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Hospitality majors make a beeline for Indian market

Hospitality majors are rushing to set up budget hotels in India, reports Mini Pant Zachariah.

business Updated:

Come, sleep with the best' was the smart catchline of the Hyatt Group of Hotels some years ago. The current trend in the Indian hospitality industry is set to change that phrase to 'Come, sleep with the best value-for-money.'

Hotel companies of all hues are scrambling to develop budget hotels that offer a clean and fully functional room to sleep and work in—at rates ranging from Rs 1,000 to Rs 2,000, with no hidden costs.

Sure, they have no bellhops or a concierge service but the modern-day smart traveller has little use for these. What he needs, more importantly, is Wi Fi connectivity, a direct phone-dialing facility, a mini bar, a tea/coffee maker and a clean bed and toilet. Throw in a restaurant serving regular meals, a coffee shop and a bar, and you've made life so much easier for the weary traveller.

Internationally, such no-fuss hotels are preferred by the young business or leisure traveller. Given that hotel rooms in metros like Delhi, Mumbai and Bangalore come with a neat tariff of Rs 14,000 to Rs 21,000 a night, budget hotels are attracting guests especially the business travellers — individual and corporate — who use a hotel room only to sleep and shower in.

So promising is this segment that Indian biggies like the Indian Hotels Company Limited of the Tata Group (IHCL), Sarovar Hotels and Kamat Hotels India Limited (KHIL) are rushing to fill the demand-supply gap.

IHCL's wholly owned subsidiary, Roots International, has launched budget hotels under the brand name Ginger Hotels. It is based on the Smart Basics concept developed in association with corporate strategy thinker Dr CK Prahalad. Sarovar Hotels and Resorts (SHR), a multi-brand hotel management company with three, four-and five-star properties, launched its budget hotel range, Hometel, in Bangalore a year ago. And KHIL is coming up with its Kamfotels.

Foreign funds are coming in too, to claim a slice of the pie. Last month, US fund Berggruen Holdings invested Rs 450 crore ($100 million) to set up a chain of 38 budget hotels under the brand name Keys.

Berggruen is not alone. Accor, the well-known European hotel chain, launched its first Indian Novotel hotel in Hyderabad last May and proposes as many as 200 hotels in the country over a span of a decade. Returns on its Hyderabad property, with 287 rooms have encouraged it to expand.

No Frills

The huge demand for low-budget hotels rooms here is because in India, one either has the high-end hotels, which are heavy on the purse; or the low-end lodges and hotels that account for 70,000 rooms, according to guesstimates. Since the latter often have dingy rooms with peeling paint and toilets that leave much to be desired in terms of hygiene, many international and domestic travellers settle for the high-end hotels. Short supply and high demand has resulted in escalated room tariffs.

"There will always be some guests who need to flaunt an address and will therefore check into the high-end hotels. But for every luxury hotel in India, you need 10 budget hotels," says Anil Madhok, Managing Director, SHR. The results of their Bangalore property have been encouraging enough for SHR to look for new locations to add to the Hometel chain.

Getting real

Now for the economics. The construction cost of a budget hotel room is between Rs 5 to 10 lakh compared to a premium segment hotel room, which takes Rs 50 to 60 lakh to construct. Setting up a 50-room facility could set a hotelier back by Rs 50 crore (without the cost of the land). Since real estate prices in the large metros have shot through the ceiling, they are more or less out of the reckoning for budget hotels. SHR had to go to Malad, a distant Mumbai suburb, to find space for a Hometel that should be ready later this year.
On the face of it, a Rs 15,000 per night room rate should rake in more money than a Rs 1,500 — 2,000 per night at a value-for-money hotel. But the industry is relying on a higher footfall to keep the cash registers ringing. Besides, the cost of running a premium-segment property is much higher than a back-to-basics place. For instance, KHIL's premier hotel Orchid, a 250-room five-star facility, needs a 500-strong staff to keep it ship-shape, whereas a 50-room budget hotel can run with a staff of just about 80.

Lower investment and running costs help the budget hotels break even in a couple of years. This is very different from the five to eight years it previously took for a hotel venture to come out of the red.

Says Delyse Braganza, VP, Sales and Marketing, KHIL, "The real growth in budget hotels will not come in the major metros as their real estate prices are exorbitant and it is very difficult to break even in these cities."

Therefore, the attempt now is to set up budget hotels in B and C class cities where land prices do not skew the economics. Hence Ginger's forays into Goa, Pune, Baroda, Ahmedabad, Pondicherry, Bangalore, Mysore, Mangalore, Agartala, Pantnagar, Tripura, Bhubaneshwar and Paradip.

Travel Bug

With improved expressways and rising car ownership, more families are willing to take off for the weekends than before. KHIL has tied up with Hindustan Petroleum and the Oil and Natural Gas Commission to set up Kamat restaurants or Kamfotels on part of the properties owned by these oil majors along the Mumbai-Goa and Mumbai-Ahmedabad highways. The idea is to have a KHIL-run facility every two hours along the highway. Anyone who has driven down the Mumbai-Goa highway would vouch for the need for this. While there are hotels galore for every pocket once you enter Goa, there is an acute shortage of clean, functional and reasonably-priced hotels along the Konkan route.

Spiritual tourism is obviously a key area on the domestic traveller's circuit and setting up budget hotels at places of pilgrimage makes good business sense. Shirdi and Nashik are popular destinations in Maharashtra while Ginger has a property in Haridwar. The less-explored Konkan coast with its temple towns like Ganpatiphule and easy connectivity with Mumbai are new areas of interest for budget hotel builders.

Given India's nine per cent growth rate, the opening up of the economy and cheaper air travel, industry sources believe that the budget hotel segment will grow at a pace stronger than the overall growth of hotels as a category.