How Indian Hotel Chains Are Adapting Amid The Pandemic

by Sourav Datta - Aug 8, 2021 05:17 AM
How Indian Hotel Chains Are Adapting Amid The PandemicCrown Plaza, Kochi
Snapshot
  • In order to shift to a more capital efficient and asset-light structure, many Indian hospitality chains have begun accepting management contracts rather than building hotels.

    The business model is simple — the hotel chain partners up with the property’s owner and operates the property in return for a performance-based fee.

The hospitality sector is notorious for being highly cyclical, capital-intensive and having low capital efficiency i.e. low returns on capital.

Jaydev Mody, who runs Delta Corp, India’s largest casino operator that also runs The Deltin brand of luxury hotels, was once quoted as saying, “For the kind of capital it (the hotel business) needs, the returns are really low. I do not see why people keep investing in hotels.”

The reason for such complaints is easy to see — hotels require a huge upfront investment but in order to compete with similar hotels in the area, they must compete solely on the basis of price.

In low demand periods, such as now, it can turn into a race to the bottom, leading to low returns overall.

In order to shift to a more capital efficient and asset-light structure, many Indian hospitality chains have begun accepting management contracts rather than building hotels.

The business model is simple — the hotel chain partners up with the property’s owner and operates the property in return for a performance-based fee. Foreign chains have also followed a similar strategy to enter the Indian market.

They partner investors in a 70:30 or 80:20 arrangement, where the local partner owns the larger share. The chains operate the hotels under their brand names and provide all necessary support.

These chains have another advantage over Indian hotel chains — large networks. Chains like Marriott, Hyatt, Inter-Continental Hotels Group, and others have hotels all over the world. Therefore, most guests prefer to join the loyalty programmes of these chains and earn loyalty points.

Indian chains, especially the smaller ones, are limited to India, making their loyalty programmes and corporate programmes worth much lesser.

With the lockdowns, the problems of the hotel sector have been exacerbated further. Occupancies have fallen to levels last seen during the 2008 financial crisis. While business properties located in metro cities have some occupancy during lockdowns, leisure properties have hardly seen much activity during lockdowns.

The inherent operational leverage of the business has come to bite it during the pandemic.

For instance, as of FY21, Indian Hotels Co. Ltd.’s (IHCL, owner of the Taj chain) revenues have fallen by almost 60 per cent year-on-year, while costs have decreased only between 26 to 45 per cent.

Meanwhile, finance costs have jumped by 25 per cent during the year. Financially weak hotels have shut indefinitely, and it isn’t just smaller hotels that are facing the heat.

Hyatt Regency in Mumbai shut down in June due to lack of funds.

Hotels have already reduced room rates to attract travellers, as evidenced by the fall in Revenue per Available Room (RevPAR), a key metric in the hospitality industry.

According to IHCL, the industry’s RevPAR for FY21 was 70 per cent lower than the RevPAR for FY20. In order to differentiate themselves in a market where everyone has lowered rates, hotels have been offering various value add-ons and packages.

Several hotels were seen offering “vaccination packages” where the vaccination was bundled with a three-to-four hour stay at the hotel.

However, the offers soon attracted the ire of the public and the offers were scrapped. Covid-19 has also changed the way people travel, with short-distance leisure travel becoming a new norm.

Business hotels, that usually see activity during weekdays, are witnessing a surge in bookings on weekends. People are looking to relax on weekends at hotels, given the low room rates.

With this is mind, several hotels have also begun offering “workcation” and “staycation” packages with the length of these packages ranging from a few hours to several days.

The effort to shift to an asset-light structure seems to have borne fruit. Management contracts contributed to around 32 per cent of IHCL’s total room inventory in FY21, whereas it was around 20 per cent in FY18.

However, for EIH, the owner of The Oberoi brand, the addition of hotels under management contracts has been quite slow, with it adding just one hotel since 2018.

ITC hotels, too, has been adding hotels under management contracts at a steady pace.

So far, large Indian hotel chains have managed to adapt and target the right audiences to keep the hotels going, while simultaneously working towards a leaner cost structure.

While the Gujarat government has declared a property-tax waiver for a year for hotels, other states are yet to offer any help to the hotel industry. Despite the lockdowns, the larger chains have managed to reach the breakeven point.

However, smaller chains and standalone hotels that do not have similar financial power are still struggling to survive. As travel restrictions ease and vaccinations continue, the sector will hopefully see a comeback.

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