Small is the new big

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Thanks to the booming economy and a cash-rich middle class, India’s tier II cities have been seeing a spurt in hotels in the recent past. Real estate developers see the presence of profitable business opportunities in these cities as the main reason for the up in the number of these hotels. And, there is a long line of hotel operators and investors looking to set up such properties in these cities.

Gone are the days when large hotels were seen only in metros. Be it luxury chains like those of the Taj, Oberoi or ITC, or for that matter mid-segment chains like that of Lemon Tree Hotels, most of them are foraying into the smaller cities. It is the age of non-metros.

The development of airports, roads and convention centres has also created a platform in the smaller cities for these hotel chains to flourish. Not only that; The foray of IT companies, BPOs and retail industries into tier II and even tier III cities has generated enough purchasing power among the people there and therefore, created a ready clientele for these hotels. Cities like Pune and Gurgaon are witnessing a rise in demand for quality rooms due to the development of its IT industry and BPOs. Hotel chains are beginning to realise the potential of these small but yet untapped markets.

Despite the trend, it would be incorrect to say that the focus of hotel chains is shifting to tier II cities. Akshay Kulkarni, director, South Asia, Cushman & Wakefield Hospitality explains: “Hotels have always gone where there are demand drivers — for example when Aurangabad was a hot destination on the Buddhist trail, hotels came up there. So it would be unfair to say that their hotel industry focus is now shifting. As and when new centres emerge where new business drivers set up shop, hotels will follow,” he adds.

Some of the Tier II cities which have always had hotels as part of the mainstay are — Jaipur, Agra, Chandigarh, Amritsar, Kochi just to name a few. Fortune Park Hotels, which is currently present in cities like Jaipur, Jamshedpur, Vapi, Vijaywada, Madurai, Shirdi, Pune, Darjeeling, Ooty and Tirupati, is planning to augment its presence in other tier II and III cities, in keeping with the growth.

“We currently have 20 hotels operating in a number of tier II cities and another 22 hotels under construction,” says Suresh Kumar, president, Fortune Park Hotels. There can be no discount to the fact that there is a substantial cost advantage in these cities too, as growth in them is mostly based on scalable infrastructure and availability of skilled manpower. Says Kumar, “On an average, the final cost of the project is at least 30% cheaper than in bigger cities like Mumbai or Delhi.”

“The tier II cities have their own commercial worth and that was the reason why we decided to cash in on the growth in these cities,” says Sunil Mathur, director, International Development, Indian Ocean Region, Wyndham Hotel Group International. The group has got upscale business hotels set up in Jaipur, Varanasi, Khajuraho and Cochin.

Sunil Gupta, executive director, Inovoa and Choice hotels is in the process of setting up hotels in Bangalore, Pune, Gurgaon under Inovoa Hotels & resorts, a Joint venture company with Hillwood corporation, USA. “There is a lot of demand potential in these cities because of the tremendous growth seen in service industries such as IT and pharmaceuticals among others,” says Gupta.

According to industry analysts, out of the total cost of setting up a hotel in a metro, 40% is the land cost. In comparison, land prices in tier II and III cities were far lower, leading to lower costs in setting up a hotel. “Better air and road infrastructure are also fuelling the growth of these cities,” says Kumar.

“The hotel industry at the moment is a very profitable business. With a surge in travel, profitability is assured in this sector,” says Mathur. The key factors spawning India’s hospitality industry growth are a booming economy, steady political scene, soaring service industry, FDI inflow, infrastructure growth and a boost for the tourism sector due to government funding. An estimated 4.4 million tourists are expected to visit India with an annual average growth rate of 12% in the next few years and the domestic tourist market is also flourishing.

As the economy takes major strides, fashion, lifestyle and consumer behaviour patterns are changing. This indirectly has led to consumers now opting to go on short vacations and staying in starred hotels. This change in mindset and desire to go out and spend some time in hotels is driving the growth of this industry.

Wyndham Hotel Group International has been deriving more than 45% of its operating profit from its hotels in the tier II cities. Phoenix Group Global, which is currently coming up with a business hotel in Bangalore - Whitefield by the end of the year and has plans to make its presence felt in Vizag, Jaipur, Nagpur, Ahmedabad and Cochin is expecting returns of around 20% on a year on year basis. “We saw a large gap between demand and supply and decided to expand our business in these cities,” says Priti Chand, director, PR & communications, Phoenix Group Global.

Lemon Tree Hotels targets occupancies of 70% plus in the city that they operate in, at an average room rate of 60-70% that of a 5-star hotel. “Demand for hotel rooms in these cities is often greater than the supply of rooms and supports these aggressive business plans,” says Aradhana Lal, vice president-sales & marketing, The Lemon Tree Hotel Company, which has hotels in Pune and Goa and is building hotels in other tier II cities like Ahmedabad, Indore, Aurangabad, Jaipur, Chandigarh, Ranchi and Shimla.

Multi-cuisine dining, a bar, recreation and fitness facilities, a swimming pool (where possible) as well as a business centre, wi-fi facility, meeting rooms and state of the art conference halls are some of the basic facilities a majority of these hotels offer. And with tariffs suiting the travel pockets, the popularity of these hotels is going north. At the Fortune Landmark Indore, the tariff for a single standard room comes to about Rs 4,000 (as per the hotel website). At the Lemon Tree Hotel, Hinjawadi, Pune a single superior room costs Rs 8,000 per night, which is far less than what a luxury hotel has to offer in a metro.

There are, however, a few speed-breakers. One problem that a business traveller faces in these small cities is lack of transportation. “Often I do get a cab booked for the entire day beforehand when I travel. But yes, during one of my visits I did face some difficulty in finding a taxi, and even the hotel staff was unable to help me. I think in that respect, a lot needs to be done in these smaller cities,” said Rahul Pande, a frequent business traveller. But most are optimistic that it is just a matter of time before these issues get sorted out.