Here's an insight about the markets that the big hospitality groups are expanding to and the potential they hold — from Raipur to Siliguri, and Kolkata to Chennai
The hotels are expanding their portfolio to include properties in megametros, metros, Tier II and III towns and resort destinations
Let me put before you a few numbers about the Indian tourism and hospitality industry:
• In 2018, the tourism segment earned India Foreign Exchange Earnings of US$ 28.59 billion, an increase of 4.70 per cent* year-on-year. Overall, the sector generated USD 247.3 billion (INR 16.91 trillion) in 2018, accounting for 9.2% of the total economy.
• According to IBEF, the tourism and hospitality sector’s direct contribution to GDP surged by 23.6% in 2017, raising the share of the industry (direct & indirect) to INR 5.9 trillion (US$ 91.3 billion).
• India has only 103,000 hotel rooms in all categories compared to Bangkok city, which alone boasts 125,000 rooms, according to the Federation of Hotels and Restaurant Association of India (FHRAI).
• Foreign tourist arrivals are likely to touch 15 million by 2020. And then there are domestic tourists, business travellers and leisure travellers. India needs a minimum of 180,000 more hotel rooms at the least (again, FHRAI figures).
• According to CARE Ratings, the expected future inventory in 11 major markets (across categories) is lower at around 49,400 rooms for the next five years (FY19 to FY24). With increasing demand, the major markets can sustain average room rates (ARRs) and grow at 3.5-4.5% per annum, CARE stated.The occupancy is expected to inch up to an average of about 68-70% by the end of FY23 compared with 66.6% in FY18.
• The Indian government is working to garner a 1 per cent share of the world's international tourist arrivals by 2020 and 2 per cent share by 2025.
These interesting statistics reveal quite a few things about how India’s rising affluent class and its increasing disposable incomes have continued to support the growth of tourism, and in turn, the demand for quality branded hotel rooms. The opportunities for hotels to expand their footprint are immense. And most groups have several hotels in the development pipeline.
The frontiers for the hospitality industry — both new and old
The hotels are expanding their portfolio to include properties in megametros, metros, Tier II and III towns and resort destinations. Tier I cities refer to not just the four megametros of Mumbai, Delhi, Bangalore and Kolkata. Metros such as Pune and Hyderabad are buzzing Tier-I markets in the hospitality industry lexicon and are attracting a larger portfolio of hospitality brands across all segments. IHCL is expanding its portfolio across almost all segments.
Suma Venkatesh, Executive VP - Real Estate & Development, IHCL.
Suma Venkatesh, Executive Vice President - Real Estate & Development, The Indian Hotels Company Ltd, says, “For the Taj brand, we will look at key cities and state capitals as well as tourist destinations with good access. For Vivanta, we will look at expansion within all metro/ Tier 1 location and a few Tier-II cities, where the market has shown some depth. We just repositioned our Ginger brand in the ‘Lean Luxe’ segment and it will target the top 80-100 cities. In the case of SeleQtions, we are mainly looking at hotels with a distinct character and strong equity. Expansion under this brand will be as and when an opportunity comes up.”
While Tier I cities are saturated, they continue to be a large market. As Venkatesh says, “India is still underserved both in the business as well as the leisure space. In metro and Tier I cities, various micro-markets have their own dynamics as well as demand across segments. Hence, there is space for all our brands. In smaller cities, while demand exists, it is only available at certain price points. Hence, it is important to not overbuild products and use the right brand that gets owners a return on their investment.” IHCL has a robust pipeline of over 38 hotels across all their brands and categories. The micro-markets or micro-cities within large cities is a trend that even Neeraj Govil, VP- South Asia, Marriott International alludes to.
IHCL is expanding in Tier II markets with their Vivanta and Ginger brands.
“They are self-sufficient in terms of residential, commercial, shopping and entertainment facilities, which means people don’t have to battle traffic and travel long distances to either work, live or party. Bangalore has seen the evolution of Whitefield and Cubbon Park. The evolution of micro-cities allows us to be present in different locations with different brands, within the same city. In the mega metro segment, he sees a good future for Kolkata, which is still an underdeveloped market, particularly because the city is the gateway to the unexplored Seven Sisters or the northeast of India."
Neeraj Govil, VP - South Asia, Marriott International
According to Govil, the growth in MICE travellers as well as travellers to resort destinations, is fuelling the growth. “Big cities such as Mumbai and Delhi will always present a captive market. But MICE delegates are open to trying out new destinations, which is helping us to expand our footprint to locations that were hitherto considered out-of-bound.” Marriott International operates 118 hotels in India, across 54 locations. The other big global hospitality group, Accor, operates a network of 10 distinctive brands with approximately 9,600 rooms spread across 22 key destinations in India and South Asia. Accor’s growth is led by densification, a key development strategy for the group, on the back of strong market demand.
Lokesh Sabharwal, VP - Development & Special Projects, South Asia, Accor
“Key markets to densify are identified based on their potential growth opportunities and favourable macroeconomic factors. Some of the cities we have identified or have developments underway include Delhi NCR, Mumbai, Bangalore, Hyderabad, Pune, Goa, Jaipur and Udaipur. These would essentially classify as Tier 1 or Tier 2,” says Lokesh Sabharwal, VP - Development & Special Projects.
Accor operates a network of 10 distinctive brands with approximately 9,600 rooms.
In 2019, Accor launched two properties: Mercure Devaaya Goa Retreat, a wellness resort, and ibis Kolkata Rajarhat, the first ibis in the eastern city. The group has 25 hotels and approximately 5,000 keys in the pipeline and under active development across segments such as luxury hotels, private residences, lifestyle concepts and resorts, including uber-luxury properties such as Raffles Jaipur, Fairmont Mumbai Sahar and Raffles Udaipur. Among the most promising markets, Sabharwal identifies Hyderabad, which has bounced back over the past two years after the division of Andhra Pradesh into two states. “This has been possible due to the construction of Grade-A office spaces, the presence of a world-class airport and an extremely supportive government.”
For Hilton India, both Tier I and Tier II markets are of equal importance. While they have identified Tier I cities for their luxury brands such as Waldorf Astoria, Conrad and LXR, and also the flagship Hilton brand, they see a demand for their full-service and focused brands such as DoubleTree by Hilton and Hilton Garden Inn from Tier-II cities. Bengaluru is one city that has continued to evolve and created various hubs/sub-markets spread across all directions. The increasing traffic in the city has created opportunities for hotels to open properties in these sub-markets. Dhruv Hoon, VP - Development, says, “Interestingly, demand continues to be strong despite the additional new supply. We have three trading hotels in the city and another five in the pipeline.”
IntelliStay Hotels, which follows a cluster strategy for operating and sales efficiencies, have intensely explored the key centres in Karnataka, Maharashtra, Gujarat and Rajasthan. CEO Prashanth Rao Aroor adds, “There is a team in each that helps localise the management. This year, we are trying to plug some geographic gaps such as Pune, Chennai and Jaipur. These are oversupply markets where real estate is prime and the rates are not. We always struggle to sign a sustainable deal in such locations. We will open 15 hotels in just NCR.” He marks Delhi, Bangalore and Mumbai as three of the best hospitality markets in India. “They get battered with supply and they sustain and absorb. Mumbai, of course, is the cake.” The group has, in the past seven years since their first formal funding, signed up 50 hotels and are right now operating 25. By end-March ‘20, they will be operating 35 hotels. “We have just begun to develop proprietary technology for operational controls and efficiencies, and a formal learning and development program. Our positioning as a 'chain of independent greats' augurs well with the Airbnb generation, with none of the irritants of non-centralised management,” adds Aroor. “The potential lies in the lifestyle economy and the experiential mid-scale segment in the cities, and upper-midscale and luxury in leisure markets." Lemon Tree Hotels, known for its mid-scale branded hotels, is expanding into the premium segment with hotels in markets such as Pune and Mumbai, both of which hosts a Lemon Tree Premier.
Cygnett Hotels & Resorts is scouting for assets across all markets — in cities such as Varanasi, Bodhgaya, Munnar, Kozhikode Bengaluru, Chennai, Hyderabad, Vijayawada and Mumbai, among others. “Varanasi hosts a good Buddhist circuit. Munnar is known as an interesting leisure destination. And cities such as Bengaluru and Chennai are famous for generating round-the-year occupancy from business travellers,” says managing director & founder, Sarbendra Sarkar.
The Market Challenges
The key challenges that hospitality groups grapple with in the new metros or smaller towns are infrastructure development and the availability of the right talent. “Ensuring that you have the right talent to open a hotel is of crucial importance, particularly since these markets don’t have good infrastructure,” says Neeraj Govil, VP- South Asia, Marriott International. When it comes to opening premium and select hotels in Tier II markets, the high cost of land acquisitions, delays in construction and the procurement of licenses can be major spoilers. “Port Muziris, a Tribute Portfolio Hotel in Kochi, does not have a liquor license because of the laws controlling alcohol sale in Kerala,” he says as an example.
New destinations can sometimes be challenging for first movers as the depth of the market has not yet been tested. “There is a degree of uncertainty on the expected hotel performance,” reveals Suma Venkatesh, Executive Vice President - Real Estate & Development, IHCL. “Infrastructure is an issue. While there has been a lot of positive development on this front, a lot more can be done to make the destinations easily accessible.” While India ranks as the third-largest in terms of investment in the travel and tourism sectors, which speaks of how the country is growing, “the government needs to look at aspects such as lack of skilled manpower, delayed approvals, taxation rates, very high licenses, and electricity rates,” contends Vikas Ahluwalia, General Manager and National Head – Zone by The Park.
Lemon Tree Hotels is banking on resort destinations to ensure growth in the leisure hospitality segment
Add to this, the other significant issue of the lack of skilled labour during the construction phase. According to Rattan Keswani, Deputy Managing Director, Lemon Tree Hotels and Director, Carnation Hotels, a hotel should take no more than 26 or 30 months to complete, but delays in supplies to remote locations and labour scarcity can hamper a project, extending the construction period sometimes to four to five years. “In the meantime, the finance gets more expensive and if there are policies change that we had not envisaged, it can throw the project into a tizzy. There are lots of abandoned projects across India, which have either been over-leveraged or cannot service their debts.”
Besides the location and infrastructure challenges, Dhruv Hoon, Vice President - Development, Hilton India singles out relatively low ADRs across all Indian markets, when compared to other countries. “As construction costs continue to rise and with the high cost of borrowing, there is a lot of pressure on hotels to generate the expected ROIs,” he says.
The Tier-II and Tier-III segments
Rattan Keswani, Deputy Managing Director, Lemon Tree Hotels and Chairman, Carnation Hotels, says the group has put its buck on growth in the Tier II and III markets, rather than Tier I where land cost is prohibitive. “Land should not make up more than 20% to 25% of the total budget, and there has to be enough occupancy for the numbers to stack up. In Mumbai, an economy hotel near Dadar or VT station would do well. But how will you make profits when the land costs almost INR 200 crore and all you can charge is INR 3000 per day for an economy hotel? Unless it is a 400-keys hotel with 80% occupancy at all times.”
Rattan Keswani, Deputy Managing Director, Lemon Tree Hotels and Chairman, Carnation Hotels.
Instead, mid-scale properties in Tier II and III cities, where the land cost hovers between INR 30 to 40 crores for three to four acres, make for a better business proposition. “A mid-scale hotel in Siliguri gets business from the SME industries. In markets such as Siliguri, Gangtok and Dehradun our hotels enjoy 70% occupancy at rates slightly better than the mid-scale hotels in Tier-I cities. If a brand offers consistent deliverables and an excellent service level, customers are willing to pay a slightly better price in Tier II markets.” Lemon Tree Hotels is also exploring pilgrimage markets such as Amritsar, Dwarka and Bodhgaya, which present a verdant market to branded hotels. Lemon Tree, which operates 57 hotels across its different brands, is planning to take this portfolio up to 87 hotels in the next three years, “some built from scratch, some on a long-term lease, and others that are completely owned,” adds Keswani.
Tier-II cities clearly hold a promise for appropriately priced brands. “Many Tier-II cities are likely to become the Tier I cities of tomorrow and there are times we take a judicious call to go into these cities with multiple brands,” claims Venkatesh. Tier-II and Tier-III cities not just attract domestic travellers but also enjoy local patronage because of the experiences they offer. Govil contends that any branded hotel will do well in these markets provided, well, “they get the F&B right! This is particularly true for Tier-III cities, where branded hotels are still a novelty and locals patronise it for the F&B experiences they offer within an upscale setting.”
A point also made by Sarkar, who claims they attract both business travellers and local residents with high disposable incomes. Cygnett has 18 hotels in the pipeline in cities such as Dibrugarh, Mangaldoi, YangYang, Gurgaon, Udaipur, Siliguri, Shimla, Shirdi and more. “I would also stand up for Tier III cities, which are witnessing rapid urbanisation. Newer hotel management companies are looking to grow rapidly through franchise or management agreement of standalone hotels in smaller cities. The interlinking of cities via expressways and airports have also helped tremendously.”
He singles out Digha in West Bengal as a market that has done well. “Our hotel is running at an average occupancy rate of 68% and is achieving 130% above the yearly budgets.” Markets such as Lucknow, Raipur, Amritsar and Madurai continue to grow. In markets such as Kochi and Marriott, where branded hotels are still a novelty, it is essential to identify the right brand that works well. “Courtyard Siliguri has unveiled the potential of the northeast India market to us, particularly in the leisure travel segment,” adds Govil. “Courtyard introduced international-level hospitality standards and service to the city, which has found resonance with the locals.”
IntelliStay Hotels is looking at partial circuits in Uttarakhand, Uttar Pradesh, Bihar, Odisha, Madhya Pradesh, Jammu & Kashmir, Ladakh and Andhra Pradesh. “My favourite cities are Mangalore, Dehradun, Bhopal, Surat and Aurangabad. They have character, a great vibe and good fundamentals. Brands and supply, in general, are rarely present in our categories. The hardest markets are the mini-metros such as Chennai, Coimbatore, Ahmedabad, Pune, Jaipur and Kochi, where people are building 5-star hotels and selling for $50. Till that corrects, we will only do deals if something sustainable comes up,” says Aroor.
Many hotels are looking at offbeat destinations to expand their footprint in search of sustainable growth. Vikas Ahluwalia, General Manager and National Head, Zone by The Park, says, “We are currently exploring opportunities in untapped tourist destinations and upcoming industrial hubs. As we are a design-conscious and priceconscious brand, offering value for money to our guests and ROI for the investors is our forte.” The group, he says, has a busy pipeline.
“THE Park Hotels will soon launch its first heritage project The Denmark Tavern, just north of Kolkata. Also, Indore will see the opening of another THE Park Hotel later this year. Zone by The Park will have four to five more openings this year.” The Park has a strong pipeline with over 20 projects under different stages of development. “We hope to see hotels in Amritsar, Mahabalipuram and Vijaywada,” says Ahluwalia. “In a country which is rich in tourist traffic, it becomes difficult to specify the best hospitality market. Each region has its own set of challenges.” The metropolitan cities, he contends, have fairly come to a saturation point. “The growing fondness of the millennials and Gen Z generations for travel, and the growth in the MICE segment changes the demography of the target audience. Tier-I and Tier-III cities provide unexplored territories.” MAYFAIR has chosen to open a sprawling property in an off-the-grip city like Naya Raipur. Pradipta Mohapatra, Asst. VP (Sales & Marketing) points towards an aggressive push at the policy level to harness the tourism potential of different states and the competitive spirit that exists between different cities to attract investments, as the reason for the growth in Tier II and III markets.
The resort segment
The leisure hotel segment in India is set to explode on the back of domestic tourism. Sabharwal contends that Indian travellers are looking to explore the local culture. He offers some interesting statistics: “There is rising popularity for staycations. India’s domestic travel visits currently stand at 1.6 billion, reflecting a growth of 18%. According to a 2016 Google Trends Report, staycations were up by 10% and ‘Destination Activities’ witnessed 102% y-on-y growth. Large family travel bookings have also increased by over 28% for domestic and 35% for international destinations in 2017.”
Venkatesh weighs in for northeast of India, where improved flight connectivity, better marketing of the destinations showcasing the natural beauty and enhanced focus on tourism in the region has helped expand the market. Ahluwalia also plumps in for the northeast because of its scenic beauty and untapped opportunities. “We anticipate a lot of movement in Jammu & Kashmir as well, because of the change in its (political) environment.”
Having hotels in micro-markets or micro-cities within large cities is paying groups such as Marriott International rich dividends.
Marriott is expanding rapidly in the resort segment. The group opened a Tribute Hotel in Kochi, which draws inspiration from Port Muziris, the ancient port city that was part of a global trade route. "We also opened a Sheraton on the East Coast Road in Mahabalipuram. These openings are signs of a very buoyant resort market,” says Govil. “Markets such as Kerala and Rajasthan always do well in the resort segment. But now, even destinations such as Coorg are picking up. We are opening a Marriott there next year.” The MAYFAIR group has some interesting projects coming up in the leisure segment — form a 100-keys tea resort in Siliguri to a golf resort in Satapada region of Puri. “Chilika/Satapada region of Odisha, which is a paradise for bird and nature lovers, holds tremendous potential,” says Mohapatra.
Prashanth Rao Aroor, CEO, IntelliStay Hotels.
According to Aroor, leisure hotels will outperform city hotels over the next few years on payback basis. “There must be less than 30,000 leisure rooms of quality for a population of 200 million or so in just our top 20 cities. And there is nothing available to convert. We must build fresh with ecological sensitivity to protect the destinations. This will take time and the pricing will always be high, with good demand for about 240 days in a year. Payback can be as short as four to five years for well-planned hotels. A fellow hotelier pointed out that everyone’s Instagram feed is full of Sri Lanka, Bali, Dubai and Phuket. Indians are either already the largest or the fastest-growing source market for these countries. We need to claw back some of these leisure travellers back to India.”
Lemon Tree Hotels sees a big potential in destinations that are just three of four hours away from a city. “The local infrastructure is rather decent if the destination is close to a city. And people are always looking for newer leisure destinations with a great connectivity to the city they are living in.” While the group is expanding to Udaipur with an upscale property, it is also building a Red Fox hotel near Neelkanth, a Shiv temple just outside Rishikesh, and expanding to destinations in the Indian neighbourhood, with hotels in Kathmandu and Bhutan.
One of the challenges of the key resort market is their seasonal appeal, says Venkatesh, which means the hotel sees good occupancy only in the tourist season. “Certain properties like our Taj Safaris are completely out of operation in the monsoons, thereby making them an 8-month destination and impacting revenues.” Interestingly, Sarkar mentions the image of India across the world as a major hindrance to the growth of leisure tourists. “The competition from neighbouring countries and negative perceptions about Indian tourism products constraint growth. The image of India as a country overrun by poverty, political instability and disease, and the growing safety concerns continues to hold strong.” But that could well change as the country transforms.