 If I had a rupee for every time someone commented on how expensive Indian hotels are, I would be a very wealthy man today. Not only do I hear this from people outside the industry, I get this statement from reporters every time we speak and shockingly, even from people within our industry. The statement or question is usually tinged with an undertone of accusation as if Indian hotels are overcharging for their product and forcing guests to pay a rate that is beyond what the hotels deserve for their product and services. Nothing could be further from the truth! Let’s take a look at some data points that will shed more light on the true picture on the ground.
 India currently features about 96,000 branded rooms across all positionings, with supply having almost quadrupled from 25,000 rooms back in 2000/01, reflecting one of the most significant increases in hotel supply anywhere in the world. In fact, 32 per cent of hotel rooms in the country are less than two years old and 60 per cent are less than five years old. So basically, 60 per cent of our branded inventory opened during the five worst years of financial crisis the world has seen since the Great Depression. One would expect that such a steep increase in supply would have had a severe impact on occupancy levels but that has not been the case. While supply exhibited a compounded annual growth rate (CAGR) of 18 per cent for the country over the last five years, demand exhibited a CAGR of 16 per cent, testament to the strength of our markets and the significant amount of unaccommodated demand that still exists and uses the unbranded hotel sector. Given the strong growth in demand, most of the new hotel supply was absorbed and nationwide occupancy exhibited a CAGR of -1 per cent for the past five years.
As the table shows, that is unfortunately, only part of the story. As new supply entered various markets, hotels seem to have panicked and dropped rates pretty much across the board, even in markets where occupancy levels remained stable or even increased during the last five years! This trend holds true even when we analyse average rates by positioning to negate out the impact of a greater proportion of budget and mid market hotels opening across these markets. Given the nervousness amongst hotels, nationwide average rate exhibited a CAGR of -6 per cent during the last five years.
It is also sobering when we look at the larger picture. Almost half of our branded hotels attained an average rate below $100.00 in 2012/13. Only 7 per cent of our hotels attained an average rate of over $200 and no city hotels in the country attained an average rate in excess of $300, which is shocking.
I also shopped around on some OTA websites for a hotel room from December 8th -15th, 2013 across some major cities. Here are the rates I was able to find for hotels that were classified as five-star by the websites.
These data points lead to two easy conclusions. The first, that contrary to popular belief, Indian hotels are not expensive when compared to other hotel markets across the world. The second is that as an industry, we have a problem.
As I speak to hundreds of sales managers and general managers across the country, the general feedback is that companies have become very price-sensitive and that it is difficult to increase rates. While I agree that revenue management is extremely important, giving your rooms away at ridiculously low rates is not revenue management. Anyone can sell a product that is being offered at a half-off sale and hotel owners don’t need our trained hotel professionals for the same. The goal has to be to first understand the value of your product and what is the rate that you absolutely deserve for the product and the service you offer as a professional. Customers will always be price-sensitive and hotels need to work harder to make them look beyond the price. The goal when selling any product is to earn the loyalty of the consumer, and dropping rates constantly is unfortunately not the right way to earn it. We have now created and fuelled a mindset where the client is attuned only to the rate offered and is primed to jump when offered a lower rate elsewhere. The school of thought that while we may have brought in the guest at a low room rate, his spending on F&B and other services will make up for some of the lost revenue has also been proven wrong, as these guests are eating elsewhere at more affordable places.
So we have upscale hotels competing with mid market hotels, and mid market hotels competing with budget hotels, and budget hotels competing with unbranded hotels. Obviously something needs to give. As hotel owners battle increasing land, construction, financing, and operating costs, hotel companies really have no choice but to go back to the drawing board and redo their rate strategies. The days when owners looked at hotels as fashion accessories that enhanced their social status are nearly history. The new generation owner is savvy and increasingly focused on financial returns. Having built hotels to the exact specifications and demands of the brands, owners will now hold them responsible for delivering the returns that were implied, if not necessarily promised.
It will be important the industry realises that hotel rates don’t have to be subject to the laws of gravity before it is too late.
Â
