DELHI, India—Budget hotel chains as a segment in India is in its infancy. Industry experts and players might say, the surface has barely been scratched.
According to Ajay Bakaya, executive director, Sarovar Hotels and Resorts, “There are too few of us in this segment, and even if the number of rooms available were to double itself every year in the next five years, there will be still a shortage of rooms.” The demand for budget hotels is so high that nearly anyone in the segment—even a standalone—can make a killing.
Rahul Pandit, VP operations for Lemon Tree Hotel Company, said the numbers make a case for increasing demand.
“If one were to look at the tourist inflows at 4.2 million visitors and 400 million domestic trips made by Indians in the last year, and the total of all classified hotels is just 120,000 rooms, the demand-supply gap is huge.” This gap in the years to come is set to rise, not decrease.
The two-to-four-star hotel category is virtually unexplored, with only 20 percent to 25 percent of the market catered to by any branded player. The country’s economic growth, at between 7 percent and 8 percent a year, coupled with increased tourist inflow and more domestic travel thanks to cheaper domestic flights, has resulted in a boom in hospitality and the need for quality accommodation at affordable prices. Services at some of the brands in the segmnt are: the 3Bs for Lemon Tree Hotel’s budget brand Red Fox—bed, breakfast and broadband, while in Sarovar Hotels’s economy Hometel–small sized rooms, quality bed, bathroom, one restaurant and a small meeting facility. The daily price point in the segment is about 1,500 to 4,500 India rupees.
| Occupancy | ADR (USD) | RevPAR (USD) | Average Daily Rooms Available |
| 67.3 % | 222.00 | 149.00 | 25,526 |
Given the potential and the lucrative numbers, there has been a scramble to enter the segment. So far, Ginger Hotels from Roots Corporation Ltd. – a subsidiary of the Indian Hotels Co. Ltd. (Taj Group of Hotels) of the Tata Group has gained predominance, with hotels in 14 cities. Sarovar has presence in three cities and has another four properties in the pipeline. Red Fox properties are slated to come up in 148 locations in the next 12 years, with one each in Delhi, Hyderabad and Jaipur in the next two years. Foreign investment has flowed in with the likes of Berggruen Hotels and international joint ventures include Accor teaming with Emaar to bring 100 Formule 1 hotels to India; and Hilton Hotels International tied up with DLF Group, a major real estate developer based in India.
Despite such forays and initial euphoria over the potential, most plans now seem to include a caveat –subject to the availability of land. What also has proven to dampen development is skyrocketing real estate prices, with some crazy valuations. At the end of the day, the land price justifies the room pricing.
Akshay Kulkarni, director South Asia for hospitality, Cushman & Wakefield, said, “There are a couple of reasons why this segment has not boomed; primary amongst it is the land cost which is high. The numbers just don’t add up.” Lemon Tree’s Pandit echoed the sentiment.
Special zones for hotels could level the playing field or free land from the hands of speculators. Bakaya, however, said, “Affordable land is available and one has to identify it. Every industry has its constraint and it is land here. There are pockets available where budget hotels are a very viable option.”
Several options are available in secondary cities, outside city parameters, in satellite towns and special industrial zones and parks. A budget hotel cannot be built in the heart of the city because land costs are at a luxury premium. Kulkarni added, “The earlier bullishness has been replaced by caution now given the general business sentiment. The tourist inflow data of the next month should bring out a clearer picture.”
Most players are refining their particular product mix to come up with a winning model. From carefully identifying their target segment, such as the executive, domestic traveler or tourist, and developing services around that, looking at a judicious land use mix, identifying viable location, managing property rather than building it, becoming a service entity offering their brand and hotel management expertise—all are critical considerations. Some are flirting with various models at different properties to pinpoint a successful one that can be replicated across locations.