12.1 Why the Hotels sector?

The past few chapters have been about heavy industries – cement and steel, banking and insurance. These are the building blocks of an economy. We will study more building blocks, but let’s slow down a bit. Let’s explore a few sectors that are indicators of an economy’s growth and prosperity.

We will explore the analysis of the hospitality sector, more specifically, the hotel industry. How can hotels indicate economic prosperity? Hotels are essentially a discretionary spend. People spend on hotel stays after they have fulfilled their necessities. When more and more consumers can spend on things other than necessities, the economy is said to be growing. Remember how consumers continued to spend on groceries but stopped traveling during the Covid lockdowns?

As I write this chapter towards the end of 2023, hospitality is said to be the strongest employment generator, as other sectors are going through a slowdown. Post-Covid travel boom, destination weddings, business travel and events, and the opening up of new airports under the UDAN scheme are all said to be the demand drivers for hotels and hospitality at large.

12.2 – The hotel industry in India

• • The hospitality sector is arguably one of the largest employers in the world and in India. It employs about 10% of India’s workforce directly and millions indirectly.
    The housekeeping staff, servers, concierge, etc, are direct employees of a hotel. Laundry staff, security staff, cab drivers, etc, are indirect employees.
  • India’s hospitality sector is valued at ~$24 billion in 2023. It is expected to reach $29 billion in 2028. Note that this is a forecast for the hospitality sector, not just the hotel industry. Hotels are a large part of the hospitality sector. Restaurants are another large part. I plan to cover restaurants separately as they have different economics and key performance indicators.
  • International tourist arrivals were under 11 million in 2019 and over 6 million in 2022, as per the Ministry of Annual Report 2022-23. India Brand Equity Foundation (IBEF) expects this number to surpass 31 million in 2028.

12.3 – Features of the sector

Hotels are a service industry. Unlike salons, movies, laundry, or plumbing, where a service could take only a few hours, hotels offer a longer form of service that could last a day, a few days, or even weeks. Therefore, the sector harbors some peculiar features.

People-intensive – Hotels are people-intensive on both customer and employee fronts. How customers experience their stay can determine whether they would like to return in the future.

Throughout their stay, a customer would interact with the valets, security guards, receptionists, concierge, bellhop, butlers, servers, and housekeepers, among others. Each of these professionals has different skills. Each one of them is expected to have great soft skills too.

For that, employees have to be adequately trained in their respective responsibilities. Keeping employees motivated in the hotel industry is a challenge. Angry or demanding customers could hurt employee morale. Training them to handle such situations is imperative.

You will notice that these aspects are qualitative. There are ways to measure customer satisfaction, but none is definite. Every hotel or organization will have its own way of measuring customer satisfaction. Two customers can rate the exact same experience differently.

The involvement of so many people in delivering a service makes it an operational challenge. Margins are difficult to maintain. Large hotel chains become large by establishing standard operating procedures and controlling wastage and costs.

Experience is the product – Like any service industry, a hotel stay is an experience. And experience is an outcome of several elements – decor, staff demeanor, staff’s level of knowledge, quality of the bed, cleanliness of the room and common areas, goodies or freebies in the room, facilities on the property, etc. 

Again, the effectiveness of all these offerings may be difficult to measure but they do collectively build a customer’s experience. Certain offerings may improve customer experience while others may not. The factors that do not improve experience are very important. They are the bare minimum factors. For example, having drinking water in the room does not improve your experience, but not having it could seriously annoy you.

As the price point inches up, the level of the bare minimum also moves up. As more hotels start offering added services, very soon, those services will become the standard norm or bare minimum. Therefore, hotels charging a high price must keep innovating to augment and differentiate customer experience.

Offering differentiated experiences comes at a cost. Employee training also has to be more frequent and regular. Experiences can drive revenues as well as costs. In doing so, an efficient business is one that can balance profits. 

New daily inventory – Suppose your local fruit vendor intends to sell 50 kilos of fruit every day. But today, he could sell only 40 kilos. He can try to sell the remaining 10 kilos the next day on top of the daily target of 50 kilos. He might even succeed. Can the same happen with a hotel? If a hotel with 50 rooms could sell only 40 rooms in a day, it cannot sell 60 rooms the next day. The next day’s inventory will again be 50 rooms only. This is similar to airlines – unsold seats cannot be carried forward to the next flight.

However, only room inventory gets reset every day. Most other things and services that a hotel sells are not limited by a daily inventory. Restaurants can sell more food than their tables can accommodate by offering deliveries and room service.

Seasonal business – Children’s vacations, wedding season, monsoons, festivals, etc., are major determinants of the level of business a hotel will get. Families often plan their holidays during their children’s vacations. Hotel properties in tourist destinations often see a large influx of customers around vacations. Rooms rates also surge accordingly.

Most weddings in India take place between November and April. Destination weddings have also become popular. Therefore apart from driving the demand and prices of banquet halls and party lawns, weddings also boost the demand for hotel stays. Increasingly, most large hotels now have wedding venues as part of their offerings.

Many tourist destinations are open only for a few months during the year. Ladakh, Kedarnath, Badrinath, and Doodhsagar are some examples. Hotels in such places do not have business all year round.

Seasonality may often be reflected in the quarterly revenues of the businesses most affected by it. To mitigate this, hotels offer special discounts on room stays. The idea is to offer cheaper rooms and get customers to spend on food and beverages. Price competition is usually high in a dull season.

There are businesses that enlarge their target market by altering their offerings and marketing efforts. I am talking about Airbnb here. By popularizing homestays, Airbnb practically created this working class of people who call themselves “digital nomads”. They travel places for weeks and months. They work out of Airbnb’s homestays. Then the terms “staycation” and “workcation” came up.

This new category of travellers inspired conventional hotels to offer similar arrangements. Boutique and business hotels started offering weekly and monthly plans. Lemon Tree is now offering “day-cation” or day rooms between 7.00 am and 5.00 pm.

These innovations in room plans, price points, and overall offerings are meant to improve the return on asset ratio. The next point discusses this extensively.

Capital-intensive – Picture this. There is a wedding in your family. You will probably be buying clothes, gifts, and jewellery worth lakhs. You and a few family members would spend a few hours at each store choosing and buying these things. 

It is going to be a destination wedding. The stay and wedding venue at a hotel will also cost lakhs. The hotel stay would be for a few days. You will need rooms for your guests and venues for all rituals and functions.

The point I am trying to make here is that the hotel will need much more space to deliver its offerings. This space, or real estate, is often a fixed cost. Space requirements are relatively smaller for a store.

Therefore, return on assets, or return on fixed assets, is an important metric for hotels. Hotels will always try to maximize their revenue per square foot to improve their return on asset ratio. They offer many add-on services to get their customers to spend more. Salons, spas, fitness classes, drawing classes for kids, bicycle rentals, gaming centers, etc., are a few such services I can think of. There can be many more.

A fixed-cost business often has a long gestation period. This means that if you are looking to develop a new resort, it could take a few years between the time you buy a land parcel, begin construction, and start serving customers. The money you employ will yield no returns for these years. Ratios such as return on equity and assets are impacted.

Many hotel chains run a mix of owned, managed, and franchised properties. There are various combinations. Let us see a few examples to understand these types of properties.

• • IHCL owns and operates the Taj Mahal Palace & Tower, Mumbai. EIH owns The Trident Nariman Point in Mumbai.
  • IHCL does not own but manages the Umaid Bhawan Palace in Jodhpur. 
  • Chalet and SAMHI own and operate hotel properties, but they take brand franchises from the likes of Marriott and IHG.
  • Club Mahindra may own or lease its properties under its brand name. It also has short-term inventory arrangements with the local players at many destinations. 
  • Lemon Tree has a mix of owned, leased, managed, and franchised properties under its own brand name.

Managed or franchised properties enable a hotel company to grow its capacity without investing much in fixed capital.

If a large chunk of properties are owned, the chances of high debt on the balance sheet are also high.

Large unorganized sector – According to an estimate from Nov-2022, about 1.5 lakh hotel rooms are in the branded category or organized sector. Compared to that, independent hotels in the unorganized sector collectively had 29 lakh rooms. The unorganized sector may have rooms ranging from economy to luxury. Therefore, the level of competition arising from the unorganized sector may be difficult to ascertain. Nevertheless, the organized sector can attract more customers by virtue of their brands.

Having discussed these features, we are all set to dive into the key performance indicators of the hotel industry. But I will take it up in the next chapter for the sake of brevity.

Key Takeaways

• • Hospitality, especially hotels, is one of the largest employers in the country.
  • Hotels are a people-intensive business with respect to both customers and employees.
  • Experience is the product that hotels sell. Rooms, food, and other services are a part of that experience.
  • Room inventory cannot be carried forward. Today’s unsold rooms do not increase inventory for tomorrow.
  • Hotels are a seasonal business. Children’s vacations, wedding season, business travel, etc, can drive the demand for hotel stays.
  • The industry is capital-intensive. Investment in real estate is large. Therefore, some hotel operators may take properties on lease or rent instead of acquiring properties.