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The Great Hotel Swayamvara

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India is fast catching up. The number of branded hotel rooms is set to explode from 84,000 now to just under 200,000 by 2016. To see why and how, meet Gurgaon-based Virender Bhatia of the Rs 2,000 crore Baani Group. He is a brand new hotelier, who started out in the fashion and clothing trade, moved on to real estate and has jumped headlong into the hospitality business. He is setting up three hotels in Gurgaon and plans to own 10 hotels by 2020.

Proudly sporting the Hilton Garden Inn flag on the first of his Gurgaon properties that debuted earlier this year, he says, “I could have created my own brand or gone with one of the top three hotel brands in the world. In business, there is no need to reinvent the wheel.” The matchmaker who brought Bhatia and the Hilton Group together was veteran Mumbai-based hospitality consultant Vijay Thackar of Horwath Consultants. “I was the pundit of the ceremony,” quips Thackar.

There are several dozen newbie owners such as Bhatia in the construction frenzy that has gripped the hotel industry since 2008. Real estate barons, textile magnates, infrastructure majors, high networth individuals, entrepreneurs with access to funding, politicians —  that is, anybody with a parcel of land and some spare cash — are all busy setting up a ritzy hospitality edifice. From real estate big guns such as the Rahejas to the likes of ­investment banker Lalit Bhasin, to companies such as GMR, Bird Group and InterGlobe, all sorts of players have forayed into hospitality.

Read Also: 'We Are At The Cusp Of Golden Age Of High-end Travel'

A Brand, A Brand…

But having land and cash isn’t enough. All of them need a well-known brand name on their signboards to attract the discerning new Indian traveller who is becoming increasingly conscious of things like loyalty points and service standards.
ANIL MADHOK, MD, Sarovar Hotels & Resorts Type: Management Operations: 60 hotels (54 managed, 6 owned); 5,400 rooms Brands: Sarovar Premier, Sarovar Portico, Hometel
Today, most hoteliers believe the pot of gold lies in the mid-market segment. But back in the early 1990s, nobody was really interested in it. Yes, ITC had sensed the gap and set up its Fortune brand, but it was former Oberoi man, Anil Madhok, who seized the advantage.

Madhok launched his company Sarovar with one hotel in Goa. Initially he started off in partnership with his friend Shailendra Mittal .“I went through the management route. I didn’t have any money to own the hotels,” he says.

Whatever money Madhok had was spent on creating the basic infrastructure — offices, hiring a few key people, investing in a sales force. “Now, that infrastructure has multiplied some 100 times,” he says. The first few hotel contracts came because of his personal equations. In 1996, he was joined by his old colleague Ajay Bakaya. “Had I left the office two minutes earlier, I would have missed his call,”exclaims Madhok, describing how Bakaya had gone off to Australia to work at the Four Points by Sheraton. The phone call came from Amsterdam where Bakaya was trying a new line — trading. “I told him to come and have a chat. He flew down instantly and within an hour decided to join,” says Madhok.

Today, Sarovar is 60 hotels strong  with 10 openings last year, and averaging six openings a year. “By 2017, we will be 100 hotels,” estimates Bakaya. Madhok and Bakaya operate in a very understated manner. They are too low profile and cautious, criticize some industry observers. The other criticism Sarovar faces is its pure management model, where the margins are low.

Although Bakaya says the company still does not believe in taking on any debt, today the company owns six of the 60 hotels it operates. And how will it counter the increasing competition? “With the relationship we have with the owners,”says Madhok simply. Sarovar may be a quiet operator but the way it has turned around the fortunes of hotels such as Marine Plaza in Mumbai is much talked about.  And they do have some surprises up their sleeve — expansion into Africa, for instance. Already, they have three properties in Mombasa, Dar Es Salaam and Nairobi. And now, Sarovar has tied up with an African-Indian investor to set up a new brand that will focus purely on pilgrim hotels in India.

Out and out career hoteliers, their deep knowledge of operations (Madhok spends a lot of time talking about plumbing and air-conditioning systems in hotels) is their big strength. As are the trust and respect they have earned over the years.

Happily for the hotel owners, global hotel operators such as Hilton, Wyndham, Hyatt, Marriott, Accor, Intercontinental Group (ING) and Starwood, facing a slowdown in the West, are aggressively growing their presence in India. Together, they own 40 to 50 high-profile hotel brands, most of which have already been brought into the country. More are on their way with other international operators, including several Asian (Banyan Tree and Dusit, for instance) and European players (Movenpick and Swissotel) now entering the country. All of them need a hotel on which to fly their flags and are wooing the owners assiduously. But the story doesn’t end there.

The home-grown warriors, including the big three — the Taj, ITC and Oberoi — and others such as the Leela, the Lalit, the Park, are all feeling the heat of foreign competition. They too are re-strategising, planning expansions, and pitching enticing propositions to hotel owners, even as some of them have tie-ups with global chains (ITC-Starwood).

Add to this mélange a rising crop of fleet-footed hotel companies such as Lemon Tree, Sarovar, Pride Hotels, Lords Hotels & Inns, Ferns, Keys, SAMHI, Royal Orchid and Duet Smart Hotels. Each brings a unique selling proposition to its hospitality offerings, and is an active participant in the wooing game — either as an operator or as an owner.

In short, what we are witnessing is the great Indian hotel swayamvara. And its impact has been dramatic in the way it has changed the hospitality industry. Branding and distribution has suddenly become key.

A Love-Hate Game
The matchmaking negotiations can be very intense. Some operators even pay dowries (or key money — which is an euphemism for a commission) to owners in this wooing game. Many owners are seasoned real estate veterans who know how to extract their pound of flesh. But they bring scale to the game and the global chains looking to ramp up their room numbers here love to partner them.

“Our journey in India started with a partnership with the Salgaocars of Goa. We have built the JW Marriott and the Renaissance in Mumbai with the Rahejas,” points out Rajeev Menon, area vice-president, Indian Subcontinent, Marriott. “For us, there is a clear strategic focus to align ourselves with local partners that are very well entrenched,” he says.

“Certainly, something of a beauty parade is going on,” admits Dilip Puri, MD India, Starwood Asia-Pacific Hotels and Resorts.

Read Also: Interview With Michael Issenberg,Chairman & COO, Accor Asia Pacific

There is a bit of slugfest going on as well. What happened at a recent hoteliers’ summit (HICSA) in Mumbai is instructive. Over a 100 owners were gathered there, as were a whole galaxy of hotel operators. And lo! A public venting of differences between operators and owners took place on stage. Unlike the past, when hotel owners did not understand the nuances of management contracts and brand standards, today’s proprietor is fully au fait with the intricacies and can drive a hard bargain.

Take New Zealand-returned restaurateur Ranjit Bhatia of Panschil Properties. On the HICSA stage, he described how he negotiated an upgrade of his Pune hotel. From a Marriott, it has now converted to an upscale JW Marriott. Ever since he built the hotel, Bhatia kept telling the American chain that the hotel should fly the JW flag — after all it had bigger rooms and fancier fittings. But Marriott said the location did not warrant a JW, and it hardly helped that Bhatia had gone overboard with the trimmings. “I admit I did overbuild,” says Bhatia. But his point was: should he settle for the $100 rack rate of a Marriot as opposed to $200 that a JW commands? Positive customer ratings and high occupancy levels helped his case.

Or look at the way Subhas Dabas of Tirupati Builders has had a falling out with Thai hotel chain Lebua over his Dwarka property. In this case, it was Lebua that wanted the trimmings — a restaurant with a Mughal-e-Azam theme that would have set the owner back by a huge amount. Lebua has now exited.

Says Manav Thadani, chairman, HVS India, a hospitality consultancy firm that at any given point is engaged in a search assignment for 7-8 hotel operators, “Hotel owners have become savvy. They have been through multiple contracts, lawyers, negotiated tie-ups and know it all.”

When HVS did a survey of hotel owners in India, only 55 per cent said they would go with international brands — a big shift from the past. International brands are a lot more difficult to negotiate with, their standards are stringent and they are uncompromising with their checklists, says Thadani. On the other hand, Indian hotel companies are more pragmatic and in touch with reality. In terms of distribution reach, he, however, feels global operators do have an advantage.

The consequence of all this matchmaking is that the ratio of branded to unbranded hotels is set to change dramatically. Currently, only an estimated 40 per cent of India’s 170,000 rooms are branded. But standalone hotel owners are fast realising the merits of teaming up with operators with recognisable brands and distribution muscle. The swing factor: Indian guests — like their foreign peers — increasingly prefer to stay in hotel chains where they can redeem loyalty points garnered over business trips across the country and globally. For instance, a Hilton HHonors programme rewards you with not just hotel stay points but airline miles too.
Patu Keswani, Chairman & MD, Lemon Tree Hotels Type: Owns, brands and operates Operations: 21 hotels in 14 cities with 2,500 rooms Brands: Lemon Tree, Lemon Tree Premier & Red Fox
What is missing in India is right pricing of good hotels, says Patu Keswani. The outspoken founder of Lemon Tree says 50 per cent of hotels in India are built with black money. “These owners build hotels for return on ego. When you build hotels like that, you cannot offer realistic prices.” Keswani feels that only a truly integrated player — one who owns, manages and brands the hotel — can succeed in the mid-market play. “When you manage, you get just 2 per cent; when you own, you get 100 per cent,” he says.  According to Keswani, Indian consumers want five-star service at three-star prices. So that’s what he set out to offer with Lemon Tree hotels.

A Taj veteran, the blunt-speaking Patu Keswani with his IIT-IIM background and disdain for convention is an unlikely hotelier. But with his AT Kearney and management consultancy experience, he’s a very likely entrepreneur. He has spotted the gaps, got funds and moved in with lightening speed. He points out the gap: “Around 250,000 Indians travel by second class AC every day. 100,000 travel by air. There are 35,000 foreigners in India. Put it all together and there are 400,000 people travelling every day. They all need some place to stay.”

Which is why Keswani is speedily adding rooms. “We will be developing 8,000 rooms,” he says. Of course, all this cannot be owned. This is why Lemon Tree has set up a management consultancy arm Carnation with Rattan Keswani (no relation) as head. “Eighty-five per cent of my guests are Indian, 15 per cent foreign. If you are right priced, you will get guys who step up from guest houses or step down from five-stars, both staying with you,” he says. Aware that the needs of both sets of guests are different, he’s created different brands — Lemon Tree Premier, Lemon Tree and Red Fox.

Keswani has firm views on everything — be it market needs, pricing or location. “Mid-market hotels cannot work in mofussil areas. When you come for business, the hotel should be in the right location,” he says. Of course, land costs will be high but the business model should incorporate that and yet make money. In the current HVS list of India’s top hotel companies, Lemon Tree is ranked 10 (Keswani quibbles over this – because asset-light companies and owning companies are clubbed together). “I should be number three on this list,” he says. He might soon be.

The Game Changers
HVS India managing director Kaushik Vardharajan says what has truly changed the game for Indian hospitality is the opening up of different lodging segments in the branded play. Gone are the days when big operators only thought of luxury and upscale. Now, about five or six categories have opened out — mid-market being the hottest. About 35 per cent of the 90,000-odd new rooms being added are mid-market — while luxury constitutes only 14 per cent.

Long stay (service apartments), economy, boutique hotels, spa hotels… a host of new segments are being created today. For big operators, it’s imperative to be present in every segment — and, hence, India is seeing the creation of new brands that are positioned specific to categories. That is why even the low-profile Park Hotel has followed ITC’s (Fortune) and Taj’s (Gateway, Vivanta, Ginger) segmentation route. It has just created a new brand, Zone.

Segmentation is important because unlike in the past when the industry was focused on the foreign tourist, now, the domestic traveller is the target — 850 million Indian tourists spell a big opportunity. But one needs many offerings to cater to the varied needs of the Indian traveller. Menon of Marriott admits the American chain is looking at getting 50 per cent of its business from Indian travellers. Mariott has formed a JV with SAMHI to launch its brand Fairfield here, targeting the middle class. Michael Issenberg, Asia-Pacific head of Accor —which has committed $200 million to India — says he sees the larger opportunity in mid-market and great traction for its brands Novotel and Ibis. Talk to the owners and they too see opportunity in mid-market, and are eager to play ball with operators and build smaller hotels.

In cities such as Bangalore, Pune and Chennai, and suburbs such as Gurgaon and Noida, there has been a dramatic jump in hotel room supply. In Bangalore, from 2,000-odd branded rooms in 2006, there are over 7,000 rooms now and 2,000 more are under development. If you think that is big, look at the action in Noida, which is going to see a 1,048 per cent jump in supply to 5,522 rooms by 2016 from 527 now.

Will there be a shakeout then? Although the supply glut has led to RevPar growth (revenue per available room) slowing down industry-wide, Lemon Tree’s founder Patu Keswani says there is still room for growth. He says the penetration of hotels in the US is 180 per 10,000 population. The global average of penetration of hotels is 28 per 10,000, while in India it is just one per 10,000.

The 100 Club
Also, keep in mind that hotel projects are announced with great fanfare but often don’t take off. Many projects also get delayed, as at the Delhi Aerocity, where it’s anybody’s guess when the promised inventory of over 5,000 rooms will be ready.
Ashish Jakhanwala, Founder and CEO, SAMHI Type: Hotel investment and development Operations: 22 hotels, 3,400 rooms Brands: None of his own; rides on global brands
Slim and youthful, Ashish Jakhanwala looks far younger than his 38 years, and has the infectious enthusiasm of a freshly minted entrepreneur. The Lucknow boy, schooled in hilly Nainital, however, says, “I have prepared 16 years for my launch into entrepreneurship.” The 16 years refers to the time he has put into hotel management studies and actual hotel operations, including a stint with Accor.

SAMHI was born because Jakhanwala — a keen student of the way hotels operate in the West — spotted a gap in the way the business functioned here. In the West, hotels are owned by institutional investors who look at long-term, inflation-adjusted yields. Although in 2004-05, private equity capital did enter the sector in India, Jakhanwala says they treated it like real estate investments. “Everybody thought they would build a hotel in 2-3 years, and five years later sell it. They looked at it as a trading asset.”

What was needed was for someone to look at the operational value that hotels have. So why don’t you do it, prodded Homi Aibara of Mahajan & Aibara consultancy. And Jakhanwala did exactly that, founding SAMHI along with HVS India chairman Manav Thadani. Raising funds was surprisingly easy. “Sorry, I have no sob stories to tell,” he laughs, describing his $150 million equity base. GTI Capital pumped in $25 million, while US-based Equity International put in $75 million. Another $40-50 million came through other means. “We also got billions in free advice,” he quips.

Once the funds were in, Jakhanwala started doing whatever was required to own hotels — from buying the land, constructing, to buying existing shells to even acquiring stakes in Accor’s Barque Hotels (which owns Formule 1). He has stayed away from creating a brand. “I can ride on somebody else’s distribution muscle,” he says. It’s the returns he focuses on. “Returns can be defined in many ways. Through IRRs. Or return on equity. Or even payback period. We look at everything, but importantly asset yield — return on capital employed,” he says. Jakhanwala points out how for all practical purposes Samhi began operations in 2012, but in its second year is already a positive-yield company. “In the next few years, we should be a mid-teen-yield company,” he says. Thirty-three per cent of his portfolio is budget, 33 per cent is mid-market and the balance is upper mid-scale. “Profit per sq. ft in economy and mid-market is probably the highest,” he says. McDonald’s is no-frills — hasn’t it worked in India? So is IndiGo. So why not a no-frills hotel, he asks.

“How real everyone else’s pipeline is we really don’t know,” says Accor’s Issenberg, who adds that the French chain has 20 hotels operating in India, and will have 50 by 2015. Starwood’s Dilip Puri says the group will have 100 hotels under operation, development and management contract by 2015 in India. Eight of nine Starwood brands will fly their flag in India by then, he says.
Starwood Worldwide president and CEO Frits van Paasschen says India is its fourth largest market after the US, China and Canada — but set to become its third largest.

The Taj just opened its 100th property, Vivanta, in Gurgaon. Although the hotel is valiantly putting up fresh supply (“We have opened an average of six hotels a year,” says Indian Hotels MD and CEO Raymond Bickson) as is ITC, it’s the new entrants who are taking the supply, especially the mid-market, to great heights.

Ironically, many of them are professionals groomed by the Big Three of Indian hospitality. Anil Madhok of Sarovar worked for 25 years with the Oberoi Group, Patu Keswani is a former Taj man, while Rattan Keswani who heads Carnation, Lemon Tree Hotels’ management arm, has an Oberoi background. Sanjay Sethi and Partha Chatterjee of Keys Hotel have a Taj background too.

If new operators come with fresh thinking, new owners are also more hands on. Gone are the days when they would hand over keys to the operator and only occasionally peep into their premises. Case in point: Arun Saraf of Juniper Hotels, owner of the towering Grand Hyatt in Mumbai, has a clear cut vision for his hospitality ventures.

Private equity (PE) investment in hospitality is also making it more return-focused. Ashish Jakhanwala, CEO, SAMHI, says hotel ownership in India is very different to the West where real estate investment trusts control the game. “Everything is driven by yield there,” he says.

In India, till now, 90 per cent of the total hotel inventory has been owned by the big chains, the real estate developers or high networth individuals. Things are gradually changing though. About 10 per cent of the hotel inventory is now in the hands of PE funds. There’s Jakhanwala’s SAMHI funded by PE, Duet Smart Hotels (a tie-up between Intercontinental and PE player Duet that is setting up the Holiday Inn Express brand across the country), and Keys Hotel (funded by Berggruen Holdings) that already operates 12 hotels. Even Lemon Tree has PE funding.

In the fray are also differentiated hotels such as Fern, a brand that promises to put up only eco-friendly, sustainable hotels, and regional players (Kamat Hotels and Sinclair), eager to expand their footprint.

Although analysts do say consolidation will take place and non-serious players will fall by the wayside (witness the exit of DLF, Parasvanath), if you look deeper, there is some method to the construction madness. Most operators are expanding rather systematically through micromarkets.

Early this year, when Marriott opened its property at Whitefield, an IT suburb of Bangalore, Menon explained the rationale. “When cities grow large, the businessman prefers to stay at a point near his port of business. I would say Bangalore is divided into six to seven micromarkets,” he says, pointing to how the Central Business District, Sarjapur, the new international airport, etc., all need separate hotels.

Starwood’s Van Paasschen says cities in India are developing by adding almost newly created cities — take Gurgaon, Noida and Thane. Hotels are simply following this development. “I wouldn’t even call them micromarkets, but large markets on their own,” he says.

Ego Takes A Backseat
Meanwhile, coming back to hotel owners’ and operators’ love-hate game, things are gradually changing on that front too. If the operators are no longer as arrogant in dealing with owners, then the owners themselves are building hotels with practical considerations rather than ego.
Chander Baljee, CMD, Royal Orchid Type: Owner and operator Operations: 22 hotels in 16 cities; 1,900 rooms Brands: Royal Orchid, Royal Orchid Centre, Royal Orchid Suites & Regenta
If there was a prize for doggedness, Bangalore-based Chander Baljee would surely win it. The Mr Nice Guy in hoteliering has found the going tough many a time, but has bounced back through sheer persistence. Hoteliering runs in his veins (his family is behind the Baljee restaurant in Shimla). After an MBA from IIM Ahmedabad, he joined the family hotel, but soon felt there wasn’t  much for him to do as his father and brother were running the show. When he heard about a hotel in Karnataka (Metropole in Mysore) coming up for lease, he moved south. His bid was unsuccessful; but he bagged Hotel StayLonger in Bangalore. He renamed it Harsha and for 10 years ran it devotedly, gaining firsthand knowledge of operations. In 1985, he wanted to go for an IPO. But things didn’t pan out and he had to wait till 1992.

He bought some land near Bangalore airport and started building a hotel. His plan was to set up a mid-market three-star hotel, but like every fond parent, he overbuilt and, eventually, in 2001, it was a five-star property that he threw open. In 2004, as fate would have it, the Metropole itself came up for lease, and he struck. In 2006, he went public and raised Rs 130 crore. And a furious expansion followed.

Today, Baljee has 22 hotels, some leased, some owned, and will now expand through the management contract route. “You must have credibility in the market before you can go the management route,” he says. He has earned it; though doubters remain, especially as he sold off the Ahmedabad Royal Orchid. “It was rationalisation. And this goes on constantly in our business,” explains Baljee. Ashish Jakhanwala, CEO, SAMHI, who bought Baljee’s Ahmedabad property, endorses this. “Baljee was too asset heavy — and it’s the right strategy to sell,” he says. Expansion is very much on the cards, says Baljee. “We have a good presence in 16 cities, except in the east,” he adds. But why would any owner want him to manage hotels given the glamour of foreign competition? “We are more approachable.”

The future generation of Baljees is also into hoteliering. Sons Arjun, who studied hotel management in Cornell, and Keshav (Wharton and ISB) have got their separate chains — Peppermint and Spree Hotels. Baljee says he will get into tier-2 cities now. Also East Africa.  His mantra: to constantly monitor guest feedback, come back with fast responses and be up to date on technology. “The Indian customer wants a lot more personalised service — and we deliver that,” he says.

Listen to Atul Chordia. “We look at two parameters when we set up a hotel. We must be cash surplus. And, we have to generate wealth for ourselves,” he said at the HICSA meet. Neel Raheja of the Raheja Group pointed out how only the site and location dictate how they build. Jakhanwala describes how cold, hard logic dictates how he does business with brands. “If I were to set up a hotel in an IT park, I would only go for an American chain — as the brand would have recall value with software professionals who would typically be my guests,” he reasons.

Marriott’s Menon agrees the owner dynamic is changing. “What started as return on ego is turning into a very well thought out mature strategy.”

It’s true that many hotels have been overbuilt in India, which has resulted in overpricing. But now, with owners learning to keep costs low, price parity is setting in. And as Keswani of Lemon Tree says, “Right pricing will grow the market.”

As the hotel pie expands, one can expect shifts to happen in market shares. Bickson points out that the Taj currently leads the pack with 30 per cent share of the branded hotel market in India. “But we are big fish playing in a small pond. When the pond becomes larger, anything can happen,” he said at the HICSA summit. Indeed.


(This story was published in BW | Businessworld Issue Dated 01-07-2013)