Mohankumar P KMumbai: Recent industry research studies report 9 per cent let-up in capacity building in luxury/premium hotels category and a 16 per cent growth in demand for luxury/premium hotel rooms. This is indeed good news for the segment which was in distress for long due to supply overstepping demand, thanks to indiscriminate development of luxury/premium units over the years to ride the initial wave of fortune.
However, during the downturn, there was cessation of new investments, leading to the much-needed supply correction. The last two decades have seen a misguided rush to create additional capacity in the luxury/premium category buoyed by attractive demand-supply gap and a resultant high Average Room Rate (ARR). But the project timeline and cost of development in India are so high that by the time the properties opened, the market conditions changed and the viability was not there anymore. Investors for once forgot to think about the cyclical nature of this business.
The government of the day should have come in with low cost funds and speeded up the licensing process, both of which did not happen, leading to unimaginable distress for investors. We are at a saturation point today with regard to the capacity of luxury/premium hotel rooms. India has only a few luxury destinations which are promoted globally. You cannot promote the whole country as a luxury/premium destination. That is anyway not the perception abroad in key source markets either. Kerala, Rajasthan and Goa have been created through 40 years of sustained campaign.
New growth is only possible in the mid-market and economy segments of the hospitality industry. This is ideal especially in Tier II and III cities of India with basic access by road, rail or air. In these emerging cities, the availability of land and the cost of development are financially viable to ensure a break-even within five years.
The Indian hospitality industry is witnessing a big churn.
A lot of corporate interest is being seen in the mid-market hotels category at roughly Rs. 40-50 lakh investment per key and economy hotels at Rs. 20-25 lakh per key. These are not poor quality hotels. India’s new breed of ‘smart business’ hotels, as I call them, will be design-centric and drive cost optimisation like never before. Innovations will need to be incorporated in capital structure, building design and construction, technology, labour automation and customer experience.
New growth is only possible in the mid-market and economy segments of the hospitality industry in Tier II and III cities of India with basic access by road, rail or air
About 75 Tier II and III cities in India have the potential to grow into tourist destinations and badly need investments in hospitality infrastructure. Indian and international hospitality brands recognise there is huge potential in mid-market and economy hotel categories. Every major hotel brand in the country is rejigging their brand architecture to create products for different segments under new sub-brands. Brands like Ibis by AccorHotels, Red Fox by LemonTree and Bloom Hotels are seriously looking at emerging cities in India to grow exponentially.
Green field and brown field projects are being ruled out for now. Brands are looking at existing property owners of unbranded traditional hotels for upgrading and rebranding. This makes sound economic sense. In the mid-market and economy categories, more than 70 per cent of the properties are in the unbranded category.
Therein lies the opportunity. To make mid-market and economy hotels viable in Tier I cities, especially where cost of land is high, the government should build land banks and make them available to investors on long-term lease. States like Karnataka and Odisha are moving in this direction. In Tier II and III cities, the government should make available necessary infrastructure like power, water and roads; and of course, a single window clearance for the 100-odd licenses.
Nowhere else in the world is the hospitality industry so regulated by license raj and facing inordinate delay in approvals like in India. It takes about a year to secure all licenses before ground breaking! Smart business hotels are also relooking at HR deployment. Slowly but steadily payroll cost has climbed over the years to become a huge component in operating expenses when compared to other costs. Ideally in India the room to employee ratio is 1:2 to 1:2.5 for ‘budget’ hotels.
Today the way mid-market and economy hotels are conceived, this can be brought down to 1:0.5, which means a 30-room hotel needs to employ only 15 people to run efficiently. Juxtapose this with the current room to employee ratio for luxury hotels at 1:2.5 to 1:3? Labour by definition is progressive liability in terms of output and progressive expense in terms of cost. Hence, a lot more of careful planning and analysis is needed in terms of HR deployment and cost.
Smart business hotels are redrawing plans to enhance revenue generating area to 80-90 per cent, and investing more in the rooms where guest experience can be directly impacted and not in public areas where the investments are more towards brand vanity. Air connectivity, which has always been cited as a major hindrance for hotel investments coming up in Tier II and III cities, has now been addressed by the Government of India’s UDAN regional air connectivity scheme which will operationalise more than 70 underserved and unserved airports.
Currently there are at least 200 branded hotels on the block in the classified category. This does not augur well for the industry which is one of the biggest foreign exchange earners for the nation. If the Government of India can address three basic needs for the hospitality industry – rationalise cost of development, make low cost capital available, and ensure time bound approvals – a sustainable hospitality industry can thrive and not limit itself to the metros but expand to Tier II and III cities, growing our national tourism potential manifold.
The author is a hospitality industry veteran with over four decades of standing having served in various senior leadership roles with the Taj Group of Hotels. He is the founder director of Turnstone Hospitality and Co-owner of Purple Cloud Hotels & Resorts.
