Two, three-star hotels score over four, five-star peers in revenue growth

Thanks to a rise in travel in tier II and III cities and towns and the expansion of budget hotel brands for the growth

It is not the four- and five-star hotels that are clocking the highest growth in revenue per available room (RevPAR), even as the hospitality sector has started showing signs of a turnaround. The two- and three-star hotels are seeing a stronger growth in RevPAR, thanks to a rise in travel in tier II and III cities and towns and the expansion of budget hotel brands.

The data collated by hospitality consulting firm Hotelivate, by analysing over a 1,000 domestic hotels, shows how three-star hotels saw the highest RevPAR growth of 8.2 per cent among all segments in 2017-18 (FY18). The two-star hotels registered a RevPAR growth of 7 per cent. However, growth in case of four- and five-star hotels was lower at 5.9 and 5.7 per cent, respectively, according to a report released by the consulting firm last week. This is a trend reversal since RevPAR growth of two-star hotels was flat in 2016-17, while three-star hotels had reported a decline. In the same year, growth in four-star was almost 5 per cent and five-star hotels had posted an even higher growth of 15 per cent.

RevPAR is the real measure of revenue and is derived by multiplying the average rate by the per cent occupancy. The data shows the average room rate of two-star hotels increased by 8.5 per cent in FY18, even though it lagged on occupancy at 61.8 per cent, down 1.4 per cent year-on-year. Growth in the average rate of three-star hotels was 5 per cent and the segment saw an occupancy growth of 3.1 per cent to 67.2 per cent. The average rate of four- and five-star hotels increased by 3 and 1.8 per cent, respectively. The occupancy of four- and five-star hotels grew by 2.8 per cent and 3.8 per cent to 67.8 per cent and 66.5 per cent, respectively.  

Growth in two- and three-star segments can be primarily attributed to the increase in average room rates witnessed by hotels in these two categories, which clearly seized the opportunity presented by a favourable demand situation unlike their higher-positioned counterparts, Hotelivate said. “The trend points towards a rise in travel in tier II and tier III cities in the country, the growing acceptance of branded budget and economy hotels by travellers, and the success of the franchisee model,” Achin Khanna, managing partner at Hotelivate, said. 

The stronger performance of the two- and three-star categories has been validated by fundraising of $1 billion announced by budget hospitality brand OYO on Tuesday. The deal values OYO at $5 billion (Rs 363 billion), higher than the combined valuation of the three leading listed hotel chains - Indian Hotels Company, EIH, and Lemon Tree. 

In response to a query on the Hotelivate assessment, Ritesh Agarwal, founder & chief executive officer at OYO, said the budget hotel space in India has found its sweet spot and is on the path of economic growth. “We, at OYO, are thrilled to be at the forefront of this transformation and progress, while supporting asset partners and making them better hospitality players,” he said. 

OYO has more than 120,000 rooms under its fold in the domestic market spread over several thousands of hotels.

Besides OYO, the branded budget hotel space has players like Treebo and Fab Hotels. Companies like IHG and Accor, which operate in the premium segment, are also focusing on the budget and mid-scale category. Agarwal said budget hotels offer several benefits, including affordability, accessibility, and easy availability, making them a preferred choice for travellers in the middle-income group, irrespective of a solo or group travel, for business or leisure.