The current pandemic has created a win-win situation for both the parties i.e. the hotel owner and the branded chains to enter into agreements that will benefit both and revive the hospitality ecosystem at a much faster rate.
The hotel industry has been largely dominated by unorganized players even till now. Back in 2006/07, the organized segment was dominated by International chains which primarily expanded with either management contract or franchise business model in the country. It was in 2009/10 when domestic chains also started to expand and increase their share in the pie. When we entered the COVID era, there were approximately 1 million hotel rooms available in the country of which only 160,000 rooms are of the organized players both domestic and international combined.
During the last five years, hotels saw significant growth both in terms of occupancy and room rates. Increasing corporate demand and leisure travel coupled with rising international travelers led to significant improvement in the hotel industry’s performance. In 2019, the average Pan India occupancy rate of the Indian Hotel Industry was around 65% which has dropped significantly due to the outbreak of COVID-19.
The demand is estimated to have dropped by more than 50% during these times and it has impacted the unorganized hotel industry more than the organized segment. The only demand that is flowing in the hotels right now across India is coming from three main segments, including Vande Bharat Mission, Medical Staff and patients opting for the hotel quarantine facility, and Airlines and shipping crew.
With the re-opening of the hotel industry with all the SOPs in place, we expect the demand to restart growing by mid-2021. Until then it is difficult for hotel players to survive in this market as the moratorium offered by RBI is also coming to an end in August and with no demand especially for the unorganized players for another 2 quarters, it will be difficult for them to survive and will severely impact their debt serviceability.
The organized players are currently operating at 20-30% of occupancy which is getting generated from the people cited above. Noesis Capital Advisors conducted a consumer survey during the lockdown which indicated that 73% consumers are looking at branded hotels for their upcoming vacation plans and business needs and are ready to pay a premium of 15-20% in room rates to ensure health and safety of themselves and their family members are not compromised. The trust that the consumer has on the organized player's adaptation of SOPs and highly maintained hygiene is shifting the demand towards the organized players as they feel their health will not be compromised at these properties. As an early sign of revival, we have already started witnessing demand for organized hotels on the outskirts of NCR where the local population from NCR has restarted traveling to escape the four walls of their house for even a weekend or so.
With the early signs of leisure travel seen in NCR, we expect a similar trend to catch up with other cities as well and tourism and off-beat destinations with the country to restart by the second quarter from today. After spending more than 120 days inside the four walls of the house, people will start traveling again to destinations which are approachable within self-driving of 3-6 hours from their place and enjoy niche tourism segments such as wildlife tourism, heritage tourism, etc. without compromising on their health and hygiene requirements.
The organized players have already started analyzing this trend and have started segmental marketing of their properties to capture this trend. The NCR properties have already started showing high occupancy rates where people are just staying in and working from there to escape their regular houses. The demand will not only be restricted to luxury/boutique hotels but will be divided between them and luxury/boutique villa’s which allows guests to explore the property and rejuvenate themselves.
This will not only help the hotel owner but will revive the entire ecosystem of tourism within the city and will benefit the state government, hoteliers, neighborhood businesses, and so on to see revival. Looking at these trends, and recovery that the organized players will have, the standalone hotel owners will with interest invest in the realignment of their property to capture the reviving demand. As to tie-up with a branded chain, these hotels need to have some basic quality infrastructure in place for a brand to tie-up with them.
To do so, there are two primary models which are management contract and franchise model, and a majority of independent hotel owners are focusing on franchise business models with the hotel chains because they don’t want to lose on their own rights and continue to operate their own property themselves. The franchise model will allow these hotel players to have a brand tie-up with full control on their property and added advantage of a bigger reach due to the brand's presence and central reservations system.
It is not only the hotel owners but also the brands that are looking to expand aggressively and increase their reach to non-metro cities. Many domestic and international brands are already evaluating multiple proposals at various locations to tap the current opportunity that has arisen from the current pandemic. The current pandemic has created a win-win situation for both the parties i.e. the hotel owner and the branded chains to enter into agreements that will benefit both and revive the hospitality ecosystem at a much faster rate.
But as a word of advice to hotel owners who are exploring the franchise business model of surviving in the current times, is to don’t run behind a brand just because of their existing portfolio or presence, negotiate hard on the legal and commercial points before finalizing the contract and always tie-up with a brand which has a similar vision as you have for your hotel to have an enriching and long-lasting beneficial relationship with each other.
This article is written by Nandivardhan Jain, Founder & CEO, Noesis Capital Advisors.