The hospitality industry in India is set to witness a better performance in 2019 almost after a gap of a decade. During the last few years, the industry was stuck in a crack due to oversupply, disruptions through technological innovations and a slowdown in demand due to macro issues. However, the scenario has changed since last few months and industry is expecting a better performance on major parameters. Experts of the industry believe that increasing middle class, rising disposable income, growing air connectivity and improving road infrastructure, rapid growth in domestic tourism and favorable policy initiatives are set to push the occupancy, Average Room Rate (ARR) and RevPar for the industry this year. Also, industry would witness gradual and sustainable rise in room rates backed with strong occupancies over next three-four years. This will put the industry back into its growth cycle after almost a decade.
According to Achin Khanna, Managing Partner – Strategic Advisory, Hotelivate, the past 24 months have played witness to a consistent growth in occupancy across most hotel markets in India. “Breaching the 65 per cent nationwide threshold, some markets have clocked 70 per cent plus occupancies as well. The ARR story continues to be modest though. While it is true that rates haven’t grown by leaps, it is equally pertinent to note that the blended nationwide ARR appears to grow slowly because a larger portion of the existing supply is budget and midscale positioned. The silver lining, however, is that there is growth in rates across most markets, albeit marginal,” Khanna added.
Increasing occupancies, ARR & RevPar
As demand is outpacing the supply, there is a clear indication that hotel occupancy, ARR and RevPar will see an increase this year which will continue for the next three to four years. Mandeep S. Lamba, President (South Asia), HVS Anarock informs that the industry has seen a steady growth in occupancy over the last three years growing from 61 per cent in 2016 to 66 per cent in 2018 along with a corresponding increase in ADR’s from Rs. 5550 in 2016 to Rs. 5950 in 2019 and RevPars from Rs. 3358 in 2016 to Rs. 3927 in 2018. “RevPar grew at the rate of 9.6 per cent in 2018 over 2017 and we expect it to grow by an additional 9.5 per cent in 2019 on the back of higher ADR’s,” Lamba opines.
Ajay Bakaya, Managing Director, Sarovar Hotels and Resorts, also feels that RevPar has steadily improved, primarily driven by rate increase in the last two to three years. “The increase in ARR driven RevPars are more obvious in certain submarkets like Bengaluru and Hyderabad (Hitec city area). Most markets are still doing room occupancies story. The limited supply side additions have definitely helped,” Bakaya says adding that that Sarovar is seeing reasonable growths in both occupancies and in ARR. “We currently have a measured outlook for ARR increases. Properties which are now hitting 70-80 per cent occupancies can certainly do the rate yielding. For the rest, it will not be easy to play the rate yield game except certain dates/periods,” he says. He is confident that markets like Hyderabad, Bengaluru, and Mumbai will show increase in ARR. “The moderation however comes in form of the macro economic pointers. Currently, they are vague and do not reflect the big demand surge for the coming season as was expected,” Bakaya reveals.
Prashant Mehrotra, Vice President & Chief Revenue Officer, Lemon Tree Hotels feels that the current financial year started off at a slow pace in terms of occupancy going down by 300 bsp as compared to the previous financial year primarily due to elections. “India reported occupancy at 67 per cent, ARR at Rs 6169 and Rev Par at Rs 4153. The slump in occupancy rates has also impacted the ARR downwards by Rs 350. However, from second quarter onwards, we foresee a jump in the occupancy rates across India which is expected to result in occupancies slightly over the 70 per cent mark and consequently create a four to five per cent jump in the ARR over FY 19,” Mehrotra says.
According to Khanna, occupancy across most major markets will continue to rise. “However, weekday-weekend seasonality does tend to put a cap on the upper limit of this growth. Most corporate/ commercial markets tend to peak in their mid-seventies and even the strongest leisure destinations (save Goa) do not breach late sixties. Given that many markets are already headed in this direction, coupled with the fact that demand is indeed outpacing supply in various locations, the continued growth of ARR is plausible,” Khanna says.
Slower pace of development
While performance parameters of hotels are going up, the pace of development has slowed down due to many issues. Several cities have witnessed an excessive growth in supply over demand in last three to four years impacting the overall performance of the industry. “There are roughly about 52,000 rooms in various stages of planning and development. Almost 35,000 are actively under construction. While the pace of new projects announcements had indeed slowed down in the past couple of years, recent months are showing signs of resurgence,” Khanna says.
Lamaba also believes the same. While the number of branded hotel keys signed in 2016 and 2017 remained stagnant at circa 16000 keys in about 170 hotels, 2018 witnessed a significant growth with over 19000 keys in 210 hotels having been signed during the year, Lamba adds and anticipates a similar number of keys being signed in 2019.
Bakaya, however, feels that the luxury/ultra luxe segment Greenfield investments have decreased considerably due to high capital expenditure and unfavorable lending regime. “The ROIs on these projects have never been more lopsided. However, the mid-segment still continues to go strong in terms of development. We ourselves have a pipeline of 30+ hotels in 25+ destinations slated to open in a time frame beginning this month till next 24 months,” Bakaya adds.
Chander K. Baljee, Managing Director, Regenta & Royal Orchid Hotels, opines that there was a boom in the Indian hospitality industry during 2003 – 2008. “The recession started in 2008 and the market was left with a demand-supply mismatch from here on till 2017. The development pipeline has now slowed down and demand is picking up, which is healthy for the industry. We will see a new pipeline again in two to three years,” Baljee says.
Elaborating it further, Mehrotra informs that the Indian hospitality industry added 93,000 rooms between 2005 and 2017; out of which 49 per cent of the supply was towards seven key cities including NCR, Mumbai, Bangalore, Chennai, Pune, Hyderabad, and Kolkata. “Currently, there are 128,000 branded hotel rooms across India; and by 2022, 30,000 new hotel rooms are expected to be added to the existing inventory. We envisage demand will outpace supply in the near future,” Mehrotra says.
Rate parity: Way forward
Rate parity is a legal agreement between a hotel and the OTA, providing the same rates for the same room on all the distribution channels. It is an important part of the overall hotel distribution landscape. “However, many brands have pushed for direct bookings in the last two to three years. Offering the best available rate on Brand.com is one of the ways hoteliers are using to incentivise direct bookings. Today, we’re seeing many alternative methods to drive direct bookings such as exclusive room type listing only on Brand.com, packaging of additional amenities to increase the value proposition for the customer and promoting private or closed group rates through the brand’s loyalty programmes,” Megha Tuli, Partner & Co-founder, Hotelivate, says.
Bakaya suggests that it is our fundamental duty to maintain rate parity. “Consumers should choose the distribution channel based on merits of his/her choice. As things are panning out, it is quite clear that the best value is in booking directly on the hotel Brand website. We are looking at period of consolidation of OTAs in terms of Indian markets. Its an interesting dynamic that is evolving every day,” Bakaya informs.
Baljee agrees to this and says hotels must work on value-adds which guests can only get when they book with them direct. “There are many exclusive benefits that guests can enjoy with direct bookings which they don't get when they book with OTAs. This includes F&B offers, bonus loyalty points, complimentary early check-in or late check out, free wi-fi etc.,” says Baljee.
Being more candid while explaining the dilemma, Lamba says that the battle between OTA’s and hotels wages on with no apparent solution in sight. “The relationship is that of Frenemies where hotels are hurting because of the large cost being paid to OTA’s but can’t do without them on account of the massive customer reach that OTA’s have gathered over the years and the technology infrastructure they have created,” he says adding that hotels are making focused efforts to get the customer to their websites and have attempted to create certain advantages such as availability of loyalty points only if bookings are made through their official websites but OTA’s are countering that by often being able to offer rates lower than that offered by hotel websites and absorb these losses through allocating these to customer acquisition costs as is the norm for online commerce platforms. Mehrota opines that the industry is surely witnessing rate parity establishing slowly with innovative offers and discounts.
Role of disruptors
Replying to a question over players like Oyo and Airbnb bringing in value to the industry, Khanna says that they have served a clear and evident need to a large populace that constitutes millions of traveller across the country. Bakaya also feels the same and says that they are creating new demand/development by changing the consumer behaviour. “They are driving the domestic travellers to expect a certain standard and comfort in accommodation solutions. This augurs well for the industry in terms of product development and service standard deployments. We are looking at grabbing onto a sizeable portion of the discretionary spends of one of largest consumer markets in the world,” says Bakaya.
Lamba opines that alternate accommodation players are growing rapidly and offering travellers a credible option outside of hotels. “Oyo added over 170,000 keys in 2018 alone which is 700 per cent more than what conventional hotels did during the same period. Since Oyo is largely in the economy space where the branded hotel segment has a negligible presence, there is no significant impact of these players on the performance of the branded hospitality sector,” Lamba says. Baljee believes that player like Oyo is helping bring a lot of inventory from standalone units within the unorganised sector to the mainstream branded segment. Mehrota opines that these players create balance in the market share of the organised and unorganised sector.
Relevance of agents
The traditional travel agent continues to remain an integral part of the Indian hospitality industry for inbound business as well as domestic travel. “India’s digital penetration is expected to reach 627 million by end of 2019. However, such progress will continue to shape up in the years to come. Till such time, the traditional travel agent will continue to play a significant role, especially for leisure travel,” says Mehrota.
Bakaya feels that traditional travel agents have evolved and their newer business models allow them to cater to all segments of guests and hotels across geography. “From a pure play travel agent, today he is evolving into a hybrid model combining a TMC, PCO and aggregator. It is THE survival and evolution story. It will continue to be a fascinating development,” Bakaya says.
Lamba opines that the role of traditional travel agents is reducing over time. “The only significant role continues in the Foreign GIT & Incentives segment where bookings for these segments are routed through tour operators and travel agents handling inbound travel,” he says. Khanna feels that while the online travel agencies have added to ability of a hotel to showcase and distribute inventory, it would be a folly to assume that they have replaced the traditional travel agents. “On a consistent basis, offline tour & tour operators continue to add value to the sector,” Khanna adds.
While performance of hotels in 2019 had a stellar start in the beginning of the year, it has been dampened by the general elections and the closure of Jet Airways. “We believe that the performance will catch up over the rest of the year and in 2020 we will witness the best ever performance of the hospitality sector since the turn of the century riding on the back of a stable government and an improved economy,” Lamba concludes.