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HOTELyearbook2009

INDIA

The recent few years of buoyancy caused stray developers in India to believe that they could muddle through without brands, sales networks, and systems, writes VIJAY THACKER, HORWATH’s man on the sub-continent. But the tough times ahead will lead to a realistic appraisal of the performance of hotel companies ; more so, it will lead to a better appreciation of the values of brands and hotel companies.

Separating the men from the boys

A slowed global economy with a slowing domestic economy

will lead to reduced demand and cheaper hotel rooms in India

in 2009. Not a bad thing in itself – because hotel room rates

had reached unreal levels with pricing that was inconsistent

with the basic hotel quality and positioning. A correction

was due, and was expected, as significant new supply got

introduced ; however, this is now happening due to an external

market condition affecting the demand side of business rather

than the supply side.

Interestingly, I still believe that the occupancies and average

room rates – occupancies between 65 and 72-73 percent and

average rates at between $120 to $260+ at different hotel

levels (four-star to luxury) – will be at levels that are typically

supportive of new development.

While the sentiment is undoubtedly low, that is because the

industry got used to the high and unsustainable levels of the

last few years – occupancies in the +/- 80 percent range and

average rates (annual) of between $180 and $370 in the range

of hotels stated earlier. A decline definitely impacts sentiment,

but shorn of this relative outlook, the absolute levels remain

quite healthy.

And consider this in the context of the withdrawal, stoppage

and/or delays of several new hotels that were expected to

come online in the 2010-2012 period. By my estimates, close

to 70 percent of this inventory either will not happen or will be

significantly delayed. A majority of these are projects of real

estate developers who must either shelve or cancel to create

much needed resources for their core real estate business.

Consequently, new developments that are actually completed

during this period will enjoy strong trading conditions when

the economy revives.

Airlines are cutting flights, primarily because of lower travel

loads. This directly points to lower demand potential at hotels

with the exception that the opportunity for day return trips is

reducing. As hotel rates rationalize, business travelers may find

greater affordability in staying overnight rather than making

multiple-day return trips. Of course, fewer flights will affect

airline crew demand for hotel rooms though I don’t see that

as being critically material.

The biggest challenges for the Indian hotel industry in the next

several months will include :

• Raising debt to complete projects that are essentially viable

but had not achieved financial closure when this crisis struck ;

the debt must be readily available and at reasonable rates.

• Letting market conditions determine price. All too often, our

hoteliers have panicked at the first sight of occupancy dips,

and have then dropped rates way too low. For example, in

the aftermath of September 11 (and the terror attacks over

the next several months), rooms at some established upscale

hotels in Mumbai were available at Rs 3500 (US$ 70). That

was not smart pricing ; that was panic pricing.

• Dealing with staff morale, in the context of lower

occupancies, less work – and possible redundancies.

• Dealing with increasing energy costs that have adversely

affected several hotels in the last two years, at least in some

cities such as Mumbai.

• Dealing with the drop in demand for professional events

such as conferences, training programs, seminars etc., that

are the backbone of suburban resorts and also a lucrative

revenue source for city hotels. The economic impact on ITeS,

financial and retail sectors will cause a reduction of demand

for such programs. However, this impact could be relatively

short-term if the global crisis leads to greater outsourcing of

activities to India.

• Restructuring projects that were expansively planned, on

rate expectations that were overly aggressive and flawed. I

believe a few will get restructured, but a bulk of these will

face the axe, albeit at substantial loss for the developer.

At the same time, the challenging situations should bring forth

huge opportunities in 2009 :

• Lower rates enhance the market reach of hotels, and bring

back to the fold those who had previously « traded down »

because of the high room rates being charged. Economic

circumstances and company travel policies may still force

executives to eschew their first-choice hotels but I do believe

that lowered rates will bring back some of the custom while

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also increasing the demand size – even if this does not

immediately benefi t the hotels, it will certainly do so as soon

as an economic revival is sensed.

• The hugely undersupplied mid-market segment in India will

get the focus it needs and deserves. Domestic business and

leisure travelers and also inbound business travelers will

seek out the mid-market hotels of quality, to gain better

value. Now is the time to generate awareness of such

products, to create loyalty among customers and hopefully

get developers more conscious and more focused on the

opportunities that the mid-priced sector offers.

• Staff pressures will lower, as competitors for talent also will

fi nd themselves similarly out of recruitment and growth

modes ; salaries could see some rationalization for a short or

medium-term benefi t. While staff shortages and costs will

continue to be a stress point in the longer term, the current

situation could enable hotels to review policies, structures,

work environment, ethics and retention capabilities.

• Opportunists with a cash kitty will be able to buy out assets

that are in distress, such as semi-completed (or newly

opened) hotels and sometimes even projects. In some cases,

these could yield products or locations that are of high

quality at prices that are « sub-prime ». Developers take the

hit because they paid unthinkable (and unsupportable) prices

for their acquisitions. In India, it is worth paying a larger-

than-normal premium for getting a ready, or near-ready,

asset because development timelines and risks are greater

than typical – it’s good to be in the cash fl ows sooner,

because competition will take time to complete their hotels

and open with all licenses.

Tough times will lead to a realistic appraisal of the performance

of hotel companies ; more so, it will lead to a better

appreciation of the values of brands and hotel companies –

the recent few years of buoyancy caused stray developers

to believe that they could get through without brands, sales

networks, systems etc. This crisis will help separate the men

from the boys.

The leisure sector could suffer more in the immediate future

– lower travel volumes, lower long-haul leisure travel, trading

down quality and lesser propensity to spend on holidays.

Domestic leisure is signifi cant and has the ability to grow ;

however, I do not see this as being adequately compensating

for the loss of in-bound leisure for two reasons – the

fundamental price values for the larger market are still quite

low ; secondly, the employment uncertainties in the fi nancial

and services sectors will reduce the universe of frequent

holiday makers. Undoubtedly a larger group of domestic

leisure has emerged that is willing to pay international prices

for luxury resorts – that segment will help sustain some values

though this may not be adequate. The leisure sector is in for a

diffi cult two years.

India’s fundamental attractions as a long-term investment

destination – as a key emerging market – are not diminished.

Investment will return, possibly sooner than we imagine,

bringing with it the travel momentum that the industry had

somehow taken for granted. During this period, it is those

players who (a) have the money to complete their projects

or even acquire good assets and (b) who use this forced

rationalization of business as a time for consolidation – these

players will emerge stronger and enjoy excellent returns when

the gloom lifts.

The future is positive. There are opportunities in

tough times, but let us always remember that

windfalls are what they are : windfalls.

They don’t occur regularly and

cannot (and should not) be part

of a business plan. Successful

business plans

and investment

decisions based

on rationality,

assuming moderate

or healthy growth

as the case may

be, have a longer

shelf life and are

more likely to succeed.

INDIA

Separating the men from the boys cont.

HOTELyearbook2009

« India’s fundamental attractions as a long-term investment destination – as a key emerging market – are not diminished. »

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