While occupancies have improved, hotels are yet to recover the tariff they enoyed in the pre-recession days, says Priya Paul, chairperson, Apeejay Surendra Park Hotels. In an interview with Ranju Sarkar, she explains why the group was conservative (it has just added 9 hotels in 40 years). With a PE partner in Credit Suisse, Paul is trying to step-on the pedal and have 20 hotels by 2020. Paul was joined by MD Vijay Dewan in a conference call. Edited excerpts.
Has business picked up after the recession? If you were to look at life before and after the recession, how have been the occupancies & average room rates (ARR)? Can you give us a graph, which plots both, over a three year period?
The immediate effect of the recession or events like 26/11 is a drop in occupancies across the country. Our teams countrywide worked hard to build those occupancies in the subsequent years. We were successful in doing so with some properties like Kolkata and Vishakapatnam. Our food and beverage revenues grew slowly.
Dewan: In the first two years of the recession, revenues have declined by 30 per cent but now we are bouncing bank. In the first quarter of this fiscal, revenues have gone up by 16.5 per cent. In the first of recession, revenus declined by 10 per cent, and in the second year by 15 per cent, while the overall decline was around 30 per cent.
We used the recession as an opportunity to improve efficiencies of our operations as well as as on the capital side. We also used the opportunity to grow; we have built (a new hotel in) Hyderabad, we are building (a new hotel) in Pune, and we have been able to add properties on management contracts. We have become a 10-hotel chain.
Quarter-on-quarter, the occupancies have increased by 9 per cent for us. It used to be 58 per cent in the April-June quarter last year; this year, it has moved up to 67 per cent in the first quarter of 2010-11.
Have business improved to pre-recession days or is it yet to recover?
Occupancy-wise, it is building up but room rates are yet to reach pre-recession levels. It depends on the demand-supply situation in different markets, but by and large, it is still climbing up. Hotels revise rates in September-Ocotober, and they will do so in a month. Bulk of our rates are negotiated rates, which needs to increase.
But is the demand strong enough for hotels to increase rates upwards?
Input costs have gone up considerably for all companies in the economy, whether we are dealing with food and beverages or rooms. I think the indian economy has proved to be resilient that underlines the India story. We see demand strengthening every quarter and we see room rates moving up from October, November.
You have built 9 hotels in 40 years and adding two more. Why have you been so conservative? Even a new entrant like Lemon Tree have been more bullish.
Aah! (takes a long sigh) I guess we are a conservative group. But our hotels are not necessarily conservative. We have been cautious investors; we have investing our own funds and that has a different kind of lifecycle for investment as well as in terms of your ability to grow aggressively. About three years back, we had a private equity investment from Credit Suisse ($55 million) and that’s when we put together a blueprint on how we would like to grow forward. We would like to grow not by building new projects but also taking properties on management contract. Once we had the blueprint, we started acquiring properties in Pune, Jaipur, Kolkata, and we also took 2-3 hotels on management contracts. This plan would play out in the next ten years.
This is still not adequate in terms of what others are doing. But we are managing what we can manage comfortably, looking at our balance-sheet. Also, what we are trying to do is not hotels that are replica of each other. One of they key things about Park Hotels is that we use design as a differentiator, which demands a different level of personal involvement from my end and Mr Dewan. We are not rolling out a cookie-cutter template of hotels. So, design is a key focus in our hotels.
So, what’s the blueprint you have finalised? What’s the road ahead?
We are building in Pune, we will start building in Kolkata. On the drawing board is Jaipur and couple of other properties that we are negotiating in terms of management contract. We are also getting into the resort segment, which is a different thing for us.
How will your revenue mix change from own hotels & management contracts?
The bulk of the properties are our own properties, which are in city centres. The management contracts would generate 10-15 per cent of our revenues. Dewan: The long term objective of the company is to have 20 hotels by 2020, which would be our own hotels. Over and above that, we are looking at management contracts, but they won’t add more than 10-15 per cent to our topline because that’s what the scope is.
How did the PE investment proved to be a turning point for the hotel chain?
The first trigger for change was that this is a family business, and my brothers and sisters recognised that we would like to grow further. And to do so, we would need to get a partner. At the initial stage, we also had to get used to having “outsiders” in the company, rope in an investor, and then, get onto wherever it takes us. That was the first decision. How to deal with it. For us, the private equity investor is like a partner. They bring in a lot of expertise, understand the real estate and hotel market.
How did it prove to be a turnaround point in the way you drive your business?
Dewan: Obviously, when private equity comes in, it increases the opportunity to borrow more, and that gives you the opportunity to grow more. At that stage, we had 800 rooms and looked at doubling our inventory in five years and we are, more or less, on course. We have opened Hyderabad, focused on Pune, and will start work on the Kolkata project. Credit Suisse had invested $55 million for a 15 per cent stake.
Does your growth have something to do with the way you have been managing. You are involved in every little thing from design to buying a hook? There is only so much a person can do. Do you think this has constrained your growth?
Not really. We have a large team of 40 people in our project team today. Maybe at one point, we were doing one hotel at a time; today we are doing four. Obviously, we have also evolved as a company in terms of having the structure and the people. It’s a different kind of way of doing things. We are still a small company. It’s not that the decision-making is outsourced. All day-to-day operations are taken care by Mr Dewan. I am not involved with that part of the business, except for periodical reviews.
You have talked about using design as a differentiator. Does it work in reality and translates into better room rates for you than your peers?
Worldwide, design has become not just a differentiator, but a new category of growth. When we started talking about it in 1991-92, we were the only ones in India to talk of design; not just design of products but also design of services as a differentiator. And, it has been successful for us. We have been able to develop this whole niche through out the world in terms of what we bring in terms of hotel design and the fact that we create interesting and exciting hotels. Five of our hotels are member of this group called ‘design hotels’. Certainly , it has been successful for us from a business point of view as that’s how we have been able to fund and fuel our growth.
Dewan: It is the main differentiator. We are not just designing products, we are designing services, and we are designing customer experiences. If you stay in our hotel, the experience is very different from staying in other deluxe properties we are competing with. Yes, it translates into a premium in realisation of room rates
You have just renovated your hotels in Kolkata and Bangalore. Though location has been advantage for you, your rooms are smaller. Is that a disadvantage?
Dewan: Location has always been our strong point, we are located in the heart of the business district. In a leisure destination, we are located in a unique location like we recently opened in Kerala. Location is very critical to us, and will remain critical. Yes, in the older hotels the room sizes are of the standard size, but the new properties that we are opening up, we are looking at larger size of rooms with a minimum size of 450-500 sq ft. In Hyderabad, the minimum room size is 450 sq ft, larger rooms are of 500 sq ft. That’s the case with our new Calcutta hotel as well.
Five or ten years down the line, where would you like to be? How would you like to position your hotel chain via-a-vis your peers, who are also expanding?
Park Hotels is Luxury boutique hotels. And we don’t define boutique as smaller hotels as all our new hotels are 200-plus rooms category. In one sense, they are fairly large, luxury hotels. We have differentiated design and services as positioning, and build on that. We would like to have 20 hotels by 2020, if not more. We are consistently building on what we have been doing well. We have used the downturn to improve efficiecies.
How have you used the downturn to improve the efficiencies?
Dewan – we have benchmarked our costs with our competitors (we do this all the time) and tried to attain best-in-class status in all the costs, which have been identified as major costs: payroll and manpower. We have achieved best-in-class status on these parameters as well as on other overheads, hotel operations. During the downturn, our gross operating margins or GOP have been better than our competitors. We have been able to achieve better EBITDA margins than our competitors.
When you have 20 hotels by 2020, what will it strategically deliver for you?
I would not like to hazard a guess on what my topline or bottom line would be 10 years down the line; that would not be a good exercise to do. But certainly, if we are doubling up in size – right now, we have 2100 peopel in our team. With 10 more hotels, we are talking of more people, higher profits, we will become a national player, and you may see us more more visible in the media. So, certainly, the company of today won’t be the company of 2020. So, there would be changes at all levels. I hope we remain as selective and intimate as we are today because that’s what we like, our team members like, and our customers like. ... Since we have created a storng niche for us, whichever city we go, we stand out. That’s a strategy that has worked for us, many hotel cos acoss the world. Dewan – we are fully differentiated on design, diffrentiated on services, diff in terms of the offerings and the experiences, Design part will stay. The architecture that has been created in Hyderabad is game-changing design and architechture. That will continue to be the core competency.
What’s the opportunty in resorts, any plans to take Flurry’s to other cities?
Dewan: when we did the 20-20 exercise, we said we will have 10 hotels in the major destinations, five in emerging destinations in India, which is obviously the tier 2 cities, and we would like to do 4-5 unique destinations and have resorts there. We have looked at 15 city hotels and five resorts.
Flurry’s – we used to have an outlet in Park Street, have opened another in Alipore. We have started opening in association with retail outlets. We have expanded to 8 outlets in Kolkata. We have looked at opportunities in other cities as well with big retail stores like Spencer’s, Reliance, but so far we have expanded only in Kolkata, from one store & restaurent to about 8 in Kolkata.... what are the limitations? You have to set up factory as the supplies are done through a kitchen.
