Down, But Not Out

Pavan Lall Dec 01, 2020

Recent months have seen the largest companies in the hospitality and tourism business scramble for contingency plans and emergency strategies to tackle the twin problems of zero incoming foreign tourism and the clamp-down on inessential expenditure by domestic consumers, precipitated by lockdowns and changing attitudes towards large social gatherings.

However, the largest hotel chains in India across price points, say that alternative revenue streams are slowly starting to pay off, foreign travel will resume in two to three years. The recovery when it comes, will be driven by domestic tourism and rupee spends though, and not foreign dollars.

Nakul Anand, Executive Director at conglomerate ITC, which operates the ITC hotel chain, points out that tourism contributes to almost five per cent of India’s GDP. Implicitly, the downturn in the sector will impact the economy to that extent. “In our past lies our future. It is not just about the hotel industry but of reimagining tourism India in its entirety,” says Anand. “Crisis can be adrenalin for innovation causing barriers that once took years to overcome, evaporate in a day. Entrenched orthodoxies are being replaced overnight,” he emphasises.

He has a point. For starters, the expansion spree has slowed. According to data compiled by H.V. S. Anarock, hotel companies and owners are postponing their hotel openings. For instance, around 5,050 branded keys (rooms) were signed across the country in the first half of this year compared to approximately 9,500 branded keys signed in 2019, which is a drop by almost half.

Giri (Giridhar) Sanjeevi, Executive Vice President and CFO at India Hotels Company Limited (IHCL), the Tata-owned hotel chain, says that going forward and as part of the reinvention, hospitality companies will have to think more like technology companies and less like infrastructure players. “The build-own-operate model is a thing of the past and changing cost structures mean that a hotel also has to generate stronger profits from smaller revenue,” says Sanjeevi.

Last year, IHCL closed with a revenue of Rs 4,600 crore and an EBITDA of Rs 1,100 crore. The idea is to run more and more management contracts, and look at different cost lines and reduce them. For example, the staff from existing hotels in the New Delhi region will be deployed to an upcoming hotel there. He acknowledges a pull-back in business travel, but IHCL is on track with the re-launch of two hotels in New Delhi this October – the Connaught and the Taj Mahal Delhi. “Aspirationally, the hope is to achieve similar profits at a lower top line in the coming years,” says Sanjeevi.

LOCKDOWN-DRIVEN DECELERATION

Occupancies for the Taj Group range between 30 per cent and 50 per cent, he says. That’s down considerably from past years. It’s similar for other large players. Neeraj Govil, Senior Vice President – South Asia, for Marriott International, the largest hotel chain in the world, says that the chain’s occupancies for August were at around 20 per cent and will get to 25 per cent in the next quarter. “Last year at the same time, it was typically in the high seventies,” says Govil.

“India has a huge domestic base and that will be the saviour,” he goes on to say. Govil does not see a turnaround before eighteen months. He says that his hotels have seen bookings climb in the last six weeks and a spurt in business for resort locales that include Goa, Mussoorie and Mahabaleshwar.

Anil Chadha, COO - ITC Hotels, says that while things are still extremely uncertain at this stage, much will hinge on when restrictions are lifted on travel, hotel stays and gatherings like conferences and weddings. “We will also need to see how international travel makes a comeback. It is, however, estimated that once the overall Covid numbers in the country stabilise, business travel will resume and we will see a gradual pick up in Quarter Three of the next year.” The universal truism though, is that as with every other business, hospitality too will only bounce back once a Covid-19 vaccine has been approved and launched. “We need to remember that traveller confidence will completely be restored only when the vaccine is mass manufactured and freely available,” points out Chadha.

Patu Keswani, Founder and Chairman of mid-market hotel brand Lemon Tree Hotels, says that based on the three big pandemics the planet has seen historically, recovery is imminent within three years. He takes a contrarian stance when he says that customer behaviour would revert back to normal. “If you see how the other big pandemics played out, nothing really changed a few years down the line. All the changes in human behaviour proved to be perishable,” says Keswani, “So sanitisation, social distancing, gloves and masks will all vanish one a vaccine comes and you will only see evidence of it Online in the future.”

SHIFTING SANDS

There are other changes at play. “Hotels will have to redefine and repurpose their spaces, places and experiences arising from the dual concern of distancing and disinfecting striking the right balance of connect and space. People would realise that a cleaner building, with lesser touchpoints, lesser possibility of bacteria, and such, would only improve health and immunity,” says Nakul Anand.

In many ways, especially after the advent of the management contract for the hospitality trade, project expansion has become easier for hotel brands because the capital allocation for new properties shifted from the balance sheet of the brand to the operator or the real estate developer. In other words, it’s got more in common with the infrastructure sector than aviation or travel and tourism, opines K.B.

Kachru, Vice President of the Hotel Association of India. “Meanwhile, anxiety runs deep – sentiment is low, accept it or not,” he goes on to say.

A significant ownership of hotels in India reside with real estate developers. With the real estate sector under severe stress, developers may look to monetise their hotel assets to manage cash flows and debt. Also, with the office leasing business showing a considerable slowdown and most companies putting their expansion plans on hold, corporate business for hotels will see a much slower return, which is the mainstay of the sector.

The Covid-19 pandemic has had an unprecedented impact on the growth of the sector in India. According to Mandeep Lamba, President, South Asia, HVS Anarock, over 26,340 rooms were added in the organised or branded hotels segment during 2017-19. As of May 2020, that supply was forecast to increase at a CAGR (compounded annual growth rate) of 2.8 per cent (adding approximately 44,000 rooms) during the 2020-2024 period. “However, given the recent events, supply growth is now expected to be lower, and at a slower pace, than previously anticipated,” says Lamba.

Under-construction projects may face delays on account of labour shortages and issues pertaining to vendors and supply chains. Muted market conditions will likely lead to delayed openings; some projects may be on hold pending recovery. Financing challenges on account of negative sentiment for the sector is likely to delay projects. Changes in market conditions may render proposed projects unviable. Some projects may consequently, be postponed.

Some properties may close on account of financial stress and not reopen for an extended period of time, resulting in negative supply growth. Prior to Covid-19, over 11,500 rooms were expected to be added to the supply in both 2020 and 2021. “However, we now expect only 15-20 per cent of the anticipated 2020 supply to come into the market with the rest being postponed to 2021 and beyond. A similar trend is expected in 2021 as well. Some properties are likely to be repurposed to other asset classes such as hospitals, student housing, and co-living,” says Lamba.

Overseas, hoteliers who have invested in India are conscious that spreading their investments across hospitality segments had offered some respite. Rahul Chaudhary, Nepal-based hotelier and entrepreneur, is Managing Director at CG Hospitality Holdings, which operates properties under contract from IHCL. CG Hospitality Holdings runs four resorts in India’s key sanctuaries, Pench, Panna, Bandhavgarh, and Kanha, all in Madhya Pradesh. Chaudhary says that at present all his resorts are shut and expects them to hopefully open sometime in November. “This is a stressful time for all in the hotel business and if we are to look at getting back to business at 2018 levels, I think we are looking at 18 to 24 months from now,” he says with conviction.

Chaudhary, who is also a stakeholder in a chain of midmarket hotels called The Fern, says that while they haven’t laid off employees, they have furloughed a percentage of their staff and are also looking at renegotiating payment terms with their creditors to renegotiate their contracts. “All we can say, is that our overall portfolio is not just made up of luxury, because that is the segment that is hurting the most.”

Even so, some hotel chains are continuing with some launches that were prescheduled. Puneet Dhawan, Senior VP, Operations, for Accor India, says that his development pipeline continues. Accor India expects to open Raffles Udaipur with 101 keys, Novotel Chandigarh, Tribune Chowk with 120 keys, and the Ibis Mumbai with 257 keys over the next few months.

PROJECT DEFERRALS

Hotel developments across the sector have slowed down, and most hotel openings are likely to be deferred by at least six months to a year. Reduced room revenue, coupled with erosion in both restaurant demand and MICE business too have had a cascading effect on overall business revenues,” says Chadha. Marriott, which runs altogether 122 hotels, and has another 50 under development, will open three more this year. Their three hotels for 2020, says Govil, will include hotels in Nasik, Mahabaleshwar and Ahmedabad.

Marriott will look to open a dozen more next year. “Some plans have been pushed back, around two hotels got postponed,” he says. Other players see a definite delay owing to the crisis. Zubin Saxena, Managing Director and Vice President Operations, for the Radisson Hotel Group, South Asia says, “There is bound to be some lag of 6-12 months for new hotel openings due to the crisis.” Saxena adds that despite signs of an uptick, “the industry is still far from the momentum it had achieved in the pre Covid-19 times. Experts estimate an 80 per cent to 85 per cent erosion in revenue streams.”

Dhawan does not divulge how much Accor’s revenue had shrunk, but admits that, “It is clearly obvious that there has been a significant impact on the hospitality business globally including India, with many international borders still closed. The latest UNWTO report suggests that International tourist arrival plunged by 93 per cent in June vs 2019.”

So how does one handle that sort of pull back? Chadha says that staying lean but operational is the key. “It is important to balance and control costs while working to increase revenues to remain profitable. As we are confronted with the “Survival” phase, it is imperative to focus on how much money is flowing to the bottom line. ITC adopted a short-term cash-optimisation approach by making swift adjustments to operational and investment strategies,” he says.

Will there be a pattern to the domestic recovery? Sunil Narang, General Manager, Four Seasons in Mumbai says that after months of lockdowns and travel restrictions, he is seeing a slow start in travel across the country. “While in some regions, travel, dining and experiences are opening up, in certain places like Maharashtra; especially Mumbai, the market is still regulated in line with the guidelines, and regional travel is only just beginning in earnest,” says Narang. “Travel will return and hoteliers will see the light at the end of the tunnel but the recovery will likely take longer than in other industries and will vary across metros and regions,” he says.

Narang expects the first round of leisure travellers to drive rather than fly in the light of the travel restrictions and economic uncertainty. “This will likely translate into domestic and short-haul distance travel starting off first,” he says. There is obviously, a clear upside for those working on models that include staycations, home-stays and the like, provided state laws stay uniform. Keswani explains, “State restrictions in Rajasthan are next to zero and business there is going full on and rightly so.”

For some players, some markets are proving to be more buoyant. Saxena says, “Overall, tier-1 cities have shown better pick up with quarantine stay and transient travellers contributing significantly to the growth in occupancy. Tier-2 cities are leading the trend on socials and food and beverage (F&B) related revenue with weddings taking place under strict protocols and necessary precautions. Tier-3 markets also show resilience.” He expects recovery to pre-pandemic levels at about 12-16 months from this point. “Quarantine stays continue to be a strong contributor while leisure demand has also found its way back as people start venturing out for staycations and road trips,” says Saxena.

In other towns, which are not dependent on heavy corporate demand, there is an average of 50 per cent occupancy. Markets like Bangalore and Mumbai, where corporate demand is heavy, continue to be tough. “Delhi which is a gateway to resorts and getaways is better off,” says Keswani.

Niche hospitality businesses are also seeing a slowdown. Sudhir Gupta, Founder & CEO, TLC Group, a loyalty programme management company, says that with reduced traffic in hotels, loyalty programmes are seeing a slowdown in terms of enrolment and usage of members. “However, there are some green shoots of programmes that are specific and in regional local markets and offer deals and attract deal-seeking audiences. Some customers are investing in loyalty programmes to get benefits they can use for the future,” he says. Gupta believes that by the end of the year the TLC Group would reach 60 per cent of its pre-Covid-19 numbers. “The first to usually come back are the loyalty programme members and that’s a strong indicator in the sector,” says Gupta.

Still, standalone properties in big metros are wary of ringing the recovery bell anytime soon, Chris Franzen, General Manager of the Grand Hyatt in Mumbai, which does a large chunk of business through weddings and meetings, says that India’s business districts Mumbai, Delhi, Bangalore, Hyderabad and Chennai, continue to drive demand for one other and other smaller destinations in the country. “Till the fear to travel to local offices diminishes, it is difficult to expect guests from these cities to travel across cities and states and bring back the demand,” he adds.

Ajay Bakaya, Managing Director at Sarovar Hotels and Resorts, agrees. He says that leisure is going to lead the way back, for the simple reason that there is no foreign influx to spur demand in a short time. “A strong leisure-based portfolio company will see a faster recovery, as opposed to those without,” he says, adding, “MICE business and corporate travel will be second last. “

In March 2020 Franzen believed that he would be back in business by November. “Guessing again about the horizon, I would like to state that we should ‘hope to get back to pre-Covid demand levels in 18 months from now,” he says now. Bakaya is more optimistic. “Business travel should start gaining momentum in three to six months of a vaccine coming,” he says.

CRISIS DRIVES INVENTION

Companies are looking to innovate and generate parallel income streams. India Hotels Company Limited for one, has jumpstarted plans to grow its homestay business under the brand Ama and has projected to grow 15 properties around 50 in the next two or three years, officials say. Most of their properties are close to or around metro cities or resort towns like Goa, Mumbai, Coorg and Cochin. Marriott is also localising its supply chains and services and reducing its operating costs and pushing new ground on the food and beverage service. Now they’re even providing lunch boxes to auto companies that are testing their new cars during marketing and sales under a delivery service called Marriott On Wheels. Others like ITC, which kicked off its ITC Gourmet Couch and IHCL that launched its food delivery app called Qmin, are also likely to retain such rollouts, according to company officials. Speciality restaurants have a better chance of bouncing back, but casual bars and nightclubs won’t have it easy, predicts Kachru.

Resilience is the common strain that echoes across hotel chains, where technology is likely to drive growth.