Pandemic lessons: Hotel brands, asset owners go for revenue sharing route

Having faced a “zero revenue” situation during the pandemic-induced lockdown, asset owners and mid-market hotel brands which were hit the hardest are looking at sharing costs and risks. Many of the leading hotel brands are opting for the revenue sharing model with the asset owners instead of the popular management control.  

Domestic mid-market hotel brands such as Indian Hotel Co’s Ginger, Kamat Group’s Orchid Hotels and Concept Hospitality’s Fern are in various stages of pursuing revenue share deals with the asset owners. While IHCL has been at it for some years now, for Concept and Kamat Group, which have typically relied on management contracts, it’s a first.

According to Nandivardhan Jain, CEO NOESIS Capital Advisors, post pandemic, the asset owner’s willingness for revenue sharing is quite high. “We are working actively with 10 hotel brands who are evaluating revenue share as an option to add a cumulative 12000 rooms in their portfolio in cities like Mumbai, NCR, Hyderabad, Bangalore, Pune, Goa, Kolkata, Chennai and all the major commercial capital and establish leisure destination,” said Jain whose firm has been advising the asset owners and brands on revenue sharing for over a decade.

In the last twelve months, NOESIS has concluded 23 hotel transactions on a revenue-sharing basis in Metro to tier 3 cities from business to leisure destinations.

Take Concept Hospitality for instance. For the first time in its 26-year old history, the hospitality firm that manages 5,000 keys and 95 hotels across the country --- all through the asset light management contract route, pivoted to revenue sharing in November 2021.

It signed up a 250-room property at the Statue of Liberty in Gujarat and is in the process of signing up for another 108 room hotel in Vadodara under revenue share, said Suhail Kannampilly, CEO, Concept Hospitality.

“We are now also looking to add some key assets rather than just adding hotels to our portfolio. Getting into revenue share is part of that strategy,” said Kannampilly.Similarly, Kamat Group that owns the Orchid brand of hotels which has traditionally chosen the management contract route too is in talks with the hotel owners for a revenue sharing as it seeks to expand its footprint.  

For Indian Hotel Co’s Ginger revenue share model is not new and depending on the size of the property and its location it has been stitching revenue share deals with the asset owners. In the March quarter alone two out of three deals done by the brand – one each in Dehradun and Agra are based on revenue share. Noesis was the advisor for the transaction.  

Even Kamat Group of Hotels that owns the Orchid brand has relied on either management contracts or long term leases but is now looking at revenue sharing. “One of the clear trends that have emerged during the pandemic is that the branded chains of hotels have done better than unorganised, standalone hotels. They don’t have the strength to grow and especially in human resources. These are the owners reaching out to us for revenue sharing,” said Vishal Kamat, CEO Kamat Group of Hotels.

Notwithstanding the win-win proposition, the hotel brands are treading with caution and are going ahead with it only when they are confident that a gross operating profit of 35 to 40 per cent is warranted in a stable year from a property. Only then does it make sense for them to share 20-25 per cent of the revenue with the owner and there is an opportunity to make 15 percent, which is double the management fee the operators charge, explained Jain.

Typically for domestic brands, the management fee is 7-8 per cent of the turnover.  So here they have the opportunity to double that, hence it is worth taking the risk, he said.  For the owners, it’s an assurance that he will not be “out of pocket” and he will make money even in a bad market, he added.

This is seen at a time as hotels are bracing for a strong quarter ahead as vacationers head to the cooler climes to beat the summer. Strong pent-up demand for leisure travel, opening up of international and corporate travel, and wide vaccination coverage should catapult the revenue of the Indian hotel industry by 45 per cent from a decadal low last fiscal, and almost match the pre-pandemic (fiscal 2020) levels, Crisil said in a note on Tuesday.