High interest rates, land cost are challenges for Marriott: Craig Smith

A year ago, Marriott International became the world’s largest hotel chain by acquiring Starwood. It also emerged as the biggest (by number of rooms) in India, overtaking Indian Hotels Company. CRAIG SMITH, its president and managing director for the Asia-Pacific region, speaks to Ajay Modi on its India aims and the challenges here. Edited excerpts:
 
How are the synergies shaping up after the merger with Starwood Hotels, especially for India?
 
We are in the middle of that, as the deal happened about a year ago. Synergies are happening in three groupings. There are corporate synergies. We now need less numbers of people at the corporate level and that is a direct payback. We both had teams in India, trimmed by a fourth after the merger.
 
The second synergy is at the top line (revenue) level of hotels. That happens through distribution and loyalty programmes. It helps because we never had SPG (Starwood Preferred Guest) members staying at Marriott and vice versa. Loyalty members of Marriott stay with us 60 per cent of the time (given hotel availability) and that was 40 per cent for Starwood. Now, we can capture more business and increase the market share. We now have twice as many sales people here, we have more people outside selling India and more dollars for promotion. The third synergy is on the bottom line (profit) for hotels on sourcing and procurement, due to size.
 
Marriott is now the largest in India by number of rooms. How do you plan to hold on to this position or is that not important?
 
For us, it is not about who is bigger but about who is better. There is advantage in being bigger but at the end of the day, we only want more guests to stay with us. The loyalty programme helps. Our development pipeline is huge. We will definitely double the rooms in India in the next four years. We have signed 60 new hotels (on top of the existing 91 properties) that are under execution. India is the second fastest growing market in Asia for us (after China), helped mostly by local business.
 
One of the prime properties in Delhi, the Taj Mansingh, is going to be auctioned. Does it interest you?
 
We need more properties in downtown Delhi. It is hard to break into the area and we have been looking at it for years. Property is so expensive in this part. A few years ago, a ridiculous price of $250 million was paid for only the land, when you can’t build high. How do you make returns? But, we need to have more presence there.
 
What are the challenges of running the hotel business in India and how does it impact profitability?
 
Three things hurt returns here. Interest rates are very high and because the hotel business is highly cyclical, you have higher risks than investing in an office building. The second is time to build. In Japan, they give you a time of two years to open a new hotel and they can commit the date on which the hotel will open. In India, they say three to four years but the actual average is five to seven years to open a new hotel. You tie that to cost of capital, which sits with no return for long years. There are too many licences with federal, state and municipal governments; this does not keep corruption away but creates more corruption. Every permit needed is a chance for somebody to come and shake you down.
 
The third is cost of land and it is very expensive. It is worse because you can’t build very high. If you can build double the (number of) keys (rooms) at the same land, your returns are higher. Everybody complains about the cost of land but air does not cost anything. If you just address the time taken for permits, along with vertical development, it will double the returns and you will have more hotels.
 
Are the formats of the new hotels you’re opening here being reviewed, especially on the food & beverage (F&B) side?
 
In some of the big cities, we might not have more restaurants but are still higher than others. However, F&B builds reputation. People do business over food. In our medium brands, like Courtyard, we used to have two restaurants; now we build one. But, we continue to build big catering space for weddings and social events.
 
How do you view the MICE (Meetings, Incentives, Conferences, Events) potential in India?
 
India is yet to realise that. Hyderabad is the only place here with a world-class convention centre. You need more of that in other cities. It allows bringing bigger groups, not only from India but also from outside. MICE has huge potential but you need to build the infrastructure. You can have a convention centre and everybody does better, as it creates demand.