In a candid interview, CEO Prashanth Rao Aroor, talks about acing the mid-scale market
IntelliStay Hotels is focusing on technology and talent upgrade on the back of a fresh round of equity. CEO Prashanth Rao Aroor decodes the potential of Tier 2 and 3 markets, and why overleveraging and irresponsible specifications are hurting the hospitality industry.
IntelliStay Hotels raised a fresh round of equity from its promoter, PRAMA, earlier this year. What do you envisage using it for?
In a back-to-back deal, PRAMA off-loaded stake to Maryland-based TripBorn Inc. (listed on NASDAQ OTC), an emerging last-mile provider to the agents of Travel and FinTech services. This B2B2C model goes deep into the heartland, where a mobile-only strategy struggles. Most of the capital that PRAMA raised came subsequently to us and to Apodis Foods and Brands Ltd (AFBL), which is our sister entity offering F&B Operations as a service to other budget hotel chains. They have grown quite substantially since their incorporation three years ago.
Our mandate is to use the capital and our profit accruals for 'platforms of scale' — technology, talent, and learning and development. Some brands such as iStay hotels will be given a lighter contract, like a ‘manchise’, to grow faster. We will continue to service management contracts and revenue share contracts for mid-scale brands such as Mango Hotels, Mango Hotels SELECT, Mango Suites, Mango Suites SELECT and the Apodis Collection, but will be more selective about the properties we sign. We care as much for revenue per hotel as the number of hotels. We will keep stabilising and optimising our assets under management. Since we are asset-light and don’t physically construct these assets, we have a responsibility towards our partners who build them, to sweat out the assets. We form long-term associations; we are their people and they are ours.
The affordable, quality branded hospitality segment has seen immense growth. What potential does it hold?
Affordable works better for cities. You can build a fancy hotel, but the vast majority of guests are from the corporate sector and they are constantly under pressure to rationalise expenses. The budget in the mid-scale segment ranges from $50-100. We build only as much as needed; it’s almost B2B in format. Mango Hotels is a market leader in RevPar wherever it goes. It is an intuitively ‘Made for India’ brand that offers international standards with Bharatiya sensibilities. To give you an example, a hotel in Navi Mumbai is built at say, INR 25 lakhs a key, and achieves a RevPAR of INR 3,000. An international upscale hotel nearby built at, say, INR 75 lakhs a key, if not more, achieves a RevPAR of INR 3,600. Which asset would offer better returns?
Developers are realising that just because the land is expensive, it does not mean you need to build luxury. The price ceiling tapers off the returns after a particular product category. Building more is a very dangerous game and has resulted in a large NPA problem that's needlessly sullying the reputation of hotels as an asset class. Irresponsible specifications and over-leveraging is what hurts us the most.
We launched a new brand, iStay Hotels, this month after a year of testing at two locations; it goes live with five hotels in October. It’s a design-forward, lifestyle-economy hotel with good cultural cues that will challenge the $30-50 segment and will create a new category at that quality. It can easily scale to 400-500 locations if we play it right and support asset owners with conversion on both financial and design fronts. We may raise capital for the next quarter for technology upgrade and development support. In the leisure locations, we have the upper mid-scale brand, Mango Hotels SELECT and the lifestyle resort brand, Apodis Collection, which are independently branded and curated stars. One size does not fit all in India; the country changes every 300kms.
What is IntelliStay’s game plan for the next five years?
We are working with existing owners who have decided to scale up their companies and their association with us into a multi-hotel development partnership. Technology will drive the younger brands, while talent will drive the mature ones. Quality will percolate down from an Apodis Collection to an iStay Hotel. A ready bench of talent will move in the opposite direction, from the bottom to the top. We will keep making specific plans each year as the markets are very dynamic and we don’t want to get stuck with an inflexible long-term plan. Only the vision and values should be long-term henceforth; the planning must be nimble.
What is unique about the iStay brand and what is the potential it holds?
The brand represents what we can achieve and that too with very little spend! Based on the prototype, I’m convinced that 250 stations and transit hubs across India have an existing hotel that can be transformed into an iStay Hotel within three months, with less than one to three lakh/key of PIP. With the right pricing, it can pay back the owner his investment within two years. These hotels will be compliant with statutory and self-imposed laws and regulations. Our lead architect on this brand is just 24 years old; he has designed the brand for someone like himself. iStay is a fun product that promotes the ‘Live-Work-Play’ balance. Our head-office has taken design cues from this brand.
You are also in the process of upscaling the Mango Hotels and Mango Hotels SELECT for a more boutique experience…
When we opened a hotel in Mahabaleswar last year, we were astounded that even before we completed renovation, the revenues were veering towards a 2X growth. Careful examination showed a deep undersupply in the $80+ category, which the leisure audience patronises. We decided our affordable leisure hotels need to be in a category higher to cater to this aspiration. Mango Hotels/Suites SELECT are carefully curated upper mid-scale brands. A destination as remote as Mahabaleswar did almost as much as city occupancy in year one. We are taking the brand to Udaipur, Dwarka, Gurugram and to other destinations this year. Our view is that the cities don’t have the headroom for higher pricing, but leisure does. Of course, some cities are exceptions.
The growth in the leisure segment is powered by short payback periods on new builds of quality. We have designed a 5-star 'Resort in a Box' at INR 40 lakh/key. It’s based on the seven Vedic principles of construction involving elements such as soil, waste, agriculture, water, local materials, local people and alternative energy. The Apodis Collection brand will operate these future-ready hotels.
Segments such as adventure, pilgrimage, luxury camping and banquets have emerged as profitable internationally. Do you see Indian hospitality cashing in on them anytime soon?
In segments such as adventure, pilgrimage, backpacking and glamping you need incredible scale to make it work. With our corporate overheads, we need to focus on higher revenue assets. For these destinations, we will look at inorganic opportunities with entrepreneurs who demonstrate their ability to execute and scale-up and can incubate within IntelliStay Hotels.
Banquets are more profitable. Food went from 0 per cent of our business in 2013, to almost 40 per cent this year. We have two hotels where food outsells rooms. Stand-alone banquets are a fragmented space and it is time to get organized. You have to visit Indore to experience their 120-days operating model. Hotels open for only 120 days a year and stay closed for the rest of the year! But they make more GOP than a 365-day operation with very low OPEX. We are planning a prototype to test the economics and standards of this model. If it works, we may focus on the segment next year.
What in your view is needed to ensure that the industry creates employment even in Tier 2 and Tier 3?
In India, 80 per cent of the hotel supply is still unbranded and independent. We sense that about 70 per cent of these have too many physical defects and core deficiencies, such as non-compliance of fire norms. These assets are non-tradeable. But the other 30 per cent are fundamentally very strong and they account for over 700,000 rooms. Located in marquee locations in cities and leisure destinations, they may be 10 or 20 years old and with little investment, they can be made good for another 20 years.
A lot of these properties are in Tier 2 and 3 cities. IntelliStay has been branding them at the rate of two per month. The private players will grow the industry. Being manpower centric, we hire more people per rupee invested than most other sectors. But to be sustainable, the government needs to focus on unlocking infrastructure. Tourism is on the concurrent list which means there is too much tug-of-war between the states and the centre. A common non-negotiable tourism policy needs to be put into action and for this; the sector needs to be apolitical with representations from the private sector, industry veterans, associations and private players. A national tourism board that is empowered to develop infrastructure in each of our showcase destinations is essential. The board should have a revenue model and receive development funding from all stakeholders. The rest of the hard work of investment, skilling and promotion will be done by the private players. The current generation is not driven by material things; they are driven by unique experiences and tourism has the potential to create them.
Is it a challenge to work with local talent in Tier 2 and 3 cities?
I will answer with reference to our experience in towns such as Davangere, Haridwar, Manali, Manipal, Dwarka, etc. These are all small towns. Developing a hotel building consumes so much capital and energy that as projects conclude, everyone expects the pre-opening to happen overnight. But pre-opening is a very intensive activity; at the last count, there are over 1500 tasks between the project conceptualisation stage and its final opening. It’s hard to use raw talent at that stage. We do depute central surgical teams who can deliver an opening.
Once the pressure has eased out, we help develop local talent. They are, in turn, trained as the opening experts of future openings. Our entire workforce of 1200+ people is our 'talent bench'. Only their ambition determines how far they go. We like to hire on the floor and promote the talent real quick to zonal and central roles. We recently hired a stalwart from the industry to help take our operations to the next level, and one of his first comments to me was how young the leaders are for their designations! That is bound to happen when we add two hotels a month.
But we need to invest a little more in skilling. We will designate specialised skilling hotels within the chain this year that will help prepare people for our rigour and culture. I spend a lot of time on making sure we don’t lose that pure start-up energy, ethics and ideals.
The Indian government is putting a lot of focus on infrastructure development, particularly in hitherto inaccessible areas. Do you think it will help open up the tourism potential of smaller cities and towns?
While roads and trains are important infrastructures, airports are the game-changers. They let you go from one doorstep to the next in three to four hours. In my view, tourism is so much more robust in the Gharwal district of Uttarakhand, rather than in Kumaon because of the presence of the Jolly Grant airport. It has unlocked the potential of the region. While Haridwar delivered 70 per cent occupancy, Manali is a lot of hard work because of the 10-hour long drive. Sikkim, I am told, is still under-served despite the Pakyong airport where flights land sporadically. Ratnagiri, on the rich Konkan coast of Maharashtra, where we operated a hotel for a few years, suffers from major connectivity issues. These are some blind spots.
But every single day we hear some good news. I recently heard of an airline called Star Air which made Belagavi-Hubli its hub and connects to destination as far apart as Jamnagar, which is wonderful for our new resort in Dwarka. From some 30 airports in 2014, we have gone to well over 100 airports now, most of them serviced. Airlines are waiting for flight deliveries and we need to pick up the slack caused by the closure of two major airlines in this decade.
I am not too impressed with our network of highways, though. Aurangabad, a UNESCO site, is so poorly connected that you can’t drive up to the Ajanta and Ellora Caves. We need to maintain basic infra connectivity while we wait for big projects such as Maharashtra’s Samruddhi corridor to come through. Roads in the coastal Konkan region are still under construction, though the pace has picked up recently.
Is the industry facing tough times due to economic recession? What are the current-day challenges?
We are in a slow but sustained up-cycle. The demand in India is decoupled from global economy due to high domestic consumption. Elections did have a great impact on occupancies, and so did the monsoons. Among the challenges, credit availability is a concern. Not only is there no credit, but it’s also available for too short a tenure. The next big debt innovation in India will be hotel lending. You can’t build too much, borrow too much for too short a period, and then blame the sector. Hotels have sound investment rules. Follow them and it’s a decent dividend forever.
What are the future trends for the hospitality industry?
Automation, sustainability, design thinking, multi-skilling, customisation and subscription models are significant and will evolve rapidly. We need to watch out for the technical upgrade bullets we may have to bite.