NEW DELHI—Eyeing the oft-hyped opportunity for growth in India’s mid-market hotel segment, domestic chain Lemon Tree Hotels has accelerated its growth strategy by forging a key equity partnership and opening the door to franchising.
Lemon Tree owns and manages 18 properties throughout India ranging from 100 to 120 guestrooms under three brands: Lemon Tree, Lemon Tree Premier and Red Fox Hotels. Eight additional hotels are in development.
Earlier this year, Lemon Tree formed a joint venture with APG, a Dutch pension fund, and the two companies announced plans to invest 2,000 crores ($40 million) to add 4,000 more rooms in India by the end of 2016. In a separate but related transaction, APG also acquired a direct stake in Lemon Tree Hotels.
Saurabh Nandi, Lemon Tree’s chief marketing officer, said the hotel company is India’s fourth-biggest owned and managed chain in India, behind Taj Hotels Resorts and Palaces, Oberoi Hotels and Resorts, and ITC Hotels. After the investment, Lemon Tree is expected to fully own or have major equity in 8,000 rooms, which will be 6% to 7% of India’s room inventory.
Nandi said there is opportunity for Lemon Tree in its home country because of an emerging middle class and an undersupplied market.
“The hotel industry (in India) is significantly underdeveloped, with only one room per 10,000 people,” he said, adding the global ratio is 28 rooms per 10,000 people.
“Also, the supply pyramid is inverted, with more than 50% of the rooms in the 5-star luxury segment,” Nandi continued. “Hence, there is significant latent demand, as most guests cannot afford hotels today. This offers a huge opportunity for the mid-market to grow exponentially, as supply at the right prices will create its own demand.”
Lemon Tree hotels are mostly concentrated in the Western, Southern and Northern regions of India. There are no Lemon Tree hotels outside India. Nandi said Lemon Tree will “continue to focus on cities that are underdeveloped or have high potential for growth.”
With the addition of APG as a major investor, as well as other minority stakeholders, Lemon Tree will open up the business model to allow for other asset owners. The chain is in the early stages of building a management company—an independent legal entity—that will manage hotels under the Lemon Tree brand.
“Lemon Tree will continue to own and operate most of its hotels,” Nandi said. “We have set up an asset owning (joint venture) with APG, in which Lemon Tree has a majority stake, that may own the property and Lemon Tree manages it. However, we will have a significant stake in the equity of the asset.”
Future growth will come by way of new construction and conversion, Nandi said.
“On a macro scale, we see significant expansion of the market as newer hotels open up more opportunities for the domestic and international travelers,” he said. “So growth for Lemon Tree will be both organic and inorganic.”
Because of the Indian consumer’s newfound penchant for travel, Lemon Tree sees a ramped up interest from both local and global brands in developing the mid-market segment.
Global brands are flocking to the region. InterContinental Hotels Group in April 2011 signed a joint venture with Duet India Hotels Group to develop 19 Holiday Inn Express hotels across 12 cities in India. Wyndham Hotel Group in January 2011 entered into a master franchise agreement with Chatwal Hotels & Resorts LLC to develop the Dream and Night boutique brands in India. Choice Hotels International has 27 hotels open in India and an additional seven properties under development. And earlier this year, Vantage Hospitality Group announced it formed a joint venture with three experienced Indian players to develop the Value Inn Worldwide and Value Hotel Worldwide brands in India.
Because of the heightened competition, Lemon Tree will focus on improving partnerships with third-party distributors and will place more emphasis on capturing the mobile user.
“Currently, most of our guests are business travelers with some contribution from (online-travel agents) and the Internet,” Nandi said. “However, going forward, the Internet will become a big focus, along with our partnerships with OTAs and corporate.”
Capturing mobile demand, Nandi said, is “a big priority area.”
Patu Keswani, founder, chairman and managing director of Lemon Tree, has not been shy about his eagerness to take the company public. An initial public offering will occur “within the next three years,” Nandi said.