How Indian Hotel Chains Are Adapting Amid The Pandemic
The hospitality industry is known to be very cyclical, capital intensive and have low capital efficiency, i.e. low return on capital.
Jaydev Mody, who runs Delta Corp, India’s largest casino operator that also runs the luxury hotel brand The Deltin, once said: âFor the kind of capital that (the hotel business) needs, the yields are really low. I don’t see why people keep investing in hotels.
The reason for such complaints is easy to understand: hotels require a huge initial investment, but to compete with similar hotels in the area, they have to compete purely on the basis of price.
In times of low demand, like now, this can turn into a race to the bottom, resulting in low overall returns.
In order to move to a more efficient structure in terms of capital and light assets, many Indian hotel chains have started accepting management contracts rather than building hotels.
The business model is simple: the hotel chain partners with the property owner and operates the property in exchange for performance-based compensation. Foreign chains have also followed a similar strategy to enter the Indian market.
They bring the investors together in a 70:30 or 80:20 arrangement, where the local partner has the largest stake. The chains operate the hotels under their banners and provide all the necessary support.
These chains have another advantage over Indian hotel chains: the large networks. Chains like Marriott, Hyatt, Inter-Continental Hotels Group and others have hotels all over the world. Therefore, most of the customers prefer to join the loyalty programs of these chains and earn loyalty points.
Indian chains, especially the smaller ones, are limited to India, which makes their loyalty programs and corporate programs much less appealing.
With the closures, the problems of the hotel sector have become even more acute. The occupancy rate fell to levels last seen during the 2008 financial crisis. While commercial properties located in metropolitan cities have some occupancy during closings, recreational properties have seen little. activity during closings.
The operational leverage inherent in the company came to bite him during the pandemic.
For example, beginning in fiscal year 21, the revenues of Indian Hotels Co. Ltd. (IHCL, owner of the Taj chain) fell almost 60% year-over-year, while costs fell only 26-45%.
Meanwhile, financial costs jumped 25 percent during the year. Financially weak hotels have closed indefinitely, and it’s not just small hotels that are facing the heat.
Hyatt Regency in Mumbai closed in June due to a lack of funds.
Hotels have already cut room rates to attract travelers, as evidenced by declining revenue per available room (RevPAR), a key measure in the hospitality industry.
According to IHCL, the industry RevPAR for FY21 was 70 percent lower than the RevPAR for FY20. In order to differentiate themselves in a market where everyone has lowered prices, hotels offer various options and value-added packages.
Several hotels have been seen offering “vaccination packages” where vaccination was combined with a three to four hour stay at the hotel.
However, the offers quickly attracted public ire and the offers were dropped. Covid-19 has also changed the way people travel, with short-haul pleasure travel becoming a new normal.
Business hotels, which typically experience weekday activity, are seeing an increase in bookings on weekends. People are looking to relax on weekends in hotels, given the low room rates.
With this in mind, several hotels have also started to offer âworkcationâ and âstaycationâ packages, the duration of which varies from a few hours to several days.
The effort to switch to a light asset structure seems to have paid off. Management contracts contributed about 32 percent of IHCL’s total room inventory in FY21, up from around 20 percent in FY18.
However, for EIH, owner of The Oberoi brand, adding hotels under management contracts has been quite slow, with only one hotel added since 2018.
ITC hotels have also added hotels under management contracts at a steady pace.
So far, large Indian hotel chains have been successful in adapting and targeting the right audiences to keep hotels in business, while simultaneously working towards a leaner cost structure.
While the Gujarat government has declared a one-year property tax exemption for hotels, other states have yet to offer assistance to the hotel industry. Despite the blockages, the biggest chains managed to break even.
However, small chains and independent hotels that do not have similar financial strength are still struggling to survive. As travel restrictions relax and vaccinations continue, the industry is hopefully expected to return.