Hotels Should Immediately End Price War

THERE ARE many reasons for a large number of hotels making losses and turning into non-performing assets despite reporting high occupancies. Revenue in respect of Room and Food & Beverage are not increasing as they should. On the other hand, expenditure on raw materials, manpower, heat, light, power and taxes is increasing.

Non-payment of interest and loans results in increase in liability to banks and financial institutions. The final result is loss / lower Profit.

Hotels in India may be enjoying occupancies of 65% and above but are heading for difficult times.  Most of the hotels which have come up in the recent past in the National Capital Region have lower ARR, with five-star deluxe hotels between Rs. 6,500-7,000 and for 5-star hotels Rs. 3,500-4,500.

Hotels, in order to achieve higher occupancy, give lower rates to corporates, Airlines, Tour operators and OTAs. Most of the hotels, apart from giving lower rate, offer freebies which cost a good amount. The freebies include:

·         Pick-up / drop service from airport                                         Rs, 1,000

·         Welcome drink on arrival                                                         Rs.       30

·         Mineral water, despite having water filtration plants              Rs.       20

·         Breakfast comprising over 50 items and multiple cuisines     Rs.     600

·         Wi-Fi                                                                                         Rs.       50

·         Sauna                                                                                      Rs.       50

·         Some hotels give 50% discount in Bar on drinks during Happy Hours

·         Confectionery items 50% discount from 8 p.m. onwards

In other words the total amount of freebies comes to Rs. 1,750. Estimated operational cost of maintaining a room is Rs. 1,000 for a five-star hotel and much more for a deluxe hotel. Net recovery of the room will be Rs. 750.

In addition, there are other expenses such as rent, taxes and interest on loan, depreciation, etc. resulting in further losses for the property.

Another department where hotels continue to offer discounted rates is the Banquets in comparison to stand-alone Banquet halls resulting in lower revenues / profits. Private caterers organize banquets, especially weddings, with tented, air-conditioned halls, and charge rentals of Rs. 15 lakh to Rs. 25 lakh while farm houses charge rentals from Rs. 5 lakh onwards. In addition, the private caterers charge separately for food, a good-quality menu costing Rs. 3,500 to Rs. 4,500 per head.

Five-star deluxe and 5-star hotels either do not charge for rental or even if they do, charge negligibly. Even the food charges are modest, ranging from Rs. 3,000 to Rs. 4,500.

 I suggest that hotel general managers in every State and city sit together along with their associations like FHRAI / HAI collectively and take a decision on the minimum rates to be charged for rooms during various periods of the year.

Hotels competing for higher occupancies by resorting to discounts and freebies resulting in lower ARRs are only harming their balance sheets. Beneficiaries of this competition are the corporates, Travel agents and OTAs who buy the rooms at a lower rate and sell at higher rates. Hotels should stop discounts as well as curtail the number of freebies or else face the consequences.

In my view hotels should immediately end this price war, increase ARR for 5-star hotels to a minimum of Rs. 5,500 and five-star deluxe hotels to Rs. 7,500. They should preferably make their product and service value a decider of their room rate strategy. In respect of Banquets they should increase rates and hall rentals as stand-alone banquet operators are doing.

In case hotels do not stop this price war of discounts and freebies they will continue to bleed, resulting in losses. The Hotel industry will become sick and this will inevitably lead to lower investments from within the country and abroad.