Budget hotels rush in to meet surge in demand

The announcement of a joint venture between a US-based multinational company and a Pune-based company, slated for April this year, had to be postponed three times.

The team representing the US partner could not find a place to stay in Pune; the five-star hotels were full. Finally, when the signing of the pact could no longer be postponed, the visitors stayed in service apartments.

Consultancy firm PricewaterhouseCoopers (PwC) estimates the availability of hotel rooms in the country at 100,000-125,000 less than the demand by 2010.

Curiously, five-star and luxury hotel chains, going by their expansion plans, do not seem to have seized this opportunity. Some multinational hotel chains, such as Intercontinental Hotels, which recently opened a Crown Plaza hotel in Russia, are not quite rushing to India.

In all, the anticipated increase in five-star accommodation "� including the Taj chain's 200-room property in Gurgaon and The Leela's 70 rooms in Bangalore "� does not exceed 1,000 rooms.

The budget hotels have rushed in where the five-star hotels fear to tread. The number of rooms available at budget hotels is slated to increase by as many as 40,000 under brands such as Marriot, Courtyard, Whitbread, Country Inn, Sarovar and Lemon Tree and Ginger. International hotel chain Accor has tied up with Emaar MGF to set up Formule 1 and Ibis budget hotels in India.

Equally significantly, budget hotel chains are looking to close in on five-star hotels in the luxury segment.

Patu Keswani, managing director of Lemon Tree Hotels, which is planning 1,700 budget rooms in the next three years, says his hotels will create a niche by offering "almost everything" that a five-star offers, but charging 50-60 per cent of the five-star tariffs.

This, he says, is possible mainly due to the cost saved on the common area per room (lobbies, foyer and the like). Lemon Tree offers less common area as compared with that of five-star hotels.

Industry analysts say there was a lack of clarity till recently in the segmentation of hotels in the country; five-star hotels were considered luxury and everything else budget. But hoteliers in India are waking up to the global segmentation of luxury, mid-scale, budget and economy hotels.

Says Nandita da Cunha of KPMG Advisory Services: "The critical success factor will be control over costs and operating efficiency through innovative use of design and technology without compromising on the basic level of cleanliness, hygiene and security."

Roots Corporation, a 100 per cent subsidiary of Tata-controlled Indian Hotels Company, is planning to open its low-cost, no-frills Ginger hotels in 30 locations in the country by 2007-08, entailing an investment of Rs 350 crore.

Prabhat Pani, Roots Corporation's chief executive officer, says the new chain falls into the "smart basics" category, cutting down on the amenities not frequently used by travellers.

"The hotels will have no bellhops, valets or room service, though we will ensure clean, secure and hygienic accommodation," he says.

The rooms in Ginger are currently priced at Rs 999 for single occupancy and Rs 1,199 for double occupancy.

The economics of the industry favours budget hotels, at least in the medium term. "A five-star room costs Rs 70 lakh to Rs 1 crore compared with only Rs 30-40 lakh for a three- or four-star room. The gestation for a five-star property is three years or more, whereas a budget hotel can be up and running in well under two years," says da Cunha.

According to Sanjay Dutt, deputy managing director of real estate advisory Cushman & Wakefield, the slow response of five-star chains may be put down to the cyclicality of the hospitality business.

The current demand-supply mismatch has driven the average room rates up by more than 20 per cent, making the business look attractive. This trend is likely to continue till 2010, by which time substantial new rooms will be available in the market.

"The biggest challenge will be for the luxury segment, which will find it difficult to maintain average room rates and occupancy," he points out, adding that rising real estate prices and increased employee costs will also put pressure on the profitability of large players.