| |
|
Economic Liberalization - A new impetus in hospitality industry
|
| Hospitality is about offering warmth to someone who looks for help at a strange or unfriendly place. Nothing but care, concern, cooperation, consideration for others, well being, comfort and prosperity make the whole world interrelated and lively. There is a kind of satiation in catering to the needs of others, which the people of hospitality sector can only feel and experience. |
|
|
Hospitality in marketable sense refers to activity of hotels, restaurants, catering, inn resorts or clubs who make up a profession for treating tourists. Helped with the unique efforts by the government and all other stakeholders, including hotel owner, resort managers, tour and travel operators and employees who work in the sector, Indian hospitality industry has attain a level of recognition worldwide. It has yet to go miles for its acceptance as a world leader of hospitality. Today hospitality sector is one of the fastest growing sectors in India. It is expected to grow at a rate of 8% between 2007 – 2016. Many international hotels including Sheraton, Hyatt, Radisson, Four Season Regent and Marriot international are already established in Indian markets and are still expanding.
Key Characteristics of the Indian Hotel Industry
- Metropolitan cities such as Delhi and Mumbai are the major sources of revenue generation for this industry and account for 75% -80% of revenues.
- The average room rate (ARR) and the occupancy rate (OC) are the two most crucial factors that determine profitability. ARR depends upon, location, brand image, star rating, quality of facilities and services offered. The occupancy rate depends on other seasonal factors.
- India attracts large number of tourist. Approximately 4.4 million tourist visit India every year. Thus growth prospects are very high.
- In the past years number of multinationals has reinforced their position in this sector. Indian hotels chains are also expanding internationally. A combination of all these factors could result in emergence of budget hotels, which could potentially lower the cost of travel and related cost.
|
| |
|
Reasons behind the growth of the industry
Hotel industry in India has experienced a terrific boom in recent years. Hotel industry is inextricably linked to tourism industry and growth in tourism industry has furnished the growth for Indian hotel industry. Apart from this expanding Indian economy and increased business opportunities have also played a key role in flourishing Indian hotel industry.
For an industry which has always played second fiddle to more imposing steel and heavy industry during India’s first tryst with economic planning, tourism has finally come on its own. The tourism and hospitality sectors have been major incumbent of the economic transition sweeping across the land.
|
|
|
|
According to HVS International a leading consulting firm in tourism space India’s prevalence as a preferred destination has been subsidized by strong GDP growth deepening of economic ties with rest of the world. Global interest in India story and steadily rising incomes of a rapidly expanding middle class constitute the foundation of current tourism boom.
Hotel industry depends largely depend on the foreign tourist arrival further classified into business travelers (around 65% of the total foreign tourist) and leisure travelers. Over the last 2 years the hotel industry has seen higher growth rates due to greater number of tourist arrivals, higher occupancy rate and significant increase in the average room rate. The major factors contributing to this growth include stable economic and political conditions, booming service industry, FDI inflow, infrastructure development, emphasis on tourism by central as well as state governments and tax realization initiatives to bring down the tax rates in line with international levels. |
Indian Hotel Industry comprises of following main catagories
|
Star hotels: They comprise of 30% of the industry size. The star ratings are five- star deluxe, five star, four star, three star, two star and one star. The first two are mainly locate in metro cities and cater to foreign tourist, business travelers and top government officials, offering luxury at high price. You ill find next 2 types in tier II cities and tourist destinations. The last two are found in smaller cities and around tourist spots and preferred by domestic tourists. Reputed Indian ventures include ITC, Indian Hotel Company (Taj Group), East India Hotels (Oberoi Group), Hotel Leela Venture, ITDC hotels. Foreign players include, Radisson, Sheraton, Meridian, Hyatt, Four Season Regent, Carlson group and Dubai’s Istithmar Luxury hotels.
|
|
|
Heritage hotels: these are characterized by less capital expenditure and greater affordability and operate from fort, palaces, jungles, river lodges and heritage buildings. They comprise of Heritage Classic constructed between 1920 and 1935, Heritage Grand, existing before 1920 and Heritage set up around 1935 to 1950. Most Indian hotels group mentioned above operate Heritage hotels at historical sites in India.
|
|
|
Budget hotels: They are usually preferred by domestic travelers seeking economical accommodation. These hotels are reasonably priced, offer limited luxury, seasonal discounts and decent services. Some new global entrants include UK’s Dawnay Day and Whitbread Premier Travel Inn, Shangri –la, Aman resorts, Golden Tulip budget hotels, Country Inn, courtyard by Marriott and others. Budget hotels are preferred by business travelers contributing to greater ARR (average room rate) than leisure travelers. Increased demand and healthy occupancy has fueled the growth of budget hotels in short time.
|
|
|
Unclassified hotels: These are low priced motels spread throughout the country. A low pricing strategy is only their selling point. This segments accounts for 19% of the industry.
|
|
On the job - Domestic tourism explodes
To put the size of India's gigantic domestic market into perspective, it equates to over one third of total international arrivals received by all markets globally. While current mid-market players like Choice Hospitality India, Best Western, Fortune Park and Sarovar Park Plaza have catered for domestic tourism for some time - this market has recently exploded and demand is growing
As the domestic market continues to be on the verge of expansion, the mounting Indian economy provides rising middle class with increase disposable incomes. The arrival of low cost airlines and associated price wars has given domestic tourists more options than ever before. The “Incredible India “destination campaign has also helped the growth of much domestic market including religious tourism. To respond to needs of this growing giant, companies like Choice and Best Western plan to significantly increase their portfolio over next 2 years by 100 % and 50% respectively. Other hotel companies have also taken steps to ensure they benefit from country’s huge domestic demand.
Catching the eye of international market
The flow of foreign tourist arrivals has recorded remarkable growth rates. The number of arrivals has increased from 3.9 million in 2005 to 4.4 in 2006 and 4.95 million in 2007 recording a growth rate of 13.5 % in 2006 (over 2005)and 11.9% in 2007. Alongside there has been simultaneous increase in foreign exchange earnings. Total earnings from foreign tourist have shown an annual growth rate of 19.2 % in 2006 and 33.8% in 2007. Currently corporate travel dominates the international orbit.
|
|
|
The Indian subsidiary of Kuoni estimates that 80 % of foreigners are staying in their hotels are on business. While corporate business will continue to expand as economy grows, there is enormous untapped potential in the leisure market. Incredible India has not only focused on promoting traditional holiday attractions and cultural experiences but on defining unique markets from medical to religious tourism. In fact India is witnessing growth in Japanese tourist due to promotion of Buddhist travel. India’s growing reputation as major destination for medical tourism is attracting more and more foreign visitors. In fact Indian hospitals are becoming first choice for foreign patients owing to easy access to visa facilities coupled with best emerging medical infrastructure which will help India to earn to an extent of US $ 1.8 bn in foreign exchange by 2012. Currently India’s earnings through medical tourism annually is an estimated at US $ 821.40 million.
This tremendous growth of tourism sector turns out to be boon for hospitality sector as this sector is witnessing increase in occupancy ratio and average room rates. While occupancy ratio is around 75-80%, the average increase in room rates is floating around 22-25%. This ongoing upsurge in tourist inflow will bring about terrific opportunities for investors in this sector. For e.g. the estimated numbers of required hotel rooms is around 240,000 , the current availability is just 90,000 rooms, leaving a shortfall of 150,000 rooms to be provided. With such a huge potential available in this segment, several global hotel chains like the Hilton, Accor, Marriott International, Berggruen Hotels, Cabana Hotels, Premier Travel Inn (PTI), InterContinental Hotels group and Hampshire among others have all announced major investment plans for the country.
The advancing airline industry
The entry of the aviation industry in India brings with it impressive opportunities for hotel industry as it relies on airlines to transport 80% of the external arrival. Increased airline activity has intoxicated demand and has helped to improve India’s turbulent infrastructure. The upgrading of national highways connecting various parts of India has created new opportunities for development of budget hotels in India. Not only new aviation brands have emerged but also the existing ones have ordered new planes due to upsurge in demand and to fight competition. |
|
|
Apart from this government decisions to substantially upgrade 28 regional airports in smaller towns and privatization &expansion of Delhi & Mumbai airports will improve business prospects of hotel industry in India. Steps taken by government such as abolishment of inland travel tax of 15%, reduction in excise duty on aviation turbine fuel to 8% and removal of restrictions on outbound chartered flights, including those relating to frequency and size of aircraft will boost travel and tourism in India which in turn would benefit the growth of hotel industry.
Analysis of the sector
The tables below show the market wide occupancy and average room rates of selected hotels in the major five metropolitan cities of India.
|
|
Bangalore: the table shows Bangalore to be one of the strong performers in both occupancy and average room rates. However values of hotels have dropped by over 18.2% last year due to displaced demand, stabilizing revenues and steep rise in associated costs such as human resource. Bangalore is expecting new surge of developments and this supply is expected to enter the market by 2008-09 end. It is expected that valuations of hotels to begin correcting by 2009-10.
Chennai: this metro city has turned out to be one of the most stable markets. While occupancies have generally averaged around 75%, the average room rates have also been well treated and have shown a gradual increase. Due to well spread development across the city’s outer locations it is witnessing a well spread out development of hotels. Chennai also consist of some very competitive indigenous brands such as GRT and Ceebros that are now on the verge of expansion in southern India. Values of hotel in Chennai have grown by healthy of 20.3% over the past year and currently the fifth largest in the country.
Delhi: this capital city has emerged as one of the best performing market in India. The above shows stability in occupancy rates, however room rates across national capital region (NCR), have risen sharply and making it along with Mumbai the most expensive destination in India. Factors that have contributed to this sustained growth of demand are: continued development of Gurgaon as a commercial hub, expansion of the international airport, improvement in basic infrastructure and demand pattern that is evenly spread across the region. Supply, on the other hand continues to lag behind- primary reasons being freeze on development plans for a proposed hospitality as apart of modernization of Delhi airport and Greater Noida expressway hotels –effectively removing 33 % of all future supply.
Goa: despite all the dejection showered by soothsayers, Goa continues to gather strength by each passing year. Goa is considered to be strong leisure, meetings, conferences and exhibitions destination. The coming up of the convention center in future and industrial development in Goa shall help further to cement its position as important MICE destination. Acquiring licenses and clearances still remain to be laborious task in Goa which has contributed to retardation in new hotel development. This leads to existing hotels demanding immoderate prices. There is no supply entering the branded hotel market thereby increasing the Goa’s attractiveness as an investment option. Showing a growth of nearly 34.4% in valuations in 2007-08, hotels in Goa have fourth most expensive valuation in the country.
Mumbai: the heart of India’s finance and commerce contributes to impress with increases in average room rates, dislodging Bangalore from number 1 position. Mumbai hospitality market has split into smaller micro markets such as South Mumbai, Worli, andheri, navi Mumbai and thane. With 31.7% over the past year Mumbai ranks number 1 in terms of hotel valuations.
Role of Government
In view of stimulating domestic and international investment in this sector; the government has implemented following initiatives:
- 100% FDI under the automatic route is now permitted in all construction and development projects including construction of hotels and resorts, recreational facilities and city and regional infrastructure.
- 100% FDI is now permitted in all airport development projects subject to condition that FDI for up gradation for existing airports require FIBP approval beyond 74%.
- A five year tax holiday has been extended to companies that set up hotel resorts and convention centers at specified destinations, subject to compliance with prescribed conditions.
- Plans for substantial up gradation of 28 regional airports in smaller towns and privatization and expansion of Delhi & Mumbai airports.
These above mentioned initiatives have resulted in increase of FDI flows in this sector. From April 2000 to November 2007 a total of US $ 36 million in foreign direct investments were transmit towards development of hotel and tourism.
During recent times private equity sector has also shown keen interest in this segment. Investment ha tripled from US$ 60 million in 2004-05 to over US $ 180 million in 2006-07. Estimation is that hospitality sector is further to see US $ 11.41 billion investments over next 2 years. |
|
|
Analysis of the sector
Strengths
- Natural and cultural diversity: India has a rich cultural heritage. The “unity in diversity tag” attracts most tourists. With a backdrop of 500 years, India is one big package of culture and legend that never fails to fascinate imagination of the visitor.
- Demand and supply gap: Indian hotel industry is facing a mismatch between demand and supply of rooms leading to higher room rates and occupancy levels. With the privilege of hosting common wealth games in 2010, there is more demand for rooms in five star hotels. This has led to rapid expansion of the sector. The table below show average room rates of major cities, which have witnessed strong growth due to high demand and lack of supply.
- Government support: the government has recognized the importance of tourism and steps are being taken to development of infrastructure and of new tourist destinations and circuits.
Weakness
- Poor support infrastructure: though the government is taking necessary steps, many more things are to be done to improve the infrastructure.
- Slow implementation: the lack of adequate recognition for the tourism industry has been hampering its growth prospects. There is a wide gap between steps being taken on paper and their implementation.
Opportunities
- Rising income: rising income levels have left with Indians spare money to spend which is expected to increase leisure tourism.
- Open sky benefits: with open sky policy, travel and tourism has witnessed increase in business. Opening up of the airline activity has increased demand and has been helpful in improving infrastructure. It has proved to be beneficial for both domestic and international travels.
- New business opportunities: over next four to five years, the biggest surge in accommodation demand is expected to emerge from commercial zones that are being developed in to metro suburbs and secondary market. Mixed use development projects that include retail and commercial space have also gained momentum in the last 24 months will continue to be an attractive option. This provides a unique opportunity for hospitality projects.
Threats
- Fluctuations in international tourist arrivals: dependency on foreign tourist can turn out to be risky as there are wide variations in international tourism. Events like 9/11, SARS outbreak and Afghanistan & Iraq wars have severely impacted tourism industry in the past and threat remains.
- Increasing competition: there is emerging competition in the industry after witnessing the entry of four seasons, Shangri –la, Carlson group & Marriott chain in Indian hotel industry.
|
Trends in hospitality sector
The Indian hospitality sector is revolving around a high growth orbit. Various possible trends, including high tourist arrival, improved domestic business, confidence, and increasing foreign investment inflows; rising consumerism and cheaper finance for vacations have resulted in rapid growth of hospitality sector.
Now the major question which arises is what will be the future course of trends that will be shaping up the future of the hospitality industry. |
|
|
The answer to this lies in 5 trends which are discussed below:
- Low cost carriers : air Deccan , Air –India express , kingfisher , spice jet… all these names sounds very common and many of them are yet to begin operations –go airlines , magic air and east west airlines of emergence of low cost carriers (LCC) that are soon to conquer Indian skies. The concept of low cost carriers or no frills airlines, though globally successful is gradually catching Indian traveler. Most of the times it has been observed that travelers are general are most sensitive to airfare than they are too hotel room rates. Often a low airfare will stimulate demand for travel even if hotel prices are increasing. Therefore LCC turns out to be a good option for business travelers, as they have advantages like low cost, more options and connectivity.
- Budget hotels: More than 50 % of the occupancy of majority of hotels comes from business travel segment. The average room rate realized from business travelers is normally higher than leisure travelers. Growing demand and robust occupancy have resulted in increase in number of budget hotels.
- Service apartments: the concept of service apartments, a globally successful concept, is a recent arrival in India. Service apartments are latest trend in accommodation offering comfort and convenience of a home without hassles of having it to maintain or look after it. Ideally suited for long term to medium term staying guest, service apartments are natural choice for corporate employees or expatriates relocating to a particular city, non- residents Indians visiting the country for long spells and foreigners visiting the country for long durations.
- Technology: travel and technology have become inextricable. Technology is making it own advances with high tech video conferencing facilities, web cameras and virtual reality mode of conferencing. On line booking, e-ticketing, easy access to information etc are just few areas where technology has completely changed the way we travel.
- Loyalty travel: Today, airline-credit card company tie-ups have brought a whole range of benefits to the travelers. These include insurance cover, upgrades, free tickets, access to executive lounges, and a host of other goodies.
- Employment generation: one of the largest HR consultancy firm has predicted one million new jobs in India in 2008. Ma Foi employment trends survey (METS), conducted by Ma Foi one of the India’s leading HR consultancy firm has predicted 3% increase in employment in 2008. The biggest glob of new jobs according to the survey would be generated by hospitality sector which is riding high with the tourism boom in the country. Its add that an estimated USD 11.41 bn is expected to be seen in the hospitality sector in next two years and that is India is likely to have around 40 international hotel brands by 2011. The boom in the tourism industry has had a cascading effect on hospitality sector which was result of increase in occupancy ratios and average room rates.
Challenges before Indian Hospitality Industry
The number of tourist visiting India is estimated to touch figure of 4.4 million. The major factors that are sowing the seeds of India’s hospitality industry growth are, booming economy, steady political scene, booming service sector, FDI inflow, infrastructure development and boost for tourism sector due to government funding. It is being estimated that India may achieve growth of 12% per annum in tourism for many years to come. Not only international tourist but also the domestic tourist market including business and leisure travelers is also prospering. |
|
|
This market is estimated around 300 million tourist per year. 10%-15% growth is also expected in spiritual and medical tourism in coming few years. This boom in tourism will bring about tremendous growth in the hospitality sector. Though there is shortage of rooms at present, it is going to get over soon, as top international players are heading towards India to establish themselves here. A strong growth of about 10% for new hotel projects is expected for next few years. Apart from this 2010 commonwealth games will add to the demand for quality accommodation.
As seen above it is for sure that Indian hospitality industry is poised for tremendous growth. The demand &supply imbalance have persuaded several national and international companies to rivet their energies towards expansion in India. While these developments are a desirable transformation in growth pattern of our industry, but one must divert its attention towards challenges that are waiting ahead.
Most of the Indian cities are offered with some of the world poor floor indices (FSI). Floor space index is the ratio of total floor area of buildings on a certain location to the size of land of that location or the limit imposed on such ratio. Facts show that these FSI norms have frozen with time and the practice of raising FSI across most cities of the world some how not imitated in India.
Typically progressive FSI has two purposes:
- It permits households as well as businesses to consume more floor space with rise in their incomes, without having to move to new areas in the suburbs.
- An increase in FSI will render to a decrease in city spatial expansion in the countryside, decreasing population dispersion, transport costs and pollution due to transport.
Ironically, while FSI norms have posed a serious difficulty for developers to construct tall building structures, the one thing that has touched the sky is land valuations. Hotels in India across major cities are offered low FSI. Land prices are rising exponentially. Adding these two things together, the result turns out to be that we are in a financial marshland. HVS research indicates that last year commercial land auctions in regions like , wazipur , dwarka and gurgaon areas of NCR ranged from 60 to 75 crore per acre. More and more hotel projects appear financially unfeasible as breakeven projections as well as stabilization forecasts run well beyond typical ten year cycle.
A recent fashion of building hotels in association with malls is also started getting witnessed in India. Though this facilitate the developers in compensating land costs by constructing hotel on top of the mall ,and thus building a mixed use product , this trend brings with it some additional challenges that have to be tackled. Most malls across India average about 1.6 parking spaces per 1000 square feet of built up space. The addition of hotel on top of the mall only leads to increase in demand for parking spaces. It’s not surprising to know that more and more consumers are finding their shopping and now lodging experience to be a traumatic one. The nuisance value associated with parking woes of our nation is often a function of poor planning and limited foresight by these developers of malls and hotels.
Infrastructure in India has always remained bottleneck for a sustained growth in India. The problem of irregular water supply has now become a day to day phenomenon. Power cuts in most of the metropolitan city have become now a daily occurrence. The hotel industry is also posed with these obstacles progressively. India’s infrastructural problems have direct impact on growth of both leisure and commercial travel to the country. Infrastructural challenges are certainly a hindrance to the kind of growth with economy such as ours expect to witness.
Apart from these challenges the major challenge industry has to face in its future course is of retaining quality workforce. Retention of the workforce through training and development is a problem and attrition levels are too high. One of the reasons for this unattractive wage packages. Though there is boom in the service sector, most of the hotel management graduates are joining other sectors like retail and aviation.
Indian political uncertainty is another additional element that contributes towards the ambiguity regarding the future of our country’s overall development. Although several multinationals are clumping to India and laws of demand and supply make a strong argument in favor of continued growth, they fail to account for gloomy effect of our nation’s politics.
Therefore though the hospitality industry in India is going through a significant expansion phase of widening and deepening the market, it has to face a few big obstacles along the way. Inflexible FSI norms, high land costs, inadequate parking spaces, poor infrastructural facilities, political uncertainties are just some the challenges that confront this industry in near future.
To conclude hotel industry visible revival starting 2002, owed to strong domestic travel trends a positive economic and investment environment will continue. It is believed that hotel industry will witness sustained growth in terms of occupancy and average rates due to booming business travel. The industry has in past overcome the challenges posed by 9/11, SARS. Its is expected that industry will remain buoyant in face of US sub prime crisis , benefiting instead from a well performing economy and strong demand from within the sector. |
|
|
|
