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Indian Economy and Hotel Industry Global Investments in hospitality Sector has shown increasing trends over last few years. Asia is viewed as Top Global Prospect for Hospitality Investment. Emerging markets in Asia are unseating Europe as the epicenter of new hospitality investment and development while investors in the United States are switching their focus from the acquisition of existing hotels to developing new properties. According to the Ernst & Young Hospitality Investment Survey, which surveyed more than 300 investors and industry executives worldwide, capitalization rates for hotel properties are expected to stabilize and possibly even increase over the short-tomid-term in the US. Even with the dramatic shift in the debt markets over the last few months, hotel industry sector fundamentals continue to be strong. Tourism and hospitality industry may help underdeveloped/developing countries more in resolving their various problems as this industry today has emerged as one of the fastest growing industries in terms of capital invested, foreign exchange earnings and providing jobs. In India, it is considered as highly labour intensive service industry, where the employment-investment ratio is higher than any other industry.

2.1 Hospitality Industry in India The history of the hotel industry is as old as the history of tourism and travel industry. In fact, both are two sides of the same coin. Both are complementary to each other. Hotel is an establishment which provides food, shelter and other amenities for comfort and convenience of the visitors with a view to make profit (Chakravarti, B.K). Hotel is a commercial establishment and intends to provide visitors with lodging, food and related services with a view to please them so as to build goodwill and to let them carry happy memories.

2.2 Significance of Hospitality Industry One of the India's biggest problems is to find ways to employ its ever-growing population. Travel and tourism directly creates employment opportunities in hotels, restaurants, airlines, travel agencies, passenger ships, and as a result of the spread effect creates jobs in industries like construction, telecommunication, manufacturing and the retail trader. As per an analysis done by retail consultancy Technopak, at the end of 2010 the Indian hotel industry’s worth was estimated around US$ 17 billion. 3 3

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Of the total revenue, nearly 70 per cent is being contributed by the unorganized sector and the remaining 30 per cent (US$ 5 billion approx.) comes from the organized sector. The hotel industry is estimated to grow at a CAGR (Compounded Annual Growth Rate) of around 15 per cent over the next five years. The share of hotel and restaurant sector in the overall economy is still below 2 per cent. For the last five years the total contribution of the hospitality sector has remained stagnant. Although the overall share increased from 1.46 per cent in 2004-05 to 1.69 per cent in 2007-08, but then after the phase of economic meltdown in US the total share again decreased to 1.45 per cent in 2009-10. According to Economic Survey of 2010-11 the average annual growth rate of hotel and restaurant sector has been 8.8 per cent for the period during 2005-06 and 2009– 10. However, last two years have not been quite pleasant for the sector as growth faltered badly. Till five years ago, the sector was registering a growth of around 15 per cent but slowdown in the economy has affected the growth prospects of the sector badly and the growth rate has dropped into single digit level. The sector registered negative growth (-3.41 per cent) in 2008–09 over the year 2007–08, which was due to the adverse global economic conditions in this year. But, the sector is back in the positive growth territory and clocked a growth of 2.2 per cent in 2009-10. Annual growth rate (in per cent)

Year

2005-06

2006-07

2007-08

2008-09

2009-10

Hotels & Restaurants

17.5

14.4

13.1

-3.1

2.2

Table no. 01: Annual growth rate Source: Economic Survey 2010-11

The hotel and tourism industry’s contribution to the Indian economy by way of foreign direct investments (FDI) inflows were pegged at US$ 2.35 billion from April 2000 to February 2011, according to the Department of Industrial Policy and Promotion (DIPP). But, there has been a rush of international hotel chains towards India since the latter half of 2010. A lot of major hotels have announced their plans to expand their footprints in India.

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Thus domestic hospitality sector is expected to see investments of over US$ 11 billion by 2012, with 40 international brands making their presence in the country in the next few years.

Number of Greenfield projects Year

Number

2007

297

2008

553

2009

370

Table no.02: Number of Greenfield projects Source: UNCTAD, World Investment Report 2010 Tourist inflows to continue World Travel & Tourism Council (WTTC) expects travel and tourism (T&T) demand in India to grow above 8 per cent annually till 2019, the highest growth, thereby making India second highest tourist destination after China. Structural problems aplenty Although rapid rise in personal disposable income and changing lifestyle of younger generation augurs well for the hospitality sector but high land prices, low FSI, plethora of taxes, and low incentive from government are some key hurdles for hotel companies in India. International hotel chains eyeing India To tap the growing opportunity, nearly 25 major international hotel companies like Accor, Marriott, Claridges, Shangri-la, and Carlson Hospitality are looking to enter India, either independently or in collaboration with domestic partners.

2.3 Sector Status Several studies have highlighted the demand-supply gap in hotel rooms in India. Most of them have estimated a gap of 150,000 hotel rooms. A greater need is being felt in the mid-market and budget hotels segment in which a shortfall of around 100,000 rooms is estimated. Since the construction of hotels is capital intensive with a long 3 3

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gestation period, the Government is making efforts to stimulate investments in this sector and speed up the approval process to attract private sector investments. It is estimated that the room demand in the premium segment hotels in 10 major cities in India increased by around 5 per cent since the past one year. The room demand in India is expected to grow by approximately 10 per cent over the next five years. The World Travel and Tourism Council, India, data says, India ranks 18th in business travel and will be among the top 5 in this decade. With such growth, sources estimate, demand is going to exceed supply by at least 100 per cent in coming years.

Hotel categories

No. of Hotels

No. of Rooms

5 star deluxe/5 star

165

43,965

4 Star

770

134 20

3 Star

505

30,100

2 Star

495

22,950

1 Star

260

10,900

Heritage

70

4,200

Uncategorized

7,078

-

Total

8,707

1,32,885

Table no. 03: Number of Hotels – 2010 Source- FHRAI

Although, organized sector contributes only one-third of revenue of the overall revenue of the industry but several well known hotel chains have lined up aggressive expanding plans for India. The foremost contribution of the organized hotel industry comes from 5-star hotels. Despite a dip in the year 2009, average growth rate of 8 per cent augurs well for the hotel industry. Industry is adding about 60,000 quality rooms, currently in different stages of planning and development and should be ready by 2012. An upward trend in growth of the overall hotel sector is expected in the next few years, whereby the industry is expected to grow to US$ 36 billion by 2018.

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2.4 Operating performance The hotel industry in India is recovering from the blows it suffered in the year 2008, first due to financial meltdown in America in September and later due to terrorists attack on the two 5-Star hotels – Taj and Oberoi in Mumbai. The onset of the global economic slowdown had a greater impact on the profitability of the sector determined by the occupancy rate. The occupancy rate came down from 69 per cent in 2007-08 to 60 per cent in 2008-09. It was hovering above 71 per cent before the incidents. Average room rates (ARRs) saw a marginal decline of about 2 per cent during that time. As the occupancy rates were badly hit, overall revenue per room (Rev PAR) fell by 14 per cent, in 2008-09.

The swine flu outbreak in 2009 further eroded the profitability. ARRs fell 25 per cent and ORs plunged to 53 per cent in the first half of 2009-10. By then, hotels were doling out generous discounts in a bid to fill up their rooms even as RevPARs declined by 30-40 per cent. Nationwide performance

Year

2005-

Occupancy

%

Average

%

Revenue

%

Rate

change

Room Rate

change

Per Room

change

71.5

3.6

Rs 5,444

26.6

Rs 3,892

31.2

71.4

-0.1

Rs 7,071

29.9

Rs 5,049

29.7

68.8

-3.6

Rs 7,989

13.0

Rs 5,496

8.9

60.3

-12.4

Rs 7,837

-1.9

Rs 4,726

-14.0

65.0

7.8

Rs 6,426

-18.0

Rs 4,177

-11.6

68.0

4.6

Rs 6,800

5.8

Rs 4,624

10.7

06 200607 200708 200809 200910 201011

Table no. 04: Nationwide performance Source: HVS

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After declining 3 per cent in 2009, foreign tourist arrivals (FTAs) to India saw a heartening 9.3 per cent increase during 2010. The inflows of tourists continued in 2010-11. As a result, ARRs have increased by 10-15 per cent in the past one year. The RevPAR though increased to Rs 4,624 but still it is way short of the revenue clocked by hotels in the year prior to crisis.

Of the 60,000 rooms that are due for opening by 2015, Pune, Chennai, Bangalore and Delhi are likely to see maximum increase in supply.

Cities/No. of rooms

Current premium room

Incremental

room

supply

supply by FY14

Chennai

2,150

2,500

Kolkata

1,240

1,400

Bangalore

3,350

4,500

Hyderabad

2,250

3,000

Pune

1,600

3,000

NCR

8,750

5,000

Mumbai

8,000

3,500

Table no 05 Increasing rooms supply Source: ICRA

2.5 Key Players

Company

Indian Hotels

ITC

Type of properties

Brands

Luxury, mid-segment

Taj, Gateway, Vivanta and Ginger

and budget Luxury, budget and

ITC

Hotel—Luxury

Collection,

heritage hotels

WelcomHotel—Sheraton, Fortune and WelcomHeritage

Welcomgroup Business

hotels,

Oberoi and Trident 3

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INDIAN ECONOMY AND HOTEL INDUSTRY

leisure

hotels

and

cruises Luxury, Carlson

business

Radisson Hotels and Resorts, Park

hotels, economy and

Plaza, Country Inns & Suites, Park Inn

cruises

InterContinental

Luxury, mid-segment

InterContinental,

Crowne

Plaza,

and business hotels

Holiday Inn, Holiday Inn Express, Hotel

Table no. 06: Key players Source: IBEF In the Indian hospitality industry the major players are Indian Hotels, EIH, ITC hotels, Hotel Leela Ventures, Bharat Hotels and Asian Hotels, ITDC and Orient Hotels Ltd.

The booming industry has attracted many international players as well. A number of global players are already well established in India. These include Hilton, Shangri-La, Radisson, Mariott, Meridian, Sheraton, Hyatt, Holiday Inn, InterContinental and Crown Plaza. The country has been flooded by some of the world's leading hotel brands. New brands such as Amanda, Satinwoods, Banana Tree, Hampton Inns, Scandium by Hilt and Mandarin Oriental are planning to enter the Indian hospitality industry in joint ventures with domestic hotel majors.

2.6 International Hotel Brands

Brand

No.

of

Target

hotels

date

Carlson

50

2012

Four Seasons

6

2012-13

Starwood

15

2012

Hyatt

10

2012-13

Marriott

24

2012 3

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Wyndham

50

2011

Hilton

75

2015

Intercontinental

41

2012

Fairmont Raffles

15

2012-13

Accor

44

2012

Table no. 07: International Hotel Brands Source: Business Standard

Some announcements: •

Carlson Group is bringing Regent to Gurgaon by 2013. To tie-up with Pioneer Urban Land and Infrastructure that will invest US$ 49 million.The Leela plans to open six more properties by 2013.



ITC Ltd expects to add 8-10 hotelsin India in the next 3-5 years.



The Thailand-based hospitality major, Amari, plans seven 4-star hotels near major airports in the country.

International hospitality chains are expected to acquire local players to increase their presence in the country. For instance, in early 2010, Carlson increased its stake in RHW Hotel Management Services Ltd (RHW) from 13 per cent to 87 per cent. RHW has been managing hotels under Carlosn’s brands since 1998. Both domestic and international players are expected to form strategic alliances and partnerships with regional players /developers to expand in the country, reduce risk and optimize resources.

2.7 Latest Trends Investment in smaller cities Rising business and

leisure

travel to

smaller

cities such as

Udaipur,

Thiruvananthapuram, Bhubaneswar, Pune, Kochi and Chandigarh, have increased demand for quality hotel rooms in these cities.

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Hospitality chains are expected to increase their presence in smaller cities to leverage this opportunity. Further, they are likely to plan a suitable project mix (more budget/business hotels compared to luxury hotels) for these cities. For instance, Carlson has announced its plans to set-up mid-segment hotels in tier II and tier III cities. Diversification into new segments: Many hospitality chains that were earlier focused only on the luxury segment are now diversifying into new product segments, such as budget hotels and serviced apartments, in order to reduce risks. IHCL has already launched budget hotels in India, while Accor has announced plans to introduce its budget hotel brand, Formule1, in the country. Moreover, hotel chains are diversifying into niche segments such as medi-cities, wildlife lodges and spas to establish additional revenue-generation streams. These segments also help hotel chains retain customers and provide them with value-added services. For instance, IHCL operates wildlife lodges under the brand TajSafari, a JV between IHCL and &Beyond, an Africa-based safari and ecotourism company. ITC-Welcomgroup and IHCL operates spas at some of their luxury properties. In the Hotel Industry Sector, Foreign Direct Investment (FDI) has been permitted up to 100 per cent under the automatic route. For foreign technology agreements, automatic approval is granted if: •

Up to 3 per cent of the capital cost of the project is proposed to be paid for technical consultancy services.



Up to 3 per cent of the net turnover is payable for franchising and marketing/publicity fees.



Up to 10 per cent of gross operating profit is payable for management fees, including incentives fees.

Tax Holiday •

A deduction of an amount equal to 100 per cent of the profit and gain for the first 5 consecutive years to an undertaking deriving profits from the business of a hotel or from the business of building, owning and operating a convention

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centre, in specified areas, if such hotel/convention centre is constructed and has started or start functioning before July 31, 2010. •

A deduction of an amount equal to 100 per cent of the profit and gain for the first 5 consecutive years to an undertaking derived profit from the business of a hotel located in the specified district having a World Heritage Site. If such hotel is constructed and has started functioning before March 31, 2013.

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