Indian hotel market eyeing midscale category for growthApril 17, 2015 / By
Culturally speaking, India is a country that very well might be the most diverse place in the world. It has an intense mixture of landscapes, magnificent historical sites, colourful people, and rich traditions and festivals that mesmerise tourists and visitors alike. At the same time, the Indian hotel sector has been a great contributor to making its guests feel comfortable and at home.
With more international players entering the market with sophisticated services, competition is growing increasingly fierce. With higher degrees of professionalism in the business, guests expect more and better services. In such a situation and, balancing cost against experience, the Indian hotel business is exhibiting an interesting trend, especially within the luxury and midscale segments.
International tourists, a core clientele of the luxury segment, are not generating enough demand in comparison with the increased room supply. According to the Ministry of Tourism, from 2011 – 2014, the number of international tourist arrivals had a CAGR of 6%, whereas the supply of luxury rooms in India grew by over 10%. As a result, the Average Daily Rate did not rise to the level expected. The luxury segment now sees some hotels generating more revenues from non-core activities such as food, beverages and banqueting than from room rates. Certain debt-heavy hotel chains have decided to limit capital expenditure by acting only as hotel operators under management contracts, rather than as hotel owners.
On the other hand, the number of domestic tourists grew by 10% from 2011 – 2014 and branded hotel chains have started tapping this strong internal demand. This can be seen through the supply dynamics of branded rooms, which are in the process of being re-aligned. The upcoming room supply in the luxury segment is not increasing much, while there is a higher growth in room numbers in the mid-segment (see graph) that caters to the rising Indian middle class. This brand-conscious, internet savvy and ambitious middle class finds that mid-segment branded hotels address the aspect of affordability, and this middle class demand is likely to continue as inflation in India is held in check and results in higher disposable incomes.
To have a well-rounded growth in hotel-room demand, the government realises that some policy changes are necessary. The visa-on-arrival facility is to be made available to citizens from 180 countries, up from 43 as of now. Also, the government will try to implement this within six months and before the next tourist season begins in October 2015. The easing of other visa regulations is likely to help drive international tourist demand, a segment that badly needs a push.
Occupancy is always a lead indicator to change in the cyclical performance of hotel markets worldwide. A recent survey undertaken by JLL suggests that there was a slight growth q-o-q and y-o-y in hotel occupancy levels in 4Q14 in India. As and when the economy improves, the highly correlated hotel market should improve shortly thereafter – starting first with an increase in demand for midscale rooms, followed by revival in the luxury segment.
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