Budget hotels book expansion

Written by Vishakha Talreja | Updated: Jan 31 2011, 04:50am hrs
The Budget and mid-market hotel segment is in the thick of action. Both homegrown and international players are drawing up plans to add more rooms in the segment across the country. Its in keeping with the sentiment that the segment would see prolific growth post-slowdown.

Sample this: Indian Hotels Company (with brands such as Taj, Gateway, Vivanta and Ginger) aims to have a total of 70-75 Ginger Hotels (budget hotels) across India in the next four-five years, up from its pool of 24 hotels at present. Similarly ITC, which doesnt have an out-and-out budget brand, is quite bullish on its mid-market brands under the umbrella of ITC Fortune. It has 62 signed hotels in the pipeline. Lemon Tree Hotels is targeting 3,000 rooms by next three years under its brands Lemon Tree and Red Fox. Royal Orchid Hotels, too, is looking at fast expansion of its budget brand Peppermint. Meanwhile Asian Hotels (West) which owns the Hyatt in Mumbai is looking at expanding the four-star Clarion brand in India through its master franchise.

However, its not just the homegrown players that are bullish. International hospitality majors, too, are lining up their budget brands for the Indian market. Marriott International has a target of launching around 40 properties of its mid-scale brand Fairfield. Similarly, Intercontinental Hotel Group recently launched its limited services hotel brand Holiday Inn Express, signing six properties with New-Delhi realty player Amrapali Group. Accor, too, is busy expanding its Ibis Hotels with its JV partner, InterGlobe in India.

This shift in the market scene may be attributed to a combination of the burgeoning number of middle-class travellers, increasing number of first time flyers and the spurt in domestic travel. Outlining the reason for the growing demand of budget accommodation in the country, CEO of Ginger Hotels Prabhat Pani says, A substantial segment of business travellers look at accommodation options that are economical, as it helps lower their operational costs. Similarly, the economic growth in the country has led to an increase in leisure travel, including short weekend trips. A proportion of such travellers, especially the young ones, look for accommodation that would provide them with the basics.

In the next few months Ginger Hotels will be opening properties in Bangalore, Tirupur, Faridabad, Noida, Greater Noida, Jaipur, Amritsar, Hyderabad and Chandigarh. The managing director of Peppermint Hotels, Arjun Baljee, too, says, As a budget brand, our room rates are half of what luxury hotels offer in the same city. As the market matures, every price point attracts a number of hotels. For a budget hotel chain, its important to have a network, as its a volume game. That is why everyone talks about scale. At present, Peppermint Hotels has three hotels in operation. It is planning to add seven more by the end of this year at an investment of Rs 60 crore. Its target is to have 20 operational hotels by March 2013.

Most of these brands launched their budget segment four to five years back, introducing the concept of no-frills or limited service hotels. However, during the slowdown, many players put their hotel projects on a backburner. Post-recession, the tide turned and the hospitality industry witnessed a second wave of budget boom. A hotel analyst with a Mumbai-based consultancy says, While the building cost of per room in a luxury hotel is about Rs 1 crore, it is about Rs 40-45 lakh for a budget hotel. Many homegrown players are still tied up with their capex, therefore, building a budget hotel makes sense for them right now.

What makes the investment in this segment even more attractive is the demand-supply mismatch. Lemon Tree Hotels VP-operations Rahul Pandit says, Owing to high real estate cost and supply constraints, not many hoteliers ventured into mass market brands and concentrated more on luxury hotels. This is not the case in the rest of the world where budget hotels form the base of the pyramid. However, lower gestation period and an increasing demand are attracting players to this segment. The expansion in the space is finally happening with hoteliers saving on land costs by going for lease-back and innovative formats such as hotels located in malls and SEZs.

Now, the big players are looking at speedy expansion of their budget brands as compared to their luxury brands. We are quite bullish about 45-60 room hotels in tier two and three cities. We see growth in our Fortune Inn and Fortune Park (75-80 rooms) brands. A mid-market hotel can be developed on a small land parcel, which makes it attractive for a hotelier cost-wise, says Suresh Kumar, president, ITC Fortune.

With foreign players introducing their budget brands in the country, the market is getting more organised. A hotelier says (on the condition of anonymity), Initially Indian brands were confused when it came to positioning their budget brands. For instance, when the Oberoi group started Trident, it was launched to be a mid-scale hotel, but it went on to actually become a luxury hotel brand. But foreign brands launching in Indian market have strong budget brands and a clear cut brand structure. Another case is that of Lemon Tree, which started essentially as a budget brand, but repositioned itself as an upscale hotel later. The group later launched Red Fox as its budget brand.

As per hotel consultancy HVS Report, a confirmed 60,000 hotel rooms will be added across India in the next five years. Though it remains to be seen how many announced projects actually take off without repeating the story of 2008-09, when many hotels projects were stalled by players themselves.