Impact of Covid-19 on Independent/Budget Hotel Industry in India
The Covid-19 is a black swan event which has affected each and every industry in the world, however the effect it has had on the Travel & Hospitality sector in a very short period of time has been unseen or unheard of. The virus has unleashed itself across the world and India is no outlier, we have been witnessing a steady increase in the number of active cases on a daily basis. The common consensus backed by medical experts has been that isolation and lockdown are the first steps in slowing down the spread of this virus.
In line of this, we appreciate the swift decision made by the Central Government to put the country on a complete lockdown effective 24th March 2020 until 14th April 2020 and further extended till 3rd May 2020, this has significantly slowed the growth rate and given us time to ramp up our medical facilities and plan for the future.
While the lockdown has been done keeping the best interests in mind, it has had a catastrophic effect on the country’s economic activity and a recession in the coming few quarters may well be imminent. It has had a massive cascading effect on the hospitality industry in India, with the cancellation of flights & trains across the country, hotel bookings have faced monumental cancellations and that has had a ripple effect on Travel Agents, Taxi Operators, Handicraft Showrooms etc. Hotels across the country are now virtually closed for the last one month or so with essentially zero revenues while having to bear with mounting fixed costs.
Over the past few weeks, we have come across plenty of publications and articles that have discussed the impact of Covid-19 on the Travel & Hospitality sector of India, however most of the conversation has been restricted towards the mid-market/premium branded hotels segment of the market. However, independent/unbranded operators, who form the bulk of the hospitality industry, are generally ignored or overlooked. This article primarily draws attention to smaller chains of Hotels/BnBs and alternative accommodations like ours (Le Pension Stays) that have facilitated the Domestic & International Traveller.
Brief look into the growth of independent operators and domestic tourism:
Let us first discuss a little about what led to the growth of the unbranded and alternate accommodation (Home Stays, Hostels, Airbnb’s etc) segment in India. The last 5 years has seen tremendous supply growth in this category, with small property owners converting their assets into guest houses, Backpackers hostels and Homestays, choosing to either operate such properties themselves as a side gig or leasing their assets to other professional operators. The demand for this was primarily driven by millennial travellers who have been smitten by the travel bug.
Social media platforms such as Facebook, Instagram and Twitter have been extensively used by travel bloggers and influencers, often recruited by State Tourism Ministries, Travel Magazines and other market players like MakeMyTrip, Tripoto etc to advertise domestic tourism and motivate people to explore India. The fact that we have the largest train network in the world and a growing network of flights covering each and every corner of the country has logistically made it much easier for us to explore our vast country as compared to 10 years ago.
While marketing has played a key role in mobilizing travellers, better affordability thanks to a myriad of accommodation options ranging from pocket & youth friendly backpackers’ hostels to boutique BnBs and Homestays have offered something for every kind of traveller depending on budget and requirement.
Pick any famous tourist destination in India, for ex. Udaipur, Jaipur, Coorg, Kasauli, Rishikesh, Daman, Diu, Dharamshala. Today, a traveller has the freedom to book a room or a dormitory bed anywhere from 200 INR – 5000 INR. This leveraging factor for travellers has enabled all of us to look at the country and the world with open eyes without burning a hole in our pockets.
Finally let’s not forget the instrumental (as well as somewhat diabolical) role Venture Capital money has played in the travel sector for the last 5 years. OTAs and companies like OYO flush with investor money with a single point agenda – capture as many travellers as possible, offered discounts ranging from 30% up to 70% on gross room rates. This meant that a room which was priced at Rs 1,000 could be booked for as low as Rs 400 by a client, that too sometimes including breakfast. OTAs would fund these discounts themselves (thanks to the investor money) and charge a comission of an average of 20% of the gross room rate and the operator would get a pay out of Rs 800.
So, while this discounting party was on, graciously sponsored by Indian & foreign investors, travellers made merry, booking hotels, tickets, activities et all at massively discounted rates. One might think that it was a win-win for both the clients as well as the operators but it wasn’t so.
By 2019, the funding had slowed down and companies were asked to start concentrating towards their bottom line, this meant that the discounting was tapered down to a more conservative figure of 15-20% however the market rate expectation for a room in a decent hotel had already plummeted. Independent hotel operators enjoy little brand equity and massive competition, a potential client at any point of time has at least 50 options to choose from, so if you are an independent hotelier who is not willing to offer an aggressive discount on your room rate, someone else will! So, while sales surged for such independent hoteliers in the short term, it permanently dented the market structure in the long term.
Role of Independent/Budget accommodations in the Indian Hospitality sector:
Renowned hospitality consulting firm Hotelivate, pegs the total number of rooms in India at 2.72 million (as of September 2019) and out of this, they estimate that a whopping 72% of the inventory belongs to the Independent/Unbranded segment. Alternate accommodations such as Home Stays, Guest Houses, Backpackers Hostels etc contribute another 15% of the total number of room inventory, which means that 87% of the total number of rooms today are being managed by independent/small hotel operators. This number is also of significance when we consider the amount of employment this category generates, Hotelivate estimates that close to 2.4 million people are employed by the industry in total out of which almost 81% are employed by the independent/unbranded category.
Source: Hotelivate
Let’s look at this segment from revenue point of view, one could ascertain the segment's revenue contribution from the historical GST collections. Between July 2017 to March 2018, the Indian hospitality sector paid close to Rs 6,709 crores as GST collections out of which almost 38% came from the independent/unbranded segment. So, while at an individual level the contribution of small hotel operators may seem to be insignificant, the segment’s contribution on a collective level is massive and cannot be ignored. Both the central as well as state governments will have to play a crucial role to protect this segment lest it leads to a massive downturn and business closure which will eventually translate into loss of tax revenues as well as employment.
Typical operating structure of an independent Hotel:
Generally, an Independent Hotel or Chain of Hotels in India is bootstrapped/self-funded. Investors in this field are hard to find as smaller operators focus on profits and not growth at all costs with the intent to build scale at a rapid pace, operators rely on customer goodwill and positive reviews to flourish.
Given this constraint, independent operators may expand to 4-5 self-operated properties and a few more under the franchise model. Independent operators in India primarily operate through the property leasing model, wherein they take up a property on a long-term lease with fixed monthly payments, invest in its renovation and then manage and operate it with their own staff.
This works well since it is somewhat an asset-light model and the operator does not have to invest significant capital and the break-even period is much shorter. Let’s look at the cost structure of such hotels:
Source: Company Estimates
As can be seen, more than 60% cost of running such a property is fixed. A scenario where revenues are 0 and fixed costs intact, begs the question of business continuity itself. Independent hotel operators don’t draw fixed salaries to live on, the money they make is from the profits after covering costs. In a country like India, if you are a very good performing hotel, with great reviews, good staff and a control over your operating costs, you may manage a year-round occupancy of 55-60%. In such a scenario, typically hoteliers are able to draw profits for 6 months, cover costs for 4 months and suffer a loss for the remaining 2 months, essentially meaning the small operators are left with very little retained earnings to drive through a phase of prolonged closure of business.
Where we stand today, there is absolutely no question of inbound tourism resuming in India for at least another 2 quarters, domestic tourism, however may revive in the next 3 to 4 months. This means that operators are now facing the possibility of little business for a period of 5 to 6 months with massive fixed costs, low business reserves and a big question mark on their own survival itself.
It is important to note here that unlike the industry giants, small companies like Le Pension Stays have little or no cash reserves to survive the delayed repercussions of a Pandemic Like Covid-19. It is one thing to go through a slow month and another to drop revenues to ‘0’ whereas the liability part remains intact. The landlords still require rentals, the staff which has worked tooth and nail for the company to grow still needs their salary to feed their families. The utility bills, Bank EMIs, necessity expenses, software costs are very much still due. While the bigger firms can invoke “Force Majeure” and strong arm the vendors to hold up any invoices, a chunk of the industry does not have such negotiating power.
In view of the above, we foresee mass scale closure of independent properties with 10 – 15 rooms across India. Such business operators will be left with no option but to wind up and look for alternative professions since it’s a question of their survival. This would also mean a large-scale erosion of employment opportunities. It is important to note here that this segment employs individuals from varied backgrounds and most of them are without professional degrees or certifications, a lot of our staff is constituted of people who have studied till only 8th or 10th standard but have been working with small hotels for a long time and have honed their skills and have been trained by hoteliers. It is important to ascertain the impact of such an eventuality on these individuals.
Flip-side of the virus outbreak:
A by-product of this business downturn could be a realignment in property rentals across the country with rentals dropping anywhere between 20-30% from the current levels. Some of the most popular tourist hotspots in India today are also the most expensive for Hotel Operators from an operational feasibility point of view.
The last few years has seen commercial property rentals almost tripling in certain tourist hubs like Goa, Dharamshala, Mussoorie etc. This is when concurrently the room inventory has gone up and ARRs have gone down significantly. An average or below average property demands rentals starting as high as Rs 160,000 per Key per year and it can go up to Rs 400,000 for better luxury properties.
As a result of this, most of the well-functioning brands in our country target an average occupancy of 65%-75% while charging lower ARRs to draw profits.
Till a year back, an independent operator had the option of partnering with Hospitality management companies like Oyo, Treebo or Fab Hotels and either sign an agreement of minimum guarantee or a commission based structure, however the future looks quite dim for these companies as well which is highlighted by large scale job and salary cuts across these companies along with funding freeze. Venture Capital is going to be tough to come by and this is going to have a trickle-down effect on small hoteliers and asset owners as well.
The way forward:
The next 6 months are going to be extremely tough for business and only the ones who have operated with a tight leash on their finances and guest experience might survive. Let us not forget that access to bank loans and government support is almost negligible so this is where an individual’s business savings and frugal nature will come into play. For independent operators who manage to survive and continue on this journey, we have a few small suggestions:
How can the Government help?
Many of the smaller travel-related firms are now on the verge of Bankruptcy and this risks putting the entire ecosystem into a downward spiral. To stop this economic Pandemic, we can all start by doing our little bit, maybe something as small as promising to focus on domestic travel post-Covid-19. Spending a reasonable amount on domestic travel every couple of months may not hurt the people but it will go a long way in feeding back the industry that upholds the very charm of our Nation “अतिथि देवो भव”.
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