The secondary markets are today becoming as important as the primary ones, with major international chains and homegrown hotel companies expanding their presence in Tier II and Tier III locations across the country – from state capitals and industrial hubs to pilgrimage centres and tertiary townships By Sudipta Dev
The growth of the secondary markets in India is compounded with the emergence of the midscale segment which has marked the strongest growth and will continue to do so in the future. While homegrown brands like Sarovar Hotels and The Fern Hotels & Resorts have always had a strong focus on Tier II & Tier III locations, what has brought dynamism to the market is the growing footprint of major international hospitality chains in these destinations. Raj Rana, CEO, Carlson Rezidor, South Asia avers that the Indian hospitality landscape is evolving after first having made inroads in metro cities and is now shifting focus to secondary markets where broad parameters such as improved infrastructure, focus on connectivity and lower land costs are promising growth indicators. The leading international hotel operator in the country with over 110 hotels in operation and under development in over 40 cities across India, is at the forefront of expanding into these markets. Of its current pipeline of over 40 hotels under development, about 20 hotels are in secondary cities such as Jalandhar, Aligarh, Raipur, Kota, Karjat, Phagwara and Coimbatore. “This year, we have opened hotels in secondary markets such as Radisson Blu Guwahati and Country Inns & Suites Bathinda, which gives us a first mover advantage in these markets,” adds Rana. The company has a well-established presence in the northern region and is now focusing on opportunities in East and South India through prospective strategic partners.
Wyndham Group recently announced that the 10 properties, which will operate under the Ramada Encore and Howard Johnson brands, in locations like Gurgaon, Darjeeling, Greater Noida, Jaisalmer, Pali, Lonere, Dharmapuri, and Trivandrum. Marriott International is also venturing into North East India with hotels coming up in three cities in the next couple of years. Marriott will launch a Courtyard by Marriott in Shillong, Courtyard by Marriott and JW Marriott in Siliguri and three properties in Guwahati. All the properties in North East will be developed within the next two years. Marriott International in association with Chhatisgarh based-City Mall 36 Group is planning to launch Renaissance by Marriott in Raipur by mid 2015. When it comes to Indian hospitality chain, Sarovar Hotels has from the beginning had a focus on the secondary markets. “We have been well rewarded and secondary market would be the main theme of our expansion strategy in next three to five years,” says Anil Madhok, managing director, Sarovar Hotels. Sarovar with 70 hotels is looking to be a true pan India company. “We are monitoring all regions and states and wherever cities show potential of growth we are targeting those cities,” adds Madhok.
For The Fern Hotels & Resorts of Concept Hospitality, this market is very important as 70 per cent to 80 per cent of its development is within Tier II and Tier III cities. “Our primary focus is in the western region (Gujarat, Maharashtra, Goa) and we are strengthening our presence in north and southern region as well. We recently opened two hotels in eastern region – The Fern Residency Tezpur and The Fern Residency Asansol, future plans in this region is limited,” says Param Kannampilly, CMD, Concept Hospitality.
Another fast growing chain in the country, Keys Hotels has its presence in many Tier II and Tier III locations. “The secondary markets are as important as the primary ones. Keys is looking at a high density pan India presence,” says Sanjay Sethi, MD & CEO, Berggruen Hotels India. While the company has a significant presence in west and the south India, in the future the focus will be on growing in the northern and eastern part of the country. Apart from metros like NCR, Kolkata, Hyderabad, the immediate focus of the company, according to Sethi, is having a presence in cities like Lucknow, Agra, Patna, Ranchi, Mysore and Bhopal.
Factors driving growth
Affordable real estate prices, available talent pool and improving connectivity have attracted many hotel companies to the growing Indian secondary markets. These companies generate a lot of hotel room business along with reasonable F&B demand. Shwetank Singh, vice president – Development & Asset Management, InterGlobe Hotels, mentions, “In these locations hotels show high growth in F&B revenue through social dinners, outings and functions being organised in hotels. Hotels in most of the secondary markets have F&B contributing a large pie of the total revenue and to succeed in these markets hotels should have sufficient banquet space and good restaurants. MICE is another important segment growing in these cities.” The primary growth factor is the dynamics on the supply and demand front. “One has to carefully study the proposed (under development) supply too. On the demand front, we look at the economic drivers for the region / city that will impact business in the future,” states Sethi.
Growth, acknowledges Madhok, cannot happen in cities of Maharashtra and Gujarat only. “For the seven to nine per cent growth we will need multiple hubs of manufacturing and trading. I think same holds true today particularly with ‘Make in India Campaign’.” Sarovar will be driving Sarovar Portico and Hometel brands for expansion in Tier II and Tier III cities, in the larger cities it will primarily be Sarovar Premiere.
This market segment has lack of quality accommodation facility with latent demand for these facilities. Kanampilly avers that development in terms of infrastructure projects coming into tier II cities is a good sign of growth, “Our midscale brand The Fern Residency will be our focus in these markets, though the choice of brand will depend on markets ability to absorb the rate. Secondary market has immense development potential, cost of operations is low and low land cost therefore allowing healthier operating margins.”
Era of midscale
Secondary markets are attractive due to their better return on investment as land costs are lower and financials therefore point to sustainable profits. “These markets are ripe for midscale brands as demand resonates with the growing corporate and leisure travellers in that market segment,” states Rana.
The shift in the Indian hospitality scenario on quality midscale hotels have attributed to the development to more hotel projects in non-metro locations. Another global hospitality major, IHG, has ambitious growth plans for its midscale brands, Holiday Inn and Holiday Inn Express. “We currently have nine Holiday Inn hotels and two Holiday Inn Express hotels open across major metros and secondary cities, and close to 85 per cent of our development pipeline (by number of hotels) in the country are Holiday Inn and Holiday Inn Express hotels which are expected to open in the next three to five years,” says Shantha de Silva, head of South West Asia, IHG. In developing the hotels in the pipeline, the company is also working to ensure they are locally relevant by bringing global brand standards to India, customised for the Indian customers. “For instance, we are tailoring our dining concepts to reflect regional tastes and cultures which we know are well-received by our guests,” informs de Silva.
While secondary and tertiary cities offer good potential for midscale hotels over the long term, however, for India to develop as a mature hospitality market over the next decade, these cities will require better hospitality-specific infrastructure. “As several Indian cities are benefiting from improved rail, road and air connectivity and state governments are aggressively seeking investments, they are attracting manufacturing, industrial, commercial and IT-related developments. All this augurs well for new hospitality-related infrastructure development in such cities, which currently lack any quality accommodation and related services,” says Mandeep Singh Lamba, managing director – Hotels & Hospitality, Jones Lang Lasalle India.
Industrial corridors
The development of industrial corridors, for example the Delhi-Mumbai industrial corridor is a huge fillip to the hospitality industry in the cities and townships along the way. Lamba is bullish about the industrial corridors, which have large captive demand with little or no significant hospitality infrastructure. “These are spread across the country and offer great potential. We have recently done some feasibility studies in some of these locations and find this to be an attractive investment opportunity,” he says.
Growth is going to happen at the intersection where there is infrastructure development and industrial productivity. “New growth is going to be driven around highways in India. What happened in the US in the 70s is that motel and hotel boom rode parallel to the growth of roadways/ highways. In India highway growth is going to lead to growth in hotel demand,” says Rahul Pandit, president and executive director, The Lemon Tree Hotel Company. He points out that another factor leading to growth is tertiary locations surrounding big markets.
Emergence of micro markets
A significant development in Indian hospitality scenario in the last decade has been the emergence of micro markets. Singh believes that India should be seen as a collection of micro-markets rather than markets per se. “Therefore we believe that there is still a lot of scope of expansion in these markets. Beyond these we are also very keen on establishing our flags in the secondary markets and we are pursuing them proactively. We are keen to establish ourselves in all the state capitals to begin with,” he states. Following its presence in all Tier 1 cities such as Mumbai, Delhi NCR, Chennai, Bengaluru, Hyderabad and Kolkata, the company is now targeting state capitals and other cities such as Surat, Vadodara, Ahmedabad, Amritsar, Kanpur, Madurai, Trichi, etc., besides looking at further development opportunities in Tier I micro-markets. The focus is on expanding the ibis brand in India.
Pilgrim and leisure
Both Indian and international hotel chains are looking at expanding their presence in pilgrim townships and leisure destinations that have significant growth opportunities. Carlson is amongst the first international chains to establish hotels in pilgrimage centres and other destinations such as Country Inns & Suites Katra, Radisson Varanasi, Radisson Blu Haridwar and Country Inns & Suites Ajmer. The company has also made timely entrance into resort destinations and opened hotels such as Radisson Shimla, Radisson Blu Resort Temple Bay Mamallapuram, Radisson Blu Goa Cavelossim Beach and Radisson Blu Plaza Hotel in Mysore. “It is part of our strategy to cater to this market segment with the appropriate brands in various locales,” says Rana.
Sarovar opened in Shirdi in 2014, and in January 2015 will open in Tirupati. “We are also looking at resorts and hill stations as we feel that as the country progresses creating a bigger middle class and people take more frequent holidays these destinations will be very lucrative,” adds Madhok.
Keys Hotels already has a sizeable inventory in the pilgrimage and leisure destinations at Shirdi, Ajmer, Tirupati, Goa, Jaipur and Mahabaleswar. “We have an upcoming product in Haridwar and another in Varanasi,” mentions Sethi.
Roots Corporation is also expanding its footprint in key pilgrimage centres across the country – from a 100 room Ginger in Katra, near Vaishnodevi and 125 keys property in Tirupati to Shirdi, Udipi, Ajmer and Haridwar. Interestingly, InterGlobe Hotels is selective when it comes to pilgrimage centres, hill stations and offbeat locations. Singh explains why, “Pilgrimage tourists are generally budget conscious and hence performance of branded hotels in these locations is not very encouraging. On the other hand, hotels at hill stations and offbeat locations are doing good but development cost at these locations is very high given the scarcity of material and labour. These markets being seasonal in nature carry a big business risk as well.” However India’s hospitality infrastructure in most pilgrimage markets is inadequate, as is reflected by the lack of good quality economy and mid-scale rooms.
(With inputs from Kahini Chakraborty and Akshay Kumar)