India turns battleground for global biggies like Hilton, InterContinental
Dec 14 2012 , Mumbai
Global chains are lured by the country’s growing economy and shortage of hotel rooms
With the global slowdown depressing demand in the west, leading hotel chains such as Hyatt, Hilton, InterContinental are looking to diversify and tap Asian region. The world’s second most populous country has in effect become the battleground for these foreign majors.
“Foreign brands in the luxury and semi-luxury segments have more than doubled their market shares in India over a five-year period to 40 per cent now,” said Anuj Nangpal, co-head of investment advisory at DTZ.
“All major international chains and new players are persistent with their push into India, encouraged by the resilience of its economy and shortage of hotel rooms,” said Douglas Martell, vice-president for operations, Southwest Asia, at InterContinental Hotels group.
Hotel owners in India are attracted to foreign brands for their proprietary global distribution system and base of loyalty scheme customers who prefer staying at hotels where they can accumulate membership points. The foreign brands also hope to attract a larger share of overseas guests earning valuable foreign exchange.
Rajiv Kaul, president at Hotel Leela Palaces and Resorts, said: “The foreign brands’ market share is expected to grow because they are adding new rooms.”
PRS Oberoi, chairman of EIH, said: “Foreign brands have been there in the country for the past several years, but over the past few years the number of rooms added by the foreign brands has gone up significantly.”
The entry strategy for many of the foreign brands is to make a venture with an Indian hotel owner, often purchasing a minority stake. Once the hotel is established, they tend to focus on getting pure management contracts and steer clear of making any more equity investment in the project, instead earning a management fee that is computed as a sliver of the hotel’s gross earnings.
For Sofitel, the French luxury brand, which recently entered India by opening a flagship hotel in Bandra Kurla Complex, India is a big focus market.
From a real estate point of view, the hospitality industry has towards professional management contracts and franchising model from own-and-operate one. “The focus is on an asset-light and asset-right model. At the initial stage, when most companies preferred control over the asset and underlying land, the move towards managing and franchising led them to expand beyond their geographical and limiting economical turfs. Being asset light helps shore up the balance sheet and aid in further expansion and growth. Being asset right implies having control over some of the assets, which define the brand or its identity. Most of the foreign brands are focusing on the asset light model,” said Nangpal.
From the developer’s perspective, the move towards hospitality has been part of a risk and portfolio diversification strategy and owing to limited knowledge of the working of the industry, most have tied up with major players such as Starwood, Hilton, Marriott, Hyatt and InterContinental Hotel group (IHG), as they expect these global brands to deliver higher gross operating profits than the Indian firms would. However, industry experts say this has yet to be conclusively proven.
In the Indian context, early players like EIH (Oberoi’s) and IHCL (Taj) have looked at owing and managing their respective assets. As times evolved and the burgeoning real estate cost weighed on balance sheets, most of the existing hospitality players realised that relying simply on their own balance sheets for growth would be severely limiting. By opening the door to other investors, who would like to invest in a hotel, but don’t have the expertise to run it, a management contract allows hotel operators to have a much faster expansion of the brand. This is crucial as a network of hotels in key destinations can help attract corporate customers and frequent travellers.
As more and more firms realise the need for investment on the backend and services side vis-à-vis the real estate side, they would move to the next phase of the hospitality industry’s evolution, which is being asset light, said industry experts. “Examples of sale of assets of Leela’s Kovalam property to Travencore Enterprises and Royal Orchid’s Ahmedabad property to SAMHI are some of the examples of this strategic move,” said Nangpal.
From a developer’s point of view, all major players have historically partnered with key hospitality players for hotel management and franchisee contracts. For most, it has been at an asset level and for some it is at a portfolio level. “Key examples include Bestech’s JV with Carlson and Raheja group’s association with Marriott for its various brands. For individual assets, HCC tied up with Double Tree by Hilton, Grand Mercure, Novotel, Pullman in Lavasa, Brigade with Sheraton in Bangalore, among others,” said Nangpal.
These tie-ups (management and franchise contracts) help a non-player enter a market at a level-playing field. A number of real estate developers, which hold land parcels in key geographies, have thus entered a market with the help of marketing and GDS (global distribution (reservation) system) of a hotel management company. In these cases, the realtor is looking to own an asset that provides a steady stream of regular income and which appreciates in value over a period of time.
“Bharat Hotel’s Lalit brand is an example of newer indigenously grown brands post their parting from IHG,” Nangpal said.