Recovery is near for India’s hotel industry
16 DECEMBER 2013 6:56 AM
Even with the recent economic slowdown in India, demand for hotel rooms has grown and the future of the country looks bright.
The hotel industry in India has been dealing with an oversupply problem that began in 2008. Strong industry fundamentals and significant long-term economic potential led to strong growth in the pipeline. Although demand has grown in tandem with supply since 2008, panicked hoteliers have dropped their average daily rates in response to the stronger competitive environment.
Even with the recent economic slowdown in the country, Kaushik Vardharajan, managing director of HVS Global Hospitality Services for South Asia, said demand for hotel rooms has grown by 9% through October, and he expects that pace to be maintained through the end of the year. It is likely the hotel industry’s woes will continue until 2015 when a stronger economy and slower supply growth allow hotels to regain pricing power.
Market pressure forces efficiency and innovation
While ADR has been depressed for five years, operating costs—especially labor and utilities—have skyrocketed. The pressure on margins has forced hoteliers to focus on operating efficiently. Many hoteliers have reduced their staffing levels, although some have explored other cost-cutting options.
For example, Lemon Tree Hotels has designed its hotels without carpets and with horizontal lines for air conditioning and water so floors can be closed during periods of low demand.
Raj Rana, CEO for South Asia at Carlson Rezidor Hotel Group, said Carlson is conserving energy by adjusting default settings for thermostats or switching to LED lights, which not only minimize costs but reflect the company’s dedication to operating responsibly.
The rise in costs has contributed to the shift toward less-expensive hotel models. Douglas Martell, VP of operations of South West Asia for InterContinental Hotels Group, said rising costs have contributed to greater interest in the company’s midscale Holiday Inn Express brand.
“The select-service model behind the brand means that the hotel is maximized for space and the team members are multi-skilled, so that costs are minimized for the hotel owner,” he said.
According to HVS’ “2013 Hotels in India trends & opportunities,” 57% of India’s supply pipeline is in the mid-market and budget segments.
On the revenue side, Starwood Hotels & Resorts Worldwide leverages its loyalty program to drive demand and markets to alternative source countries, such as Hong Kong, Singapore and other parts of Asia/Pacific, to replace underperforming European nations. Hoteliers have also turned to mixed-use developments, such as Oberoi Garden City, to leverage the demand created by the residential, office and retail spaces.
Despite these efforts, hotels are struggling to be profitable with some having to restructure their debt to stay in business. Many owners have put their hotels up for sale, but the number of hotels for sale greatly outweighs buyers, making few sellers willing to sell at depressed prices.
2015 could be the turnaround year…
The prolonged supply problem, along with tighter financing conditions, has caused the supply pipeline to shrink slightly, with projects abandoned or delayed. It is likely a recovery will begin at the end of 2014 as supply growth slows and national elections are finished.
Vardharajan believes at that time, there will be a rebound in occupancies, and hoteliers will be confident in raising average daily rates after 12 to 18 months of growing occupancy rates. As a result, the Indian hotel industry is poised for a recovery beginning in 2015.
…with a strong recovery to follow
Beyond 2015, the economic outlook is strong. According to Sarah Boumphrey, head of countries & consumers at Euromonitor International, India’s real gross-domestic-product growth between 2016 and 2020 will reach 7% and above each year. The economy will be boosted by delayed infrastructure projects coming online, the boost to exporters from the weaker rupee and a strong manufacturing sector. By 2015, India’s consumer market could match that of Italy’s in absolute terms and will be approaching that of France by 2020.
The strong economic growth is expected to spur more demand for hotels in India. Martell is optimistic about the country’s long-term potential, saying “India will witness the fastest-growing demand in the next 20 years, overtaking U.S. and China.”
“At IHG, we have a robust expansion plan charted out with the aim to have 150 hotels open across India in the next 10 to 15 years,” he said.
Rana shares this optimism. “India is a cornerstone of Carlson’s Asia/Pacific strategy, and we are on track to have 180 hotels open in India by 2018,” he said.
IHG and Carlson are not alone in having ambitious expansion plans. Marriott International aims to open 100 hotels by 2017 and Accor plans on opening 47 by 2015, according to reports.
Although the industry has had to weather declining ADR since 2008, the fact that demand continued to grow bodes well for the industry, especially since supply and demand are expected to be better balanced beginning in 2015. It is wise for hotel companies that are prepared to handle the cyclical nature of the hotel industry to continue to expand given the rosy long-term outlook for India’s economy.
Michelle Grant is the travel and tourism research manager at Euromonitor International, specializing in hotels research. In her role, Michelle is responsible for Euromonitor’s hotel industry research, which provides analysis and in-depth coverage of the hotel market in 211 countries worldwide. She works closely with hotel companies, providing insight into consumer trends and market performance to help clients make informed, strategic business decisions. Michelle is a respected source in the travel and tourism industry. She has presented at a variety of high-level conferences, such as the World Travel Market, La Cumbre and the Special Libraries Association and is often quoted in journals, national newspapers and trade publications. Previously, she was a research analyst for Latin America, covering industries such as financial cards and domestic electrical appliances. Michelle has a Bachelor of Arts in Economics and Finance from Washington University in St. Louis.
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