South Strategy

Incredible Hyderabad

Falling ARRs, increasing VAT, recession - just how many setbacks will the hospitality industry have to contend with? George Verghese, GM of ITC Kakatiya in Hyderabad, gets candid on the current status of Hyderabad's hospitality industry. By Amal Tewari

Of late, the decreasing occupancy and average room rates across the nation have become an issue of relevance. January traditionally being the peak month for hotels had reported dipping occupancies and room rates and the decline has persisted through the months to follow. As with other businesses, the hotel business has also been affected by the global downturn. George Verghese shares his views and opinions on the impact of the recession and also how The ITC Kakatiya is dealing with these tough times.

Tourism and hospitality

Tourism, and in turn the hospitality sector, has not seen much relief. Though the Incredible India campaign is trying to showcase the entire country, it has made a difference only in specific pockets across the country, like the Golden Triangle in the north and places like Goa and Kerala in the south which are anyways promoted by the respective state governments and tourism departments.

"The result of Incredible India has been good in some places but has not impacted much in other places like Tamil Nadu and Andhra Pradesh where more needs to be done. These places need sustainable infrastructure that supports the cause behind tourism," opines Verghese. Each location has its unique strength Verghese says, "Goa might have a naturally beautiful coastline that sells for itself but the state government had the culture and heritage to promote it also. Though Tamil Nadu has a long coastline, it is not conducive for beach tourism. The state should look into promoting temple tourism with the awe-inspiring Meenakshi and Kanchi temples." The disparity in tourism infrastructure is causing the imbalance of tourist inflow across the country, and for the tourism sector to evolve steps need to be taken by concerned authorities for each region in the country.

Industry setbacks

The hotel industry is recuperating, both emotionally and economically. "The economy has been affected by the global recession, but no one has closed shop in the meltdown. There is still commerce and travel, people are still working, maybe harder in these tough times. "The entire industry has adjusted to the economic setback and the market dynamics suggest so. When business went down, rates also came down, so people found it agreeable to travel and the cyclic process continues," states Verghese.

Highly optimistic, the GM believes the economic slowdown is marginal and things will improve soon enough. He says, "There is a recession and in some cases a 'de-growth' in the global market. Though staggered, there is still growth in the Indian market. The investor confidence had been eroded and caused a negative sentiment in the minds of the people."

In December, January and February, the impacts of recession were two-fold: international tourism slowed down due to the liquidity crunch affecting the Western nations and business travel went down due to the travel allowance restrictions that were implemented by companies as cost savings. "There is still an ornate need for business travel, we are still experiencing occupancy of 60-70 per cent which has been building up during the past few months. So I have no hesitation in saying that things will improve with brightening prospects in the coming months," expresses Verghese.

Hospitality market

Going by the weak condition of the hospitality industry viz dropping occupancies, decreased room rates and reduced tourist inflow, global hotel brands opening more properties in India will add on to the existing market competition. Verghese agrees, "The top-tier hotels have the propensity to lower their rates to suit market capacity. Hence they can take up the share of the budget hotels domain and a comparative-relative value evaluation will always incline a customer to opt for a five-star room available around a budget room price. Star properties have the privilege to categorise and match their product to suit the market need."

When prices go down, luxury properties get affected but they don't run into a loss whereas budget hotels find it difficult since their market share is reduced due to discounted luxury rooms - the pie remains the same, the divided slices become smaller.

ARR trends

It was widely speculated that ARRs in India were among the highest in the world but this year has seen a considerable dip over the past months. Verghese explains, "ARR is basically a supply-demand situation. Also, it reflects the market capacity and market dynamics - there were customers and corporations willing to pay such rates hence they existed in the market. And now, the market dynamics have caused the ARRs to dip considerably."

The market functions with a cyclic process and the ARRs will increase again. "It might take at least a year or two for the rates to come back at par with prices from 2007-08, with investor confidence boosted enough to start spending again," comments Verghese.

VAT increase

The commercial tax department of the government recently announced a hike in VAT to be levied on hotels. This new slab system might help small budget properties, but will mainly increase commercial tax collections and the woes of hotel customers. "There is no doubt in my mind that this new system may garner some revenue for the government, but at this point of time when things need to be made more affordable for people to deal with, increasing the VAT on hotels will only make services more expensive for guests," states Verghese. The government needs to see the benefits in free flow of commerce and encourage a progressive business environment. The slab system may benefit small hotels, since a smaller business paying lesser taxes will survive better; but paying no taxes at all will always be most beneficial for any business.

"International guests ask us why they have to pay such high luxury taxes. Lower taxation gives the people more confidence and spending-power with their money, which in turn keeps the economy ticking - a production and consumption cycle of the economy whose development is getting hindered by increased taxation" adds Verghese.

Toughing it out

Being part of a hotel chain, the ITC Kakatiya has operating directives that take into account such incidents of economic turmoil. When nothing can be done about the global scenario, one has to look at cutting costs at home. Taking amenities like heat, light and power into consideration, even under normal circumstances any organisation tries to conserve energy and reduce its carbon footprint.

"In the case of economic downturn, we adopt strategies such as zoning off areas, certain areas or floors in the property are closed off and energy consumption is greatly reduced. Out of necessity came the need to look for alternate energy sources. We buy wind power and are promoting investments in wind energy. Another method is to introduce variable frequency drives into large electrical machines such as air units and refrigeration so as to utilise only the optimum power required", elaborates Verghese.

Importance is given to every department through the appointment of an Energy Champion, who advise on how to run the various departments in an energy efficient manner. The hotel property runs on a centralised, integrated Building Management System which controls the energy consumption from one computer station. "We're using technology to bring in this control and manage concept", adds Verghese.

Apart from these cost efficiency initiatives, the Kakatiya people have to work harder. Instead of waiting for business to come in, they are going out in search of business. Verghese shared, "Now, even general managers are required to go out making personal calls to rake in business."

The ITC brand is offering many incentives to attract more clientele. "At the ITC Kakatiya we have an 'Upgrade Offer' where guests accompanied with spouses get upgraded to higher rooms; then we have culinary and KayaKalp Spa holidays as well," shares Verghese.

ITC has future plans on the anvil for Hyderabad; they have acquired land in the Hi-Tech City area. Across the southern region they already have huge properties in the development stage - the ITC Grand Chola in Chennai and ITC Gardenia in Bengaluru. "The Grand Chola will be one of the largest properties to be established this side of the world; a high end luxury product that is going to set new standards of its own, a benchmark that no other hotel investment in India can match up to," expresses Verghese.