Why Is Reliance Entering The Hospitality Space

Mukesh Ambani-owned Reliance Industries recently announced a formal foray into the hospitality sector with the Oberoi Group.

The company will jointly manage three hotels, Anant Vilas, Stoke Park, and an unnamed hotel project in Gujarat.

Hotel Companies Are Seeing Their Best Years In A Decade

After dismal performance during the Covid year, the hospitality sector has seen a stellar comeback in the past two years.

With “revenge tourism” kicking in, hotels have seen occupancies higher than that in the pre-Covid era, along with higher revenue per available room. Operating margins for hotels have reached an all-time high as well.

Over the past decade, EIH Hotels, which runs the “Oberoi” brand, had seen margins range between high teens and early twenties. However, that number has shot up to around 30 per cent in financial year 2023 (FY23).

Indian Hotels Company Limited (IHCL), has seen a similar spike in margins from mid-teens and early twenties to more than 30 per cent in FY23. Even less premium hotel chains have seen a spike in margins, including Lemon Tree Hotels, which has seen its margins reach 50 per cent levels from the 25 to 30 per cent levels earlier.

In such conditions, it is not surprising that the sector is seeing several new developments simultaneously. IHCL is planning a massive expansion drive with 300 new hotels to be added, while ITC have decided to demerge hotels into a separate entity.

Hilton is planning to double its property count in India over the next three years, while Marriott has announced plans to launch 100 hotels over the next two years.

Accor, which has a presence across several price points has been putting up new properties across urban and semi-urban areas. Several other international and domestic players are planning expansions as well.

Debt levels at EIH and IHCL have also dropped, which could free up their balance sheets for new expansions.

How Does Reliance’s Arrangement With EIH Work?

Reliance’s initial foray into hospitality came when ITC was allegedly attempting to take over EIH in 2010. Reliance stepped in as a white knight and bought EIH shares from promoters and other shareholders, in a bid to prevent ITC from taking over the company.

Though Neeta Ambani and Mukesh Ambani’s right-hand man Manoj Modi were quickly elected to EIH’s board, the two companies have operated separately since then.

However, in 2021 and 2022, Reliance snapped up two properties — Mandarin Oriental in New York, and Stoke Park in UK. Perhaps the timing of the purchase ensured that these properties could be bought at relatively lower rates due to the pandemic scare.

The recent announcement of a joint management by the two companies would mean that these hotels are run under Oberoi’s brand and expertise.

Such arrangements are common in the hospitality sector which requires a large capital investment. Under these agreements, a hotel chain with a large brand name agrees to manage a property in return for a management fee, with a small or no investment of its own in the actual business.

International chains like Marriott, Radisson, Hyatt operate several hotels in India under this structure. In India, usually construction companies or infrastructure companies own these hotels while handing over the management to international brands.

For the owners, it means lesser hassle, access to best practices, better cost management, access to a global chain’s systems, loyalty programmes and sales network, among other advantages.

For hotel chains, such an arrangement ensures higher returns on investment capital and rapid expansion across territories.

For instance, the Mandarin Oriental, was bought for nearly Rs 2,000 crore by Reliance — which EIH might have been unable to buy outright alone due to its smaller balance sheet.

Indian hotel chains are expanding their global footprint through both owned and managed hotels. These deals would also increase the value for money of the company’s loyalty programmes.

Loyalty programmes are a money spinner for hotel chains, and a hotel chain that can offer products across different segments and geographies can land lucrative loyalty programme contracts with corporates and individuals.

For instance, when IHCL offers loyalty programmes for corporates, it can provide rooms for middle management at its Ginger chain, while upper management can be offered the Taj brand.

Its large geographical reach and brands across segments would ensure that companies prefer its loyalty programme, over the loyalty programme of other chains that do not have presence in the required segment or geographies.

So far, Indian chains have been at a disadvantage when compared to global peers due to their lack of geographical presence — their loyalty programmes have been relatively more limited to Indian corporates and guests.

For Reliance, these investments are small and wouldn’t add significantly to their topline or profits — these are probably long-term financial investments rather than an attempt to enter the business.

However, for EIH the new business generated from these hotels could be substantial.

However, the hospitality sector’s strong run could be cut short in the near term by the possibility of a global recession. Nevertheless, the longer term prospects for Indian chains remain strong.