The budget segment: A diving board for success

The budget segment is proving to be a cash cow for Indian hoteliers and a launch pad for businesses to foray into both upscale as well as economy range and diversify their portfolio. By Sanjeev Bhar

The sensitive index of the Indian stock market might be showing severe fluctuations but there is no stopping the hotel industry's progression, especially its budget segment. The demand for the budget segment is expected to grow even more despite the land prices showing no hints of a downward trend and premium hotels in cities showing the expected room rate correction.

Spirited growth

Inarguably, budget hotels in India have always been present, albeit in a different kind of package. The boom is therefore a direct consequence of a lack of any formidable presence in the immediate past. Evidence of the same could be gauged by the fact that indigenous brands like Indian Hotels Company (IHCL) came up with Ginger (erstwhile IndiOne) smart basics hotels only in 2006. The need to provide the basic necessities of a hotel room in an attractive package at a rack rate that lures the budget traveller started primarily with this brand.

The brand riding high on the aspirational value that one associates with Taj attracted people to pay heed to the concept. Sanjay Sethi, managing director and CEO of Berggruen Hotels that launched Keys last year targeting the budget segment, says, "The factors that are leading to this boom are awareness and the accessibility provided to travellers."

This shift to the budget segment has been brought about due to the play between demand and supply. The only factor absent was good packaging in the form of a branded hotel. S N Srivastava, general manager (Corporate), UP Hotels Clarks, opines, "We figured that there are innumerous opportunities for budget hotels in small cities and townships where property owners are seeking good returns for their land or hotel properties. In such cases, our management expertise is giving opportunity to reach and establish our brands - Clarks Inn -across the country, combining our mission to be present pan-India." In turn, the unknown brands are getting recognition through their known counterparts.

The medical sector is also gearing up in a big way. Fortis Hospital finds it relevant to have a Fortis Inn in its campus in Mohali to accommodate recuperating patients and their relatives. Sarovar Hotels & Resorts has also found opportunity to expand its presence in this sector. Commenting on this, Ajay Bakaya, its executive director, says, "The hospital sector can really play a big role in taking hospitality to a new horizon. We are, in fact, considering opportunities with hospitals as this sector offers good opportunity."

Although the group is close to sealing a deal for a premium hotel project along with a hospital major, Bakaya sees enough opportunity for budget hotels to collaborate with hospital developments. On the other hand Manav Thadani, managing director of HVS India, remarks, "It is difficult to ascertain at present how medical parks and SEZs will benefit hospitality sector, but these models generally do well across the world."

Better roads, better accommodation facilities on highways, railways using its unused land for budget hotel development, and the spur of central business districts has given air to the budget hotels. Even corporate lodging options are making room for budget accommodations in many cities. The growth in the budget segment is also attributed to facilitation services, easier accessibility like hotel reservation through travel portals and active state tourism portals that help disseminate information on budget hotels.

Palette of brands

Thadani feels that people are curtailing travel these days owing to high room rates. "Once there is a rationalisation of rates, people will start travelling again," he comments. Going by his observation, the budget segment is still in a position to dictate demand. The rising cost index of other segments would force corporate houses and frequent travellers to opt for budget properties.

The level of confidence in this segment is due to the fact that so many big chains, domestic as well as international, are coming with new brands. "We have Ginger, Lemon Tree, Keys, Sarovar's Hometel, Dawnay, Day Hotels, and Peppermint. Premier Travel Inn is also coming up with hotels in India. Hence, the quality of the budget sector is going to improve dramatically in the coming years," says Thadani.

The bigger players are diversifying and the emphasis on budget segment remains apparent. But this segment's biggest achievement would be the recognition it is offering to unknown entities. Recognised brands are eyeing such unknown brands with good property or land banks and collaborating management partnerships with them. As a result of which there will be a marked improvement in the quality standards of budget hotels.

Rising land prices in metros have been another reason for hoteliers to seek budget dreams grow in tier II and III cities. The propensity of small hotel brands lining up in these cities is also a reason why state governments want to promote various destinations. Sethi says, "Tier II and III cities are the only options for budget hotels considering that the cost of building such a hotel can go up to a certain cost point for it to be managed feasibly. Going beyond that designated cost point would make it an unviable project and therefore, the higher land valuation necessitates going for the upscale segment."

Management franchise is paving the path for budget hotels in such a scenario. From cities possessing no brands per se to metropolitan cities and its suburbs, the partnership between ownership and management is leading good brands to operate budget hotels and spread the reach of budget hotels in true sense. For example, U P Hotels Clarks signed with Ankur Hotels in Alwar, Rajasthan for Clarks Inn. Anoop Kumar, the group's managing director, says, "Our management expertise will bring about an opportunity to offer best of services to the people visiting Alwar. They had the land and that created the opportunity to bring a brand to the town."

Going by the trend, smaller players are getting recognised through partnerships. Since management contracts are not necessarily exclusive in nature, similar opportunities would be taken to other parts of the country. Thus, realty is enabling small hotel companies (having land banks) to enter the big league through the budget segment.

Initiating strategic moves

More and more hotel companies using the budget segment as a diving board to launch them into the other segments. Lemon Tree Hotels after establishing its brand simultaneously felt the need to have a Red Fox - a no frills brand - to make optimum use of its expertise. Clarks Hotels is an established budget brand and is launching a premium brand Exotica in Bangalore.

Kumar says, "We got the opportunity to manage this upscale property and therefore for us it was the right time to get into the premium category. It is just the natural progression we are following." Nonetheless, the group has lined up an expansion plan of having a pan-India presence for its budget Clarks Inn brand through the management model.

Budget hotels are serving as a step towards diversifying into different models of operation. It thus opens up a plethora of options for developers and management companies to target both ends of the hotel business. Similarly, Keys has divulged its plans to get into the upscale segment. It was earlier only planning a space in the budget segment but is now eyeing the high-end segment, having acquired land in Goa, which was not feasible for a budget property. It is also looking at acquiring land in Hyderabad and Mumbai (Andheri West) and in Bangalore and Kolkata to build upscale properties.

Sustaining the boom

At present, there aren't any benefits for the budget hotel developers, who are starting from scratch, apart from minor incentives from the state governments in terms of tax subsidy. The suggestion from the industry is writing off excise for the initial period of operation for budget hotels, which would initiate more investments and strengthen the chances of sustenance of such projects. Sethi says, "There are challenges of cost of real estate, brand establishment and construction costs." According to him, the need is to strike a balance to keep the operation costs at minimum and sell rooms at the desired rates to keep the budget travellers happy. "We have to keep innovating to sustain this growth," he remarks.

The demand-supply gap is still wide in the budget segment where most hotels are not recognised by hotel associations. Hence, the scope is favourable. "The mid-market to budget segment will always be a preferred area of investment for investors in the given scenario and this segment will come of age in the next two years. It is because traditionally we didn't have budget hotels in India," remarks Thadani.