels	Ravi Wazir Principal Consultant Phoenix Hospitality Solutions
Ranjan Gupta GM The Orchid-An Ecotel Mumbai

Many empires have hit the dust in this financial mayhem. One-time finance empire Dawnay, Day has crumbled under the weight of its debt. On its debut, it had made available a corpus of US$ 200 million for its Indian hotel development ambitions, with 30 hotels planned (over 4,000 rooms) by 2015.

According to the latest reports, not only are the company's growth ambitions in India over but it is on the verge of selling all its existing investments in its Indian subsidiary company.

Delays are also rife. Cabana Hotel Management had announced plans of 100 hotels and 10,000 rooms in India within the next 10 years, yet has barely a few additions under its belt till date. Dubai-based Landmark Group too had declared strong growth ambitions in the hotel sector in India, specifically to tap the mid-market properties across tier I and II cities, for which it founded a separate company christened Citymax Hotels (India). However, according to a reliable source, the company has shelved these plans.

Seven Hospitality, which is promoted by Bengaluru-based UKN Group together with French group Seven Partners, had outlined plans to develop 20 full-service, four-star business hotels in India a year ago in the next four to five years under the brand name Seven Hotel. The company has opened just one property till date in Bengaluru.

F&B company Dish Hospitality, that had launched a new hotel vertical just like the Landmark Group, also appears to have shelved its plans. Realty company Emaar MGF, in a joint venture with Accor Hotels, had announced its aim in 2006 to establish ten 'Formule1' branded properties in the country by 2008. But the year has come and about to get over with no signs of these plans even taking off.

Applying brakes

According to the Jones Lang LaSalle Hotels India Digest 2008, India had an estimated 1,169 classified hotels (with 75,787 rooms) at the end of 2006 with majority of the supply located in Mumbai, Delhi, Bengaluru, Chennai and Hyderabad. These five markets alone are supposed get 28,000 rooms by 2011. But with company stocks sliding and land costs not yet stabilising, how many projects will see the light of the day is anyone's guess.

Says Peter Leitgeb, president and CEO of The Claridges Hotels & Resorts, "The high real estate price of hotel sites and plots has become a big deterrent." According to Ravi Wazir, principal consultant, Phoenix Hospitality Solutions, the government's stance on the buildable area on land has impacted the feasibility of such endeavours and forced many to reconsider their investments. "The liquidity crisis too has had its impact," he says.

Meanwhile, Chender Baljee, CEO and MD of Royal Orchid Hotels, has this to say. "Financial constraints have led many companies to back out of projects. Due to the current global economic crisis, it is difficult to get access to funds at reasonable rates."

Wazir makes a point and adds, "Though the recent fall of financial institutions has led to a reticence in the infusion of fresh finance in several cases, these decisions were mostly made prior to the slowdown. Reduced spending as an outcome of the slowdown has certainly added to the concerns of investors in the hotel segment."

Moreover, the economic slowdown, coupled with escalating oil prices, double-digit inflation and rising air travel cost have together led to a fall in occupancies and a steep decline in the room rates of existing hotels. As a result, several upcoming companies having examined the trends minutely have become cautious. Patu Keswani, CMD of Lemon Tree Hotels, believes that the ever-rising cost of raw materials like steel and cement along with abnormally high operating costs have drastically increased project costs. This, according to Keswani, has happened at a time when either there is no loan available because of liquidity crunch or the cost of the debt offered is extremely high. Another reason for the collapse of hospitality plans of non-traditional players, as per Param Kannampilly, CMD of Concept Hospitality, is that the time taken by non-hospitality companies to get the required licenses is too long. This is a reason why they possibly backed out.

Further, the performance of a parent company is playing a direct role on the hotel plans of its subsidiary. Says Pradeep Mathur, MD of Mathur Hospitality, "The morale of the subsidiary plummets and a financial crunch in the parent company automatically sucks out funds from the subsidiary." A case in point is a company like Dawnay, Day International, which after announcing an investment of US$ 200 million, has been forced to put its subsidiary companies in India up for sale.

Countering the downturn

Pradeep Mathur MD Mathur Hospitality

Richa Goyal Sikri Director, group business development STIC Travel Group

Hotels are adopting innovative, and in some cases, practical solutions to counter this downturn. According to Leitgeb, in these testing times it is integral to tap the key feeder markets more aggressively to get more footfalls into the country besides tapping new markets that have potential. "Compared to last year, The Claridges Hotels & Resorts as a group are 40 per cent above in terms of GOP, in the current year, despite grim economic scenario. This could possibly be because we introduced a very aggressive pricing strategy in both domestic and international markets which has been supported by sales blitz in key Indian cities like Mumbai and Bengaluru, aggressive sales trip to our core feeder markets like UK and German speaking markets. In other words, we intend to continue with the same strategy aggressively in the coming days too."

According to him, despite the slowdown, it is integral to consistently promote the destination. "We are participating in India Week held in Germany and will hold a week-long Indian food festival to promote India as a destination in the German market. We are also participating in key international fairs like World Travel Mart, ITB and the luxury fair at Cannes," he mentions.

It is also to be optimistic and strategic in operations and marketing during such testing times. According to Ranjan Gupta, GM of The Orchid-An Ecotel, "This is the time when skill and experience come into play. Undercutting, short selling, weak inventory management, leading to short yields is not the solution. It will ultimately lead to poor bottom lines. One needs to learn lessons from the aviation boom where the days of 'Re 1 airfare' did not last long." As Mathur puts it, "It is important not to over-react. Slow and steady should be the mantra. During a storm, one has to act like a willow rather than an oak."

Investment in the right city and right segment is always important and more so in the current times. Good location will be the criteria for the future development. Having a good mix of investments in premium, mid and budget segments will give the group a better robustness to weather the challenge ahead.

According to Wazir, good occupancy levels are the key during these difficult times. It is essential to work more on it and at the same time offer competitive rates. "With consumers becoming more price conscious, an increase in ARRs seems highly unlikely, at least till the slowdown persists. It is therefore important to achieve good occupancy levels," he mentions.

Chains have better capability to counter a slowdown as compared to standalones. Says Keswani, "Chains have an inherent ability to geographically de-risk. If you have many hotels in different cities, you are never too dependant on the performance of only one hotel and can take advantage of even subsidising poorly performing hotels with better performing ones."

In the short term, it is better to focus on the eggs in the basket than chase chickens outside. Sanjay Sethi, managing director and CEO, Berggruen Hotels, says, "During these tough times, companies should ideally focus more on their current projects and properties than going for new acquisitions."

Forecasting the future

Despite these testing times, the industry is united in the view that the future will be secure sooner than later. "The hospitality sector is here to grow and prosper. As of now there has not been a significant slowdown in demand especially in major cities and in the four-star and five-star categories. This seems to be a temporary phase. The future growth will now probably be more systematic. We still have a demand-supply gap especially during the peak season and India definitely offers opportunity in the hospitality sector across all segments," feels Richa Goyal Sikri, director, group business development, STIC Travel Group.

While the global financial crisis will not help the hotel companies avail attractive loans, the still unfulfilled tourism potential in the country (the tourism ministry expects to receive 10 million tourists by 2010) will continue to drive hotel developments. "Considering the numbers that other destinations get, we are still way behind. We should look at tapping our key feeder markets more aggressively to get more footfalls into the country besides tapping new markets that have potential," feels Leitgeb.

Sethi is of the opinion that during these testing times, ownership-driven companies (due to unfeasibility to start new projects) would pursue growth in the management model. "Once the slowdown is over, one would see them growing stronger in the ownership model again," he adds.

While the economy will continue to be on a slow burner for the next nine to 12 months (as many economists have predicted), chains will defer expansion due to slow growth patterns and tighter money lending. But this delay will only lead to higher input costs in future. This, according to Gupta, will see a more realistic expansion projection than what has been predicted.

The fact of the matter is that there is still a mismatch between supply and demand of rooms in India. Bad times, like the good ones, don't last forever. Yet again a time will come when companies and people will resume their usual spending when the rooms are in short supply. As Keswani says, "While the next twelve to eighteen months will be challenging, things will be back to normal if we stand up to this challenge. I reckon that the demand-supply mismatch will again come into the picture with continued shortage of rooms, which will again drive companies to develop hotels." Life comes full circle indeed.