With saturation in tier 1 metro cities, top hospitality players in the country are increasingly looking at India’s tier 2 and 3 cities. As per a 2022 report, ‘The Evolving Face of Human Capital in the Hospitality Industry’, which is a joint survey by JLL and The People Network, there has been a significant shift in hotel supply, with about 43% of planned pipeline falling in tier 2 and 3 markets.
“Going by the number of keys opened last year, 67% were in tier 2 and tier 3 cities,” Jaideep Dang, managing director, hotels & hospitality group, India, JLL, told FE. “In terms of fresh projects signed in 2022, approximately 75% keys will come up in tier 2 and 3 towns. It is important to note that some part of this inventory would be conversions of unbranded hotels into branded managed and franchised hotels,” he added.
The pandemic, which dealt a major blow to hotels across the world, had a large part to play in this trend. “The healthiest part of the pandemic was that hotels in tier 2 and 3 areas sustained themselves. They were the ones that didn’t lower their rates. The tier 2 and 3 occupancies were the first to bounce back. Tier 1 hotels had good occupancy, but they did take in business at a rate lower than normal,” said Ranju Alex, area vice-president — South Asia, Marriott International, at the recent 2023 HVS ANAROCK HOPE hospitality conclave, adding, “The markets there behave very differently, their clientele is different, their F&B does really well probably because standalone restaurants are not as robust as in tier 1.”
Identifying India as its top growth country, European hospitality major Accor, too, is excited about the opportunities across the country. In an interaction with FE, Andrew Langdon, senior vice-president, development Asia, Accor, said, “We are going to be more aggressive in offering franchises for our economy and mid-scale brands — Novotel, Mercure, Ibis — particularly in tier 2 and 3 cities,” he said.
For its premium brands, however, the focus will remain on tier 1 as well as 2 cities. During the pandemic in 2021, it launched Raffles in Udaipur and Novotel in Chandigarh. As per a recent report, a Fairmont hotel is set to open in Fagu near Shimla in 2026.
“Even if you look at the past five years, about 40% of the supply came from tier 2 cities and the rest from tier 1 and 3,” said Puneet Dhawan, senior vice-president of operations, India & South Asia, Accor, speaking at the HOPE conclave. “Over the past two years, we have signed about 10 franchise deals and a lot of them have been in tier 2 and 3 cities.”
India’s biggest hospitality brand, Indian Hotels Company (IHCL), too, operates its ‘lean luxe’ brand Ginger in many tier 2 and 3 cities along with state capitals. “Ginger will change the landscape of the hotel business in India,” Puneet Chhatwal, MD and CEO, told FE last month in an interview. The company operates almost an equal number of Ginger hotels as the Taj brand, and the strategy is set to continue.
Luxury hotel chain The Leela, too, sees an opportunity in tier 2 cities for resorts. “With increased accessibility, connectivity and better airports, there is a lot of opportunity in tier 2 and 3 cities,” said Anurag Bhatnagar, chief operating officer, The Leela, adding, “India is rediscovering itself in terms of new and remote locations. So if there is a right asset, great location and a great kind of positioning that can be built up, I am sure it is a great location to be considered for a luxury brand like Leela,” he said at the HOPE conclave.
“About 30% of our current portfolio is in tier II and III cities,” said KB Kachru, chairman emeritus and principal adviser – South Asia, Radisson Hotel Group. “We have hotels in places like Katra near Jammu, Jalandhar and many in Jammu & Kashmir. In fact, we have a huge portfolio in Kashmir,” he said, adding, “It is not just us, the entire industry is looking at tier 2 and 3 cities.” Kachru is also vice-president of the Hotel Association of India.
Increased road, rail and air connectivity too has played a prominent role here, the hospitality executives said.
“Improved air and road connectivity to tier 2 towns from metropolitan cities is a big driver to this growth,” said Dang of JLL. “Secondly, aspirations of the residents of such towns have increased dramatically over the years. People across the country are looking for improved leisure, F&B and hospitality choices. On back of such behavioural shift, investors and developers are encouraged to build hotels in such towns,” he added.
Jatin Khanna, CEO of Sarovar Hotels & Resorts, which has a strong portfolio on non-metro markets, pointed at the rise of pilgrimage and religious tourism, a large portion of which lies in non-metro locations. “I think that is set to grow and is growing faster than the leisure segment,” he said at the conclave.
Lemon Tree Hotels’ president Vikramjit Singh spoke of not just tier 2 and 3 markets, but tier 4 as well. “We have hotels in places like Jhansi, Aligarh, Siliguri and Trichy. The rates there match the tier 1 cities and occupancy is higher. These markets are the dream markets,” he said.