By Madhu Suthanan and Prashant MaheshOne sector that suffers the most during recession time is the hotel industry. The Indian hotel industry is no different. Financial performance of the two largest listed companies in the industry has been disastrous to say the least. Net profit of Indian Hotels fell from Rs 133 crore during fiscal 1998 to Rs 129 crore during fiscal 1999. While EIH witnessed a worse decline from Rs 118 crore to Rs 95 crore during the same period. Things do not seem to have improved at all. For the second quarter of the current financial year 2000, the industry average net profit has fallen by 51.6 per cent. Naturally, hotel stock prices have also plummeted.
There are three reasons behind this.
One is the economic slowdown currently plaguing the country. Most core sector industries like cement, steel and automobile have been in throes of a severe recession for the past few years. Prices have crashed and offtake has been thin. Corporates have gone on a cost cutting spree to overcome the recession. The most obvious costs that have been pruned are the traveling and hotel expenses.
Putting up at guesthouses instead of hotels has become very common. Staying in hotels is resorted to only when it is inevitable. Even then, customers are on the lookout for quality hotels offering facilities similar to five-star hotels at cheaper rates. Jet Airways has introduced low price night flights to Delhi from Mumbai to cater to those who like to fly home the same day.
The second reason behind the dismal performance of the Indian hotel industry has been the devaluation of the Southeast Asian currencies. Overnight India's competitive position has taken a severe beating with Thailand, Indonesia and Malaysia suddenly appearing more attractive to foreign leisure tourists.
Thirdly, the political situation in the country has only accentuated the problem. There is neither any coherent policy on tourism and related industries nor any effort towards attracting foreign tourists to India.
Consider the way the Indian government has handled the opportunity of the millennium -- the New Year eve celebrations. While most other countries are busy trying to make more space for tourists for the occasion, India, with its red tapism, infrastructure bottlenecks, high cost of services and lack of vision (see page III), has failed to capitalise on the millennium chance.
The fall-out
Even when hotel occupancy falls, clients start demanding more facilities. While cost cutting means opting for budget hotels, memories of exclusive treatment at five-star hotels cause them to look for similar facilities. Several four-star and three-star hotels have risen to the occasion, hammering the proverbial last nail in the five-star hotel's coffin.
Moreover, things like complementary drives from airports to hotels have become common and even staying beyond the check-out time by as many as six hours is not billed for. All this is just to retain the goodwill of the customer, to get him back to the hotel once again.
Tourism woes
Leave alone making things easy for domestic tourists, the government has even failed to attract foreign travellers. Despite India being richly endowed with natural resources and cultural heritage spots, foreign tourists hesitate to include the country in their itineraries. "Look at the Switzerland economy. It runs on tourism", says Manoj Bhatia, regional director, Sarovar Park Plaza. To substantiate his point, Bhatia points out the various incentives Switzerland confers on its tourists. Foreign visitors are treated like guests in that country. Infrastructure around airports is excellent, with signboards giving a very clear picture of how to move about.
In India, however, things are exactly the opposite. Infrastructure in and around airports is poor. Flights are delayed or even cancelled at times without any reason. And no clear maps facilitating the tourist are available even in the metros.
Take the example of Goa. With its marvelous beaches it could be promoted as an excellent tourist destination. The Goa airport, however, is unequipped to handle international flights. Currently, tourists go to Goa via Mumbai where they land during midnight hours (as most of the international flights reach Mumbai during late hours). Since there is no connecting flight to Goa during this hour, they are required to stay in the city overnight.
More often than not, they are stuck up in Mumbai for over 12 hours. "Several representations have been made to the government seeking direct flights to Goa but they have been in vain," claims Vivek Nair, vice-chairman and managing director of The Leela, a leading Mumbai based five-star deluxe hotel. The reason for delay is that the Goa airport is owned by the defense ministry, which restricts the traffic flow, especially that of foreign airlines.
Opportunities ahead
Hoteliers feel that there is enough the Indian government can do to improve things for the hotel industry, the least by promoting the tourism sector. They feel that the hotel industry holds a tremendous potential.
Consider:
Tourism contributes 10.7 per cent to global GDP. In case of India, this figure has not gone beyond 0.94 per cent in any particular year.The Indian figure of a mere 2.29 million tourist arrivals is a lowly 0.4 per cent of the global figures for this sector. Even non-tourist countries like Indonesia and Malaysia get far more tourists than India, despite the incomparable beaches, heritage sites, monuments, pilgrimage centres that the country offers.Tourism generates the highest employment compared to any other industry, except, probably, agriculture.Government figures show that an investment of Rs 10 lakhs creates around 44.6 jobs in agriculture, 12.6 in manufacturing, 47.5 in tourism and 89 in tourism related sectors like hotels and restaurants.
Tourism is the second highest net earner of foreign exchange. It is estimated that 50 per cent of tourist expenditure goes towards food and accommodation. For the inland bound tourist traffic it is much more than this, rising to the highest levels for business travelers.There are 6,200 approved hotel rooms in India compared to 1.68 lakh rooms in Indonesia and about 4 lakh rooms in China. To achieve the target of 5 million tourists by 2004, we need to add 65,000 rooms per year over the next five years. This would require an investment of Rs 6,500 crore per year.All this goes to reveal the vast untapped potential of the tourism sector for the country in general and the hotel industry in particular. Moreover, the tourist segment is not dependent on the ups and downs of the Indian economy unlike the business segment. But at the same time, tourists are more money conscious (read budget hotels) than are business travellers.
The star performer
While recession and other woes have put a spoke in the five-star hotel segment's fortunes, the lower category hotels have not suffered much. In some cases they have even gained over their high-end cousins. Occupancy rate and room rents for three-star and four-star hotels have been far better than that of the five-star hotels in the past four years. A look at the growth rates would further clarify the matters:
Between the period 1995-96 to 1998-99, the annual occupancy rate fell by 20 per cent for the five-star hotels (the overall industry rate fell by 17.9 per cent). Against this the growth rate for four-star hotels registered a minor fall of just 2.3 per cent.The overall industry average room rate went up by 25.9 per cent in rupee terms, with the five-star deluxe category witnessing a rise of 34.5 per cent. The four-star category, however, saw a rise of an astounding 82 per cent.Although, recession and the subsequent cost cutting drive have caused the corporate traveller to opt for budget hotels, there is yet another plausible reason behind this trend. The location of budget hotels that are typically located in smaller cities. The absence of high cost five-star hotels in these places further boosts the prospects of budget hotels. "Smaller cities would find it difficult to command five-star rates," says Bhatia.
Moreover, cumulative annual occupancy growth rate in the four metros has moved down, while that for cities like Ahmedabad and Hyderabad, has risen. Similarly, average room rates have climbed faster in cities like Agra, Ahmedabad and Jaipur compared to other metropolitan cities. This is the reason behind a host of budget hotels coming up in these cities.
Not too fast
However, five-star hotels do not face any serious threat from the budget hotels in the metropolitan areas. The reason is the exorbitant cost of setting up new hotels in these cities. The cost of land, as per international norms, should be around 15 per cent of the total hotel project cost. In India, however, it is more than 50 per cent, especially in metro cities like Mumbai and Delhi. And since land cost remains more or less the same irrespective of the star status, a budget hotel becomes economically less viable.
Hoteliers agree that as far as metropolitan cities are concerned, obtaining a sizable patch of land is difficult considering the exorbitant land costs and various other restrictions (like the Urban Land Ceiling Act).
In fact, some investors feel that there are better ways of utilising land than building hotels. Consider the success stories of Crossroads and Shoppers' Stop in Mumbai and Spencers Plaza in Chennai. High land costs are prompting more and more people to look at the retail business.
But the four-star versus five-star battle is not really a matter of concern. Even hoteliers feel that this struggle will continue only for a short period. Once the economy improves and the tourist arrival increases, then five-star hotels will regain their lost edge.
So where does the future lie?
The new government at the centre seems to have inspired an air of optimism all around. On the economic front too, inflation is at a low of two per cent and preliminary figures show an expected GDP growth rate of 6.5 per cent in the current financial year. Foreign direct investment (FDI) is trickling in while foreign institutional investors (FIIs) are increasing their exposure to India. All these positive signals naturally spell better days for the hotel industry and augur well for the business traveller in the country. Tourists feel India has became affordable, thanks to the recent appreciation of many Southeast Asian currencies.
On the profitability front, we still have a long way to go. The current Indian hotel market reflects that hotel demand has grown at a pace slower than that of supply growth over the past four years. A lot of additional capacity is also expected to come up in the four metropolitan cities in the coming months. This capacity may materialise sooner than expected if room rates start to improve. Take the example of Mumbai itself. By 2002, as per a study conducted by Infac, a leading Mumbai based research organisation, room supply is expected to increase in the city by 3,100 rooms during next few years. This would continue to exert pressure on the occupancy rate and room rents. Therefore, while demand at present may have slowed down, many hotels that are still under construction will commence operations in keeping with the rise in demand.
However, if one considers a sustained improvement in the economy over the long term, then due to business travellers demand for five-star hotels in metros is bound to increase. It would make good business sense for hoteliers to try and consolidate their existing businesses in the metros and other cities.
It is here where opportunities for mergers arise. In Pune, the Taj group has already taken over Hotel Blue Diamond. Mergers are likely to take place more in upcoming smaller cities where growth potential is high. Also, opportunities are many when it comes to lower grade hotels which can be upgraded to the five-star status. This is because most hotels in future are expected to be branded. And reputed brands are available only if hotels are above the three-star category. Branding also allows Indian hotel majors an opportunity to try and expand their brands through management contracts and consolidation with other hotels that fit into their profile.
More merger and acquisition prospects are expected when the government divests its stakes in various public sector hotels -- ITDC and Hotel Corporation of India. This is because with government coffers turning empty and hotels turning into a non-priority business for the government, it would have no other option but to offload its holdings in both the companies that own large number of hotels in prime locations.
Another area that is likely to witness some development is the heritage hotel segment. Already numerous palaces in Rajasthan, especially in Jaipur and Udaipur, and other areas close to Delhi are being converted into heritage hotels.
Even within hotels, in order to survive competition and retain the valuable customer, hotels may go in for more value added services like providing conference and exhibition facilities. Currently, the existing hotels offer only limited value added facilities. But plans are afoot to provide conference facilities with large seating capacities and set up permanent exhibition centres.
Already Le Meridian has taken a step in this direction. It is planning to include a conference centre in its proposed hotel in Mumbai that is expected to come up by late 2001.
Some hotels may project themselves to be based on themes. Like The Orchid in Mumbai, which is an eco-friendly hotel (or in business parlance, an Ecotel). Such concepts may not be a craze among the Indians but are sought after by westerners, who are ready to go an extra mile to be eco-friendly.
Sometimes even value-added services may help to improve the bottomline of hotels like The Leela, which offers a membership of its privileged club to regular customers. Club members can thus avail of conference facilities free of cost in the hotel. While it does not cost anything to the hotel, the customer gets to economise. The Leela also goes a little further for busy businessmen who would like to unwind and relax. It has set up The Leela Health Spa, which caters to such clients.
Says Nair: "Variable costs are just 40 per cent of the revenue in the health club business. We do a business of not less than Rs 15,000 every day. But for its limited space we could have increased this business further." He continues: "This revenue is exclusively from over-the-counter customers. We also have long term membership for our regular visitors."
All said and done, the boom markets of yesteryears are passé. To survive in the increasingly competitive market, hotels would have to do a lot more than just serve their customers.