Cover Story

Back to basics

After the auto and the airline industries, it is time for the Indian hotel industry to get on the 'no-frills' bandwagon. Sanjeev Bhar finds out how this category is changing business dynamics whilst preserving the essence of no-frills accommodation

A million dollar question that any new product is bound to ask of its future is whether the target audience will accept it. And the Indian and international hotel brands are asking the same question vis-à-vis no-frills hotels accommodation.

Although the phrase 'no-frills' sounds ticklish prima facie, it is proving itself to be a sure shot way to attract guests, mostly domestic tourists, not by offering immaculate service but by not offering them at all. Yes, perhaps it is time for hotels sans services…

Scope of no-frills

Among the most notable hotels that come under this category are Ginger by Indian Hotels Company Limited (IHCL), Red Fox by Lemon Tree, Hometel by Sarovar Hotels & Resorts, Kamfotel by Orchid, and easyHotels. Rahul Pandit, VP (Operations) of Lemon Tree Hotels, which is coming up with the brand Red Fox that offers limited service, says, "Whatever happened in the auto industry 15 years ago can be compared with the present situation of the hospitality industry. In this customer-driven economy, hotels have to offer rooms of all kinds. The time has come to provide rooms to guests who are looking for a clean and secure hotel without having to pay a fortune."

Hotel companies have realised that there lies a segment, which is unorganised with questionable hygiene but still draws a huge clientele, a segment that includes local hotels and dormitories next to railway stations, bus terminus, etc. R Ananth, consulting and valuation analyst at HVS International, believes that India has a significant percentage of small and medium-sized businesses who cannot afford to put up their employees in premium hotels but at the same time shrink from approaching local cheap places. "The answer therefore lies in no-frills," he adds.

It's not surprising then that hotel companies are starting no-frills hotels to fill the gap. For instance, IHCL recently unwrapped its Ginger brand (erstwhile indiOne), managed by its wholly owned subsidiary Roots Corporation Limited (RCL). Prabhat Pani, CEO of RCL, explains, "We have received a very positive response to our first Ginger Hotel in Bangalore. In terms of guest satisfaction, we have a high accomplishment rate with over 90 per cent score with a referral factor at 98 per cent. The guest loyalty is also high with 98 per cent."

Another set of audience that has been identified for this market is the working professionals and corporates who prefer to stay at hotels near their offices to cut travel time altogether.

Smart, not lavish

So what does no-frills really mean? While external features like the look and feel of the hotel does not stray from the conventional appearance of star category hotels, no-frills hotels deviate only when it comes to services. The focus is to serve guests smartly, not lavishly.

The room rate for most no-frills offering would waver around the Rs 1,000 mark. Obviously, price is the deciding factor. James Rothnie, director (Corporate Affairs), easyGroup that owns easyHotels, says, "In the Indian market, we are possibly the one with the most competitive rates." Explaining this, he adds that all easyHotels in India are through franchising - local franchisees with local expertise - and they decide the prices. easyHotels has alliances with Dubai-based Istithmar Hotels, a subsidiary of the UAE group Istithmar PJSC, for its hotels in India.

easyHotels is opening eight such hotels in India by 2009, according to Rothnie who says, "Travel, especially budget travel, seems to be booming globally and India is one of the key places. Our brand, easyHotel, will benefit from this immensely."

Talking point

The hospitality industry, however, had little trouble in defining this niche - the aviation industry proved to be a good case study that helped hotels to understand the market dynamics, both in terms of price and service. Pandit remarks, "Trends will slowly emerge for key features like price points, distance and location. Pricing needs to be market-based and not company-driven; if they are not market-based, it will get very difficult to sustain it in the long term."

Barbed barriers

Without frills is, unfortunately, not without problems. Changing customer mindset is one barrier in operating no-frills hotels. Simple reservation offices and smaller rooms and inventories could be seen as a deterrent because many Indians expect full service even if room prices take a dive. Pani elaborates, "This can be achieved through proper communication at all levels." He says that other problems that tend to crop up are cost of land and the right location, adding however that availability of government land in cities can help overcome this.

In fact, many state governments are giving away land to hoteliers at competitive rates for building budget hotels, and no-frills follow a significant configuration. Ananth says, "If a piece of land is purchased by an hotelier with a very high cost and at a very prospective location, it doesn't necessarily have to be congenial for a no-frill. Other related considerations will decide the type of hotel that is to be built on that piece of land."

Another drawback for hoteliers is that the project for no-frills has to be new; renovating an existing property won't work as hotels tend to retain their original look and style. But Rothnie has other things in mind. He talks of operational problems saying, "The obvious problem would be if an organisation with a higher cost base starts trying to charge low prices." This means that they have to be very precise on what they are going to charge and their inability to comply with the low cost module would then go wrong for the hotel's business. "With a recognised brand where consumers immediately understand the offering, we in easyHotel try to avoid this problem," he adds.

Feel good factor

The segmented guest houses with no brand recall, questionable service standards and hygiene conditions have been charging between Rs 1,000 to 2,000 will feel the pressure. Hence the potential for no-frills hotel is huge. According to Pandit, the existence of one five-star property in developed markets means an opportunity for three to five in the mid-market segment. Historical trends would suggest that the Indian hotel sector would saturate by 2012 or so, but the industry believes that the growth will go on to 2020.

Priya Paul, president of Hotel Association of India (HAI) says, "The latest Goldman Sachs report projects India as the fourth largest economy in the world by 2025 and third largest by 2050, next only to US and China. But it is not correct that there is shortage of hotel rooms in the country. There is however, pressure on hotel accommodation in metro towns owing to increased business travel, entry of low-cost airlines, spurt in domestic tourist movements, etc which would drive the demand for economy (no-frills) hotels in the country."

In the no-frills segment, Pandit says, within five years or so, market will start becoming saturated at a point where price sensitivity will creep in. Here the competition will become more interesting. He has another angle to add. He says that no-frills essentially will look forward to vicinity regions for its clientele. He says, "No-frill isn't targeting only those who are looking for low cost hotel rooms. The focus is to keep all the rooms occupied and prepare a target where they don't have to refuse reservations due to unavailability of rooms.”

"Pricing of hotel accommodation is a manifestation of the demand and supply phenomenon. The rising demand for low cost budget and economy accommodations would play as a dominant factor in deciding the pricing of hotel rooms over a period of time," feels Paul.

The positive wave for no-frills segment is evident with international chain like the InterContinental Hotels Group contemplating to bring its limited service brand Express by Holiday Inn to India. Michael G. Herrmann, director of operations, InterContinental Hotels Group (South West Asia) informed Express Hospitality that in the thick of international plans, IHG will eventually bring its Express brand to India, but added that it will take some time. He says, "Indian economy is growing at a constant pace and with room demands soaring, the scope of no-frills segment is high."

Pani says, "Ginger Bangalore is already doing over 85 per cent of occupancy rate, and in the absence of five star rooms some amount of business will trickle down to the next categories. But this is a very small amount." According to October-March data of HVS International, hotels in Delhi turn away business of about 300 rooms per day on 3 days a week and same figure for Mumbai is about 200. "This is just an indication of supply shortage, not directly an indication of demand for no-frills hotels," points Ananth.

Hoteliers are eyeing at two things simultaneously, or precisely saying have zeroed on the same. One is about capturing the market sentiments for low cost hotels and secondly, grabbing the opportunity with both hands.

A hospitality professional avers, "In the later stages how efficiently companies would be able to withhold themselves in relation to pricing would be interesting." It is because, he says, with time hotels will feel the crunch of market forces that may raise the operational cost. Customers will deem to believe that the rack rates for no-frill hotels will not fluctuate unlike business class five star hotels. If hotel do against the consent of customers it will draw unfavourable light. Hence, the pressure on hotels will mount. So are these hotels ready to face that challenge? Only time will tell. Meanwhile, the industry remains upbeat.