Hilton has big plans for India and is not perturbed by the slowdown or the cash crunch being faced by developers like DLF, a partner for developing its hotels. Martin Rinck, who took over a few months back as the president Asia Pacific of Hilton Hotels Corporation, was in Mumbai this week and shared Hilton’s strategy for India in an exclusive interview with Ranju Sarkar. Excerpts:
What are Hilton’s plans for India?
We are quite upbeat on India. We have 20 hotels in various stages of development with 3500 rooms, with the first two opening in Delhi and Chennai this year. India has 120,000 rooms, of which only 39 per cent are branded properties. This means that the whole of India has less branded rooms than Manhattan Island. We are aware of the climate; the slowdown is unprecedented in magnitude and speed but that doesn’t change the underlying potential for growth in India, especially in business hotels. Last year saw five million tourist arrivals in India, which is likely to double in five to six years. With the growth in domestic travel, the demand for branded accommodation will only grow.
Hilton will be core brand, key driver for growth but we also plan to bring other brands in the family—Hilton Inn Garden, Doubletree by Hilton, Homewood Suites by Hilton, Hampton by Hilton. We have a JV with DLF that’s job is to secure the land and develop the projects; the JV in turn has a management agreement with Hilton. We have a franchise deal with Marigold Hospitality for 16 Hampton hotels. We have an agreement with Shiva to develop 2,000 rooms, and on Wednesday, we signed a deal with JMD to develop 160-room Doubletree hotel in Gurgaon.
The long term potential is very strong. We intend to have 50 hotels in India by 2015, when India could account for 15-20 per cent of our Asia-Pacific revenues. The other statistic that shows India’s potential is that 17 per cent of Hilton’s new projects in Asia-Pacific are coming up in India, next only to China (63 per cent). There’s no so much underlying demand for branded hotels…
How severe is the downturn? How are you coping with it?
Overall, 2008 was an improvement over 2007; only the last quarter that was disastrous. The first nine months showed an increase in business; the last three months saw it falling off the cliff. We are getting into a situation where we don’t know how much business on the book is going to materialise. How soon we will recover, what would be the speed of the turnaround; nobody has an answer. We cannot use past experience of recovery; in 12 months we could be out of it. But whenever there’s a recovery, Asia-Pacific will be the first to recover.
It’s premature to say anything except that 2009 will be a tough year. The closure of the Bangkok airport a month ahead of the high season hurt us. But Australasia is still faring well. We expect a 10 per cent drop in revenue per available room. First half will be tough. But there are reasons to grow the business in specific markets—events like Shanghai Expo 2010 and Commonwealth Games 2010 in Delhi and the preparations going in, will generate business in these cities.
In Asia-Pacific, we were hurt by the financial turmoil—our hotel in Hong Kong Central is right in the middle of banks—and a significant drop in MICE business, which is typically the first casualty in times of slowdown as businesses try to curb on travel and meetings. Right now, we can’t say how much business on the book is going materialise. In any crisis, there’s an opportunity. You need to ring-fence your existing business, target new business, and secure your long term business.
The two key drivers to drive the EBITDA are revenue and costs. A majority of our alliances are management agreements where we manage the assets on behalf of others. So, the priority is to make sure that the returns for the owners are protected. On the revenue side, you try to protect revenue by ensuring a higher enquiry conversion, use pricing flexibility to generate committed business, drive business through loyalty programmes, and ring-fence your existing business.
Take the airline crew business, which many hotels said no-to in good times but they generate plenty of room nights with a fixed term contract for a year or more. Given the downturn, many hotels may reconsider it as it gives you certain base. So, pricing flexibility is about securing pieces of business that provides you certain base over certain period of time. Similarly, you need to ring-fence your business by retaining corporate accounts, which come up for rate negotiations around September, each offering 2,000-4,000 room nights.
Real estate developers are under pressure. Are your projects on track, especially your joint venture with DLF that will develop 50-75 hotels?
We have 16 hotels with DLF that are under various stages of development. These are secure plots of land, projects which are under development and we are working on various others. There’s no reason why we would not be able to do 50 hotels with DLF by 2011. There’s a lending squeeze. Developers have their equity positions, but today no developer would want to do (a project) on 100 per cent equity. The moment lending starts happening again and confidence swings back, you will see the projects accelerating. On the existing projects, there’s no issue. The only impact I see is a slowdown in the projects than a reduction in our ambitions; the time window to realise those 50 hotels could get extended by 2-3 years. Hilton India chairman Lenny Menezes adds: DLF went on record to say that they stay fully-committed to the joint venture and the funding is in place. There could be delay of 12-18 months. 2009 will be slower but in 2010 things will turn around. We are also developing hotels outside the joint venture; these include hotels in Saket and Rohini in Delhi. Of the 16 projects in the JV, there are 6-7 projects where the funding is in place; the rest are lesser priority as of now. Martin Rinck: With regards to other developers, the only impact I see is a slowdown as the volume of growth people had anticipated has slowed down, banks and institutions are not lending the same kind of money they were doing previously. The good news is that some of the planned projects may not happen and hence we won’t see the same increase in supply initially anticipated which helps the recovery process. Room rates will recover faster. Menezes: The slow down is more in projects where the ownership is with real estate firms. Many of our partners are fully-funded and are in a position to develop these projects.
There’s a huge demand for budget hotels. Will you play in this segment?
To make those concepts work, it’s near impossible due to the high land costs in India, which can be 60-70 per cent of the project costs or more in metros. Land cost is only 25-30 per cent in Europe and 7-10 per cent in the US. If you think of a brand that delivers a tariff of $30-40, you just can’t make it stack up. While there could be demand, it’s difficult to have a financially-viable business model. All of us are in the business of making money. If you have a business model that somehow doesn’t stack up, you are not diving into it. But they could be viable if the government extends tax breaks, for say 10 years, which it is considering.
Menezes: The main thrust of our ventures with Marigold and DLF is to have mid-market hotels, Hilton Garden Inn and Hampton by Hilton. We are very conscious that that’s where the market lies, and that would be our focus in secondary cities. (In many markets, rooms at Hampton by Hilton are available for $70-80 a night).
