Hotels check in for a cheaper stay
Srinivas Ghatta is in the western suburbs of Mumbai on a business trip from Kerala, staying at a small independent hotel where a room costs 4,500 rupees (Dh312) a night. The room is clean and tidy, but Mr Ghatta is disappointed because he doesn't think the hotel represents good value.
"It is OK in terms of accommodation, but it's a little on the expensive side. Mumbai is such a huge city and there should be more variety and cheaper places," he says.
His dream of a more affordable bed for the night may soon be answered. Many international hotel brands are soon to increase their presence in India's mid-market hotel segment. Chains such as Hyatt, Hilton, Marriott, Carlson and InterContinental plan to open mid-level hotels in India in the next few years.
The US company Marriot says opportunities in the three to four-star space are key to its business.
"Our Fairfield brand will be focusing on the mid-market segment, which is underserved in India," says Rajeev Menon, an area vice president for Marriott who is based in India. "The country is the second-fastest growing market for us after China, and we want to target the middle-class Indians who want value for money from their stay."
Anyone looking at the figures in this sector can see that Mr Menon's enthusiasm is not wishful thinking. India's total hotel market is worth 700 billion to 800bn rupees annually, according to the business consultancy Grant Thornton.
The organised market, excluding establishments such as independent bed-and-breakfasts and guest houses, is 30 per cent of the total market and is worth about 220bn rupees annually, Grant Thornton says. The mid-level hotel segment constitutes 30 per cent of the organised market, for an estimated annual value of 66bn rupees. The figures are expected to double in the next five years.
Foreign brands have about 19 per cent of the country's mid-price hotel market, according to the Federation of Hotel and Restaurant Associations of India. Market experts say the mid-level segment - US$50 (Dh183) to $100 a night - is the fastest-growing part of the hospitality sector.
"There is immense opportunity because it is still a nascent sector and there is a shortage of good mid-market hotels," says Sudeep Jain, the executive vice president at Jones Lang LaSalle Hotels India. "Given the amount of domestic and international travel now happening, supply is still struggling to catch up with demand in this segment."
Nearly half of the rooms that branded hotels plan to add in India in the next five years will be in the mid-price and budget segments, a trend similar to what has been happening in the Indian airline industry, analysts say. Many chains have begun to recognise India's potential, for its domestic as well as foreign travellers.
"International chains are coming to India after the realisation of the large market potential that the country offers, both for inbound and outbound travellers," says PR Srinivas, the head of tourism, hospitality and leisure at Deloitte India. "India's outbound is far larger than the inbound, and familiarity of branding needs to be cultivated at the source market.".
Foreign brands want to provide a cushion against a slowdown in their luxury segment, as mid-price properties are considered the least vulnerable to an economic slowdown.
"With a slowdown almost always lurking on the horizon, there would be renewed interest in providing quality hospitality options in the mid-tier market. Corporate business, is starting to slowly shift towards serviced apartments and mid-priced hotels - and when this opportunity becomes more apparent, we are bound to see a bevy of foreign mid-segment hotel chains expanding their India footprint," said Vinamra Shastri, a partner at Grant Thornton.
Domestic tourists will still be spending but the recession in Europe means less foreign travellers. "Hoteliers in India want to reduce their dependency on the foreign tourists and focus on domestic tourism, so that if there is a recession and countries take austerity measures, it would not hurt their India operations," says Mr Jain.
Challenges also exist for the internationals with possible project price hikes and hiccups. "This is especially true of the mid-market and economy sectors, wherein the cost of available hotel sites are prohibitive for the most part," says Mr Srinivas.
"A second challenge is the development time and cost of funds for this sector, which are relatively high - the first a result of policy [and] clearances, and the second a factor of the real estate risk associated with hotel projects and the longer gestation of the projects."
The onslaught of international brands has not gone unnoticed by the domestic operators and many are ahead of the game compared with international players, says Mr Jain. "This is because they have been in the market longer and are therefore more flexible with their products and structures.
"Also, they are willing to back their hotel projects with capital. That said, some of the international players are also showing willingness to invest capital now, so we are going to see some healthy competition before too long."
Local chains welcomed the competition but also questioned whether major brands would really be able to serve the demanding middle-class customers who want both the service and value for money.
"Many foreign operators will have to operate in the higher end of the mid-market," says Rahul Pandit, the president of the Lemon Tree Hotel company. "While they are globally in the mid market, here they will be in the upper end because of the pricing and branding of these hotels."
One thing is common for both domestic and international brands: they both see the opportunities inherent in India's growth story. "The country's expanding population and high degree of urban literacy is leading to continuous job creation," says Mr Jain.
"Business is pouring in from all over the world and is also being generated domestically at a high rate. This is definitely the right time for mid-market hotels to make a decisive play in India."
Published: December 25, 2011 04:00 AM