Indian Hospitality:The Shifting Equation

“The supply of ‘Margarita, The Benjamin’ with a composition of a special Cuvee of Grand Marnier… finished with Louis XIII Cognac… is limited, but the demand is getting up. Let’s have some tequila shots instead!” – were the words of a hospitality consultant explaining the shift towards the fertile markets of Tier II cities to keep up the demand. While the hospitality business is moving to Tier II cities to tap the growing demand, better connectivity & infrastructure, advent of MNCs and rising lifestyle of middle class in Tier II & III cities have opened new markets not only for hotel chain operators but also for the cleaning industry. Suprita Anupam explores…

Slowing economic conditions posed a threat to the hospitality industry with occupancy rate dipping in the last few years. HVS Hospitality Services, a leading consultant, estimates that while hotel supply across major cities witnessed a growth of 15% in 2011-12, demand exhibited a strong increase of 12% during the same period. Thus, although nationwide occupancy decreased in 2011-12, it is vital to note that it was primarily due to supply pressure and not due to an absolute decrease in demand.

In its fourth annual Global Wealth Report 2013, Credit Suisse Research Institute (CSRI) finds that between the second quarters of 2012 and 2013, the aggregate global household wealth has increased by 4.9%. India registering US$3.6 trillion in total wealth with an increase of 7.4%, it’s not surprising that the percentage reflects the growing middle class of India, which now has grown over 300 million population. Impelling the same, the hotel chain operators have localised their supplies by foraying into Tier II and III cities through various routes such as budget brands, franchise/affiliation and acquisition.

The influx of business class hotels in smaller cities accompanies quality service in tune with the guest’s corporate lifestyle. Maintenance and cleaning go hand in hand. Do cleaning schedules and maintenance standards differ in Tier II city hotels? Well, it differs from hotel to hotel, while Marriott invests highly in property, the cost of expenditure on cleaning and maintenance is much the same between 4-5%, be it in Tier I or II city property. However, chain of hotels like Ginger on an average incurs a spending of 16% of the total cost in Tier I cities and 19% in Tier II cities.

New Market Equations

 

Each property is distinctive and designed keeping in mind the local flavour and charm.

It provides everything you need to work productively… all at an exceptional value

– Vijay Sethi

In the past five years, margins have dropped from 37% to 18%. In Tier I cities, the uncertain demand owing to the dropping growth rate of foreign tourists, travellers & meetings, interviews, conference/conventions, events (MICE) activities has majorly contributed to the downslide. Explaining the shift towards smaller cities, Vijay Sethi, Chief Operating Officer, Berggruen Hotels Pvt Ltd avers, “The Tier II & III cities are rapidly emerging as business hubs with substantial development in connectivity from Tier I or Metro cities. Therefore, these cities are increasingly becoming a popular choice for business development given lower land cost and unit cost of power supply. Eventually it is a potential business proposition that supersedes the decision making to venture in these cities.”

World’s largest hotel group, Wyndham Group has announced plans to expand its presence in India with a non-exclusive development agreement to launch the iconic Howard Johnson® brand in India with 3,000 rooms across 35 new properties by 2017.Eric Danziger, President and Chief Executive Officer, Wyndham Hotel Group says, “Given the rise in tourism, the hospitality segment in India is full of growth opportunities. Expansion in Tier II and III cities is very important and franchising work extremely well in such market places.” The most important factor to consider while expanding in these cities is to find the right property, or a location to put the right brand depending upon the consumer demographics that are driving the franchise business in that particular market place.

In smaller cities, branded hotels too are getting affordable, Indian Hotels Ltd with Ginger and Gateway brands, Wyndham with Ramada, Royal Orchid, Marriott are no more secluded from the middle class developments.

PRP Ramakrishnan, Area Director of Engineering-India, Maldives, Singapore, Malaysia and Indonesia-Marriott International Inc says, “We are exploring our presence through Fairfield and Ritz Carlton as well. Our presence in India is scheduled to grow from 22 to 50 in the next four-five years.”

Some of the benefits that smaller cities offer over the Tier I cities are low investment costs in terms of infrastructure set up or rental costs; easy and cost effective marketing with low competition, marketing & promotional expenses, wider reach; and easy labour availability at low cost. Given the beneficial factors and the demand for cleaning and maintenance with the growing hospitality segment in Tier II & III cities, establishing the cleaning business in smaller cities is more productive and cost effective.

Expansion of Global hotel chains in India

Talking about the Indian brands expansion plans, Anirudh Katre, Senior Associate, HVS Hospitality Services says, “To keep pace with the international offering, Indian hotel companies too, have jumped on the bandwagon of lower positioning hotels. The Taj Group with its Gateway brand, ITC Hotels with its Fortune Hotels brand, Sarovar Hotels with their Portico and Hometel brands and Royal Orchid Hotels with their Regenta Central brand are competing head-on with their international counterparts and have seen the addition of several properties in smaller cities across the country.” P K Mohankumar, MD & CEO, Roots Corporation Ltd (Ginger Hotels) says, “We have major plans for growth and expansion over the next three years and Ginger plans to open and grow from the current 2700 to over 8000 rooms by 2016-2017. We are observing a trend in the mid-market segment wherein primarily the business travellers, the SMEs and the unorganised sector business people are moving to newer towns and cities owing to business investment and expansion. This fits in very well with the Ginger strategy which offers branding products and services to this segment.”