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An amalgamation of sorts

Among the assemblage of hotels, there are some whose potential mortality or otherwise is determined by copious factors, of which consolidation is somewhat conspicuous. Bhisham Mansukhani finds out more

Well, a vague idea will not help build a case for consolidation, even in the most general of events. So then, consolidation, technically put, is the combination of separate companies, functional areas, or product lines, into a single one. It could also be a merger in that a new entity is created through consolidation, or a concerted push to gain dominance in a particular space.

Broadly then, consolidation is defined as the process of maturation in, in this case, hospitality whereby smaller companies are acquired or run out of business, leaving only a few dominant players; here also called shakeout. When firms consolidate, many firms specialising in separate areas will come together to create a new company and a new brand. After consolidation none of the original companies would resemble their former selves.

Hospitality is the current flavour with investors and developers with more guests chasing fewer rooms, which has put consolidation on the ice for now. However, the vital signs are in place and observers are putting it down as inevitable. It may seem like a mirage for the moment, but it is in a way almost as certain as the growth this industry will experience in coming years. It may well perhaps be responsible for that.

What's going on

Hospitality remains entrenched in a phase of growth. Yet, surprisingly, it has seen two strides towards consolidation and at least one of them looks to be well on the way to fruition. India's hospitality industry rates as pretty much isolated in so much as the pessimism with regard to the likelihood of its consolidation in the near term, let alone its current possibility.

The key reason for this ascription is the skewed dynamics of supply and demand which in the realm of the usual dictate strategies that pave the way for what seems like consolidation. That is far from happening in the near term. And while hotels aren't complaining, the current trend is far too lopsided in favour of aggressive growth through inventory ramp up rather than strategic presence in markets where consolidation may be possible in the future.

That said, there hasn't been much denial of the groundwork that is being gradually laid. India's hospitality behemoths which remained a club of three will soon see the addition of The Leela that is gaining critical mass with a nationwide spread and a sizable mix of urban and resort properties apart from a separate portfolio that its new management contract firm will bag. While both Indian Hotels Company (IHCL) and East India Hotels (EIH) see most of their growth borne out of management contract, ITC uniquely continues to either lease or acquire land for properties which it itself builds. This represents the promoter's traditional predominance that its veteran peers have been gradually ceding. The staggered entry of international brands, primarily through the management contract route, bar a few cases, is also helping to set the tone. They are opening a number of opportunities across segments for India's vastly fragmented hotel industry to find identity that includes quality subsets. Broadly then consolidation, as and when it sets in, will probably play out in two directions - ownership consolidation and brand consolidation.

Ownership consolidation

In the premium segment, India's hotel industry found representation mostly in the virtual duopoly of IHCL and EIH, comparably in product positioning if not proportion. ITC Hotels and The Leela were relatively late arrivals in this space, followed more recently by the beeline of international brands.

Yet this disproportionate quartet stands at different rungs on the ladder of organisational or ownership consolidation. Promoter capital and ownership of the properties they run in are some vital signs that point to the infancy of consolidation therein. Organisational consolidation basically represents a process that sees the incumbent reign in and identification of a set of brands that in themselves represent a segment or experience which is distinct or pertains to a particular niche. It also involves the specific targeting of niche markets within which growth is the means to take market leadership. IHCL has done this to an extent in the premium and budget segments. EIH is well on its way to create a simple yet distinct perception. ITC is still some way off though in the premium segment and along with it are Sheraton Towers, Welcomgroup and Fortune Group - each being far from having created enough capacity in its own right to rise above the immediate compulsion for inventory growth. ITC has not yet considered management contract as an option and that in effect is contemplated as its next step towards organisational consolidation.

This form of consolidation, analysts feel, will find the industry undergo a more discernible evolution within star categories which have a 'rudimentary' outlook, lacking the complexity that most international markets do. America for instance has a byzantine classification hierarchy in the five-star category which pervades and rationalises pricing in each segment - a concept still light years away in the Indian market. One of the chief inhibitors for this sort of consolidation to set in is the absence of what is considered typically favourable conditions. These chiefly include viably available land and a fair demand spread, neither of which seem to be present in India.

While demand in certain months has pushed average room rates up to blushing levels, it remains firmly concentrated in the metros and modestly higher than the median in some tertiary cities. Leisure tourism apart from that in Goa, Kerala and the Golden Triangle has not encouraged enough inventory addition, thereby concentrating interest in, and consequently driving land prices, certain regions. Further to that, companies and institutions holding land banks want to own the hotels built on them rather than lease or outright sell it, citing intrinsic long term value apart from immediate revenues which stare down gestation. Real estate developers in particular, who would consider many options including residential, commercial and shopping space, hospitality also being included, have unsurprisingly begun looking at it more keenly than ever in light of the demand-supply skew.

Consequently, both IHCL and EIH have revised their approach to include the management contract route while The Leela has only recently entered it for expansions. However, its only cursory move towards branding has come by way of Kempinski standard for all properties. Ownership consolidation, uniquely in the Indian context will ensure a clique of robust indigenous hotel companies that will compete with the incoming deluge of international hotel brands. Ownership consolidation is known to occur typically through organic growth but the sheer paucity of land or ready hospitality assets has forced it to go the other way. The acquisition opportunities will only appear if and when the boom tapers, particularly for the newer builds.

Brand consolidation

Brand consolidation is perhaps the most visible and current of the trends across all verticals and appears critical for the industry. It basically entails the defragmentation of an industry teeming with standalone properties, classified or otherwise, exclusive or mixed use, under the aegis of brands across the classification universe. Brand consolidation, unlike ownership consolidation, has larger implications for the industry by way of stabilising the demand-supply algorithm and putting it on the fast track to maturity. Already, brand consolidation is being realised with the presence of Best Western and Choice in the franchising space, Radisson with sales and marketing and Marriott and Starwood in management contract. Analysts however argue that since premium brands are more inclined on new builds, defragmentation in their case tags back to competition among international and domestic five-star brands for land which ranges from purchase, lease, joint ventures or vanilla management contracts. There however remain vast and unaccounted numbers of hotels waiting to be tapped by these brands through the various mentioned routes. And the growth of the incumbents' business development will determine how it plays out.

Crystal clear

India's hospitality market, when compared with the mature markets of the Pacific and the Atlantic, appears to be a trove of opportunities to the daring entrepreneur. A non-existent mid-market in hospitality should have international investors licking their chops. But with the sectoral players flush with domain knowledge and a typically protective government, the field for consolidation through all media is ripe and inviting.

Hospitality is not short on opportunities for the very fact that little has moved on the consolidation front so far. Few brands have enough visible identity. There are far too many standalone hotels, mostly in the mid-segment but bereft of classification or standard quality. Mixed-use models, that potentially quicken gestation by offering a host of alternative revenue streams, have barely gotten off the ground. Furthermore, the intrinsic real estate value of land and about any structure standing on it coupled with some of the longest periods of steep average room rates make hotel construction the most attractive option than ever before. While land acquisition remains a tall order given the surreal escalation of the precious stuff, real estate 'banks' have never been more forthcoming with their own cash to put in projects either jointly or exclusively with hotel companies.

The emergence of real estate investment trusts and pending government procrastination over their clearance will open the much needed flow of direct institutional funding - a consequence of the sector's bull run that will continue well into the foreseeable future. Moreover, hotels globally, are getting into 'white labeling' (the concept is a form of contracting services outside one's core business which may add value to the company's overall business) and have developed holiday brands in tie-ups with tour operators as vehicles for specific objectives, British Airways Holidays being one of the notable examples.

What to expect

The future of this business might be hospitality's eventual obsession with the mid-segment. The predilections oscillate from the cautiously sanguine to the admirably bullish, sounding unmistakably similar to the international investor calls on the Indian economy and its financial indices.

The fact that hospitality offers an entirely different bent to consolidation speaks well of the industry in so much as making the process unique to its nature. India's hospitality industry has a long way to go, estimate most of the sector's analysts. Brand maturity, territorial dominance and derivatives, let alone a clutch of major players who control a sizable share of the market when enough supply has set in - these are parallel phenomena that will presumably play out by the turn of the century.

The recent ebullience of real estate companies that have watched hospitality crawl, walk and now canter, can only help its evolution, albeit attenuating the grand plans of some of the traditional hoteliers who will most certainly have to write off ownership as the popular route to expansion. Perhaps, the compulsion of change will be more apparent herein. Yet, there is plenty complexity to be found in the relationship between relatively unfamiliar partners that include part stake acquisition and leverage on brand value that is their intrinsic strength.

Further, in the direction of brand distinction, India's maturing inbound and domestic tourism market means that the time for niche consolidation is now. As each of the hospitality giants pick out their favourites, there is room for smaller, boutique hotel brands to ease into the space of wellness and adventure, particularly in the mid-segment space where the market is still to be unlocked. Building brand equity before the trend is a home truth which would serve the smaller companies well, both from the point of domain competence and the positioning of a buyout by any of the bigger players that may choose to enter the segment without enduring the initial pain. While franchising remains a risky strategy, it is difficult to ignore from the point of view of consolidating vast troves of standalone budget hotels. Ensuing dynamics will ensure that a more structured focus on expansions that more likely include brand consolidation could pervade hotel strategy while larger companies will have a lot to consider when they try to swallow brands whole to include in their portfolio as and when they see the opportunity.