Budget blast

In this sector, budget is a brand that offers value for money in the true sense of word. And the competition? It's only growing!

After an extended period of neglect, the budget hotel segment in India is finally the object of fascination.

With the Indian hospitality sector seeing among the fastest growth rates in the world (World Travel and Tourism Council estimates Indian tourism demand will grow at 8.8 per cent over the next 10 years) and the mid-market segment growing the fastest, it's clear, there's money to be made.

Now, if only the distinction between budget versus mid-market hotels would be as explicit.

"Budget is layman terminology for anything that is low priced, very different from mid-market which typically refers to full-service three-star hotels," clarifies Patu Keswani, CEO, Lemon Tree Hotels.

He would know "" he has brands operating in both categories. His newly announced budget brand Red Fox is what the existing three-star chain of Lemon Tree hotels was meant to be three years ago.

Today, the three operational Lemon Tree properties are positioned firmly as upscale, moderately priced hotels. Red Fox, on the other hand, will be an economy brand.

But that critical yardstick of low pricing is also relative. Keswani says Red Fox will be priced between Rs 800-3,000, at 20 per cent of whatever is the five-star pricing in that market.

Anil Madhok, managing director, Sarovar Hotels, that launched its budget brand Hometel last year, also prefers to let each market determine their pricing within the Rs 2,000-4,000 band. The only budget brand to operate standardised pricing so far is Indian Hotels' Ginger Hotels. The first decidedly budget brand to launch ahead of the pack in 2004 (originally appearing as IndiOne), Ginger offers a fixed Rs 999 per single room.

Blame the inflated land costs. "I cannot be limited by land costs if I want to offer wide distribution. But, I will ensure that in every city Hometel offers the best value for money," explains Madhok of the decision of most not to skip gateway cities like Mumbai, Hyderabad and Bangalore even though land costs are dearer.

Companies are settling for mixed-use development to use lease income to offset land costs. Red Fox properties currently under construction in Pune and Jaipur will be located atop 70,000 square foot shopping malls also developed and managed by them.

"The idea," says Keswani, "is to allow the mall area to occupy roughly 50 per cent of total space by value, so that later we can spin them off into assets and sell."

They tread the path of joint development cautiously. "Developers obviously have their own profits built in, and profitability in this segment hinges on cost efficiency," says Keswani.

Madhok says he's willing to explore all avenues, from buying or leasing land to jointly developing, as long as consistency of design is maintained. "Given the current land supply volatility, you take what you get," is his lament.

Entrants from the West, backed by private equity, will have to contend with that hurdle quickly, if they want to get their plans off the ground. Hotting up action is Accor, that via a joint venture with Dubai-based developers Emaar group, will release 10,000 rooms over 10 years through a new budget brand Formula 1.

Europe's easyGroup (owners of easyJet) will lend their budget brand easyHotel to another Dubai based equity firm Isthimar, which will develop and operate at least four properties by 2008. Starwood Capital also plans to deliver its budget chain Campanile to Indian shores.

Beggruen Hotels is an unusual case in private equity involvement in the segment. Berggruen Holdings, a private company headquartered in the US that manages and invests its $1.5 billion proprietary capital in a range of asset classes, has actually launched a Greenfield chain of budget hotels by itself.

Berggruen Hotels has announced plans to operate 38 hotels in the next five years under the brand Keys, evenly distributed across tier one, two and three locations, each with 100 to 170 rooms.

Partha Chatterjee, chief marketing officer, Berggruen Hotels, believes that quickly achieving scale is key to success and that's why as many as 24 sites are simultaneously under negotiation. "We will be a chain of 10 by end of 2008," he says.

Berggruen is projecting Rs 350 crore revenue in five years, but especially in this segment nothing means more than bottomline numbers. Ginger Hotels (then IndiOne) is said to have made cash profits in Year One of operation.

Keeping capital expenditure as low as possible along with developing maximum operational efficiencies will of be key. It's of interest to note that capital expenditure budgets between players vary. Keswani will spend up to Rs 50 crore per 150 room hotel, Hometel and Berggruen's budgets are a more cautious Rs 15-20 crore per 100 rooms.

With facilities like central airconditioning, Wi-Fi, LCD televisions, and conference rooms fairly standardised, Madhok believes that with some costs, penny wise is pound foolish. "Customers at every level are discerning. The cost difference between first and second grade bedsheets is Rs 25; when you wash it 170 times why stint."

Branding success, most believe, will depend on first achieving pan-Indian scale. Which is why even a company like Sarovar, a pure-play management company, switched to the own-and-manage formula, so that scale is in its hands.

Ginger, with six operational properties and a powerful mother brand, clearly has a headstart, but the fact is that with demand far outstripping supply, people will take what they get.

"The government says 55,000 mid-market and budget hotel rooms will be created over the next 10 years, if you ask me we need more like 5,00,000 rooms," says Keswani.

And what of the countless unbranded scattered properties in the nebulous mid-market? "They will have to bring in investments to scale up or be bought out," says Keswani. Looks like plenty more private equity funds will come calling!