Lemon Tree Goes Upscale with Aurika

LEMON TREE Hotels has just marked its entry into Udaipur, with its new upscale hotel – Aurika. While, the opening of this hotel marks the company’s entry into the upscale hotel category, it is also the fifth hotel by the company in Rajasthan. Overall, the company now owns and operates 79 hotels with over 8000 rooms in 47 cities of India. It is India's largest hotel chain in the mid-priced hotel sector, and the 3rd largest overall, in terms of controlling interest in owned and leased rooms, according to the Horwath report. With more plans underway, the hotel chain is staying ahead of its game.

Lemon Tree Hotels operates under 7 brands now: Aurika Hotels and Resorts (upscale), Lemon Tree Premier (upper midscale), Lemon Tree (midscale) & Red Fox by Lemon Tree Hotels (economy), Keys Prima (upper midscale), Keys Select (midscale) and Keys Lite (economy).

And once you know the man behind it all you understand why the behemoth of a brand is forever reinventing itself.

In a freewheeling chat, BW Hotelier speaks with Patanjali Keswani, Chairman and Managing Director Lemon Tree Hotels.

Focussed and understated, this Railway officer's son… Jeans clad, Patu as he is called, is almost a recluse for an industry that thrives on style. For someone who was a relative late comer to float his own, this St. Columbus, IIT-D, IIM-C, TAS alumni, Patu was the COO of the Taj Business Hotels and later a Director with AT Kearney before he tested entrepreneurial waters promoting Lemon Tree in 2002.

In his own words, he is still “work in progress” as he refers to himself, even after turning his 2002 start up Lemon Tree group into one of India’s biggest hospitality business, all in under 20 years.

While our chat was to be Aurika and MICE focussed, with Patu in his elements, we went beyond and covered a fair bit. Read on… its always wonderful to hear him. He doesn’t do that often… between us…

Bhuvanesh Khanna: Lemon Tree Hotels has very recently acquired Keys, do you tell us more and also about the positioning of your different hotel brands and where does Aurika comes in?

Patanjali Keswani: We started with the Lemon Tree, which is the equivalent of a midscale three star hotel. Then we moved down to Red Fox, which is the equivalent of a two star hotel or a two and a half star hotel. Then we moved up with Lemon Tree Premier, into the entry level four star, we just called the upper midscale and then we created Aurika, which is upscale and an entry level five star. So this is our spectrum from two and a half to five star. Because we found our customers are happy to migrate across all these price points for the different levels of service and product. The acquisition of Keys is very simple. So, now we control over 15% of all India's mid-market blended supply. Now, Keys as a product and brand we positioned as follows - Keys Lite is supposed to be the equivalent of a Red Fox, Keys Select is supposed to be the equivalent of Lemon Tree and Keys Prima is supposed to be the equivalent of Lemon Tree Premier.

So, we feel that with some investments in upgrade we will be able to bring these three brands into a parallel positioning to our three. Now, why did we do it?

One is to aggregate supply on an all India basis because the more supply you control, the more choices you give your customer across geography. And when you are in a different geography, you are able to not only get business within that geography but the outbound business from that geography to the rest of the group. And to some extent, we can ensure that there is no ruinous competition.

The other reason we looked at it was that there are many unbranded standalone hotels in India. I mean tens of thousands in the mid-market space, but most of them didn't meet the specific brand requirements of Lemon Tree or Red Fox or Lemon Tree Premier. So this is a second brand that we can now look at fitting in hotels, we take under our management. For example, Lemon Tree is built to suit, owned by us and built by us, to a certain specification; Keys is not built to those specifications.

So, many hotels, which we found we could not take and brand as Lemon Tree or Lemon Tree Premier or Red Fox and not as per our asset management strategy, we now feel we will be able to. So that's the broad strategy: more customer choice, more geographies, more supply control, additional brands to offer for management contracts and therefore more synergies within the system. The choice for the customer also widens with our new arm Aurika Hotels & Resorts.

BK: While there is a case of Red Fox and Keys cannibalizing into each other, is there also a strategy: ‘Let them compete with each other and grow in the space?’

PK: No, Keys Lite is in the same location as a Lemon Tree as a Red Fox. The only places where they are close to each other are two hotels. One is the Lemon Tree Whitefield and the Keys Whitefield and the Lemon Tree in Bangalore and the Keys in Bangalore. But we feel that there is enough demand there for us to drive improvement in the Keys hotels. We find that our hotels do very well there. So there was no reason why we can't capture more market share. So cannibalisation implies that we are redistributing our existing customers, but to me it's not that, it is that the more supply I control the more demand I will control.

BK: I’ve seen the Sector - 60 Gurgaon Lemon Tree hotel rise. How is the occupancy rate of that and some of the new hotels?

PK: Gurgaon is not one of our great performance hotels because we haven't taken the rates up too much due to location. Look at the hotels that have opened in last one year; we have opened a hotel in Dehradun, out of 91 rooms there is 75 percent occupancy. We did Red Fox Chandigarh, it is doing 85 percent in the last one year. We did Pune one year ago in November and it is doing 70 percent. We opened Mumbai in end of June this year, it is doing 80 percent. We opened Kolkata two months ago, it is at 50-55 percent and we have just opened Udaipur, but it has occupied only 20 percent because people have made bookings far in advance. It will take six months to catch up, but it's okay. It's still doing 14,000 bucks ARR and it's a brand new, but it gets amazing reviews. If you got on to TripAdvisor and see the reviews of Aurika, every single one of them is five on five.

And that broader point is that a lot of hotels are in the upscale space in India, but they have very lopsided cost structures and poor revenue. So my question is, why wouldn't the guy who currently has a hotel give to another brand where they're doing 50-55 percent occupancy with a very high cost structure. Why wouldn't they give me that Hotel once I show them our new brand and what he will see is that typically we will do at least 70 percent occupancy and lower his costs by 30 percent so we would have basically doubled his profit. And, this is our strategy – to get onto the management of hotels, but instead of the old Lemon Tree story or building 50 hotels before we get asset-light.

BK: Exactly what the international brands are doing?

PK: International brands didn’t even build one hotel in India. So in my case I will have another two now. Another resort at Udaipur and within another two years, India's biggest hotel in Mumbai. Those two will show any owner what we can do, what our band is all about, what the quality standards are and what the occupancies are. The hotel in Mumbai would have 669 rooms with a large convention centre.

BK: When did Aurika start happening in your head?

PK: Overtime, there are three reasons again: Firstly, I found a lot of our customers migrate across price points. So, I remember, I spoke to one customer of ours a couple of years ago and I found he had stayed 30 times in our hotel, 27 times in Red Fox, Jaipur at 4000/night and three times in December in Lemon Tree Goa at 10,000 rupees a night or 9,000. So, I remember that I called him and asked him, “Where do you travel?” He said, “I am Delhi based. I travel to Jaipur only for work. And for holidays I go to Goa. So, I said, “You spend 2000 bucks in Jaipur and you can spend 9,000 for quality and you're self-employed, so why don’t you go for a more expensive hotel in Jaipur?” He told me, “Listen, I only look for good air conditioning, hot water, clean room, good service and good location. Red Fox Jaipur meets all these needs.”

And he said: I like to go to a nice place where I don't want to spend Rs 15,000-20,000. So then I asked him: suppose there was no Red Fox, but there was a Lemon Tree in Jaipur and it was priced at Rs 3,500-4,000. He said, then I would stay there. So it made me realize that a guy can move from Rs 2,000 to 10,000. So, now the question is that how many of my customers are like that in the cities that don’t have a hotel and let’s assume they're looking for a hotel. How many of them are willing to pay a little more, and he told me, he said, look, if you had a Lemon Tree I’d probably not stay at Red fox. So then I said, okay, then similarly there must be enough of these guys out of this million who will go to Bangalore, happy enough to take Aurika. So why not offer that. Plus my loyalty program is growing at an amazing rate, at 1000 people a day. We add up to 30,000- 40,000 members each month. This program is only two years old. It made sense overall. We have over a million members already and perhaps the biggest hospitality loyalty program in India today.

BK: And that's also a gift of scale.

PK: So, we obviously are able to enrol more. Anyway, out of 8000 rooms we are able to do 80 percent occupancy. We have six and a half thousand rooms filled every day. Its two lakh people a month. It's like half million people stay with us across India every year. Why can’t we capture all of that? That’s the thought process.

BK: So the upcoming Aurika properties will also be managed properties?

PK: The ones in Udaipur and Mumbai are owned by us, Corbett and Coorg are managed and we feel these two hotels will be fitted to suit.

BK: Do tell me about the thought process behind Aurika? Would it be like saying buy a Lexus without mentioning Toyota?

PK: Long term, of course we would not say by Lemon Tree. Red Fox is also my Lemon Tree branding in our logos. But we are hoping that in the next few years it will be independent. But that is not a big deal. Even if they say, Red Fox by Lemon Tree, Aurika by Lemon Tree we will not emphasize, but they'll buy a Lemon Tree. It's from the same group.

Now, the bigger issues for us are following: when we designed Lemon Tree in our original business model, we asked ourselves what are the 30 percent items in a five star deluxe hotel, because we only ran a luxury hotel. Since I was the Chief Operating Officer of Taj Business Hotels, where we did upscale hotels like Vivanta etc., I asked myself what were the important ingredients in a hotel and out of the 90 things that a five star hotel offers what are the 30 things I can remove.

So, Lemon Tree was designed as follows: which is, I knock off 30% in a product/service of a 5 star deluxe offering and I actually give you 90% of the product offering without compromising the experience anymore, because it's 90- 95% of what you see that costs only 70%, of the rest you don’t see, but it actually costs 30%.

I'll give you a simple example. They are offering 24 hours room service with grilled sandwiches as an example or 24 hour hot water or a 24 hour laundry with dry cleaning. If I remove many of these things, I find that I am able to massively reduce the manpower and fuel expenses. And if I reduce area per room somewhat then I can offer you half the price in the same location as a 5 star deluxe, 80-90 percent of what you will get in the five star. That was the whole logic that customers should be happy to trade down because now instead of paying 10,000 they are paying 5,000 and they're getting 85 percent of what they wanted including the same location without compromising and the quality is the same but surely you don't get that complete range of services which a five star deluxe offers. So, that was a very small trade off and therefore, we do 80 percent occupancy as compared to a five star and we are half their price but in revenue we are two thirds of their revenue. And our investment per room is less than half so in every way it's economically more feasible.

Now, this was what I was talking 15 years ago, of course, since then a lot of people have tried to follow similar thought processes and people are building five stars more efficiently, but then they weren’t.

Now let's come to Aurika. Aurika was reverse engineering process which is instead of saving 30 percent, I’ll save 15 percent and I will give 95 out of a 100 things. Lemon Tree out of hundred, I would give 85 but save 30 percent.

So that is the whole process: It is the reverse engineering. First, I reverse engineered, 5 star deluxe hotel to 3/4 star. Now, I have added something to take it up to entry level price by adding something that customers want. And what I’ve knocked off is what 1 in 20 customers want. I won’t give dry cleaning in 3 hours, because it is very high cost and 1 in 100 customers want their jacket to be dry cleaned same day. Well I'm happy not to have those customers. My view is 2 percent of India earns over $11,000 per capita, which is 25 million Indians or 5 million families earn more than $11,000 which means 36 Lakhs a year or more. That means there are 5 million families that earn 36 lakh or more per family, 3 lakhs a month. There are 25-30 million families that earn 12 lakh per month out of them 5 million earn more than 3 lakhs, they are my targets.

Plus of course in certain companies, where senior people and GMs, Sr VPs or VPs are entitled to stay in a 5 star hotel. So I'm not targeting the luxury market because the luxury market brands I don't want to compete with. I don't think we can compete with a JW Marriott or the Oberoi or the Taj. And I don't want to, because I don't see us adding value there, but certainly I can compete with the Vivanta, Gateway, Trident and basic Hilton and so on.

BK: Now with Aurika moving in, what kind of numbers are we looking at and how does the brands stable of Lemon Tree including Aurika address the MICE and weddings market for Lemon Tree?

PK: All Aurikas have large banquet facilities and are capable of addressing that. In fact, some of our new Lemon Tree Premiers also have large convention facilities, especially, if you see the new ones in Pune and Kolkata. So, here’s the thought: it’s a recession-proof market by way of weddings. Two years from now, in 2021, we will have four operating Aurika hotels: Udaipur, Mumbai, Corbett and Coorg. Three resorts, totalling about 300+ rooms and a 670-room hotel in Mumbai, so we will have 4 hotels with 1000 rooms to showcase Aurika. If most owners see what Aurika Udaipur is all about, they will know how we deliver an upscale/upper-upscale experience. Aurika is upper-upscale in Udaipur though I call it upscale. Most customers don’t see it as an upscale product. Yes, definitely positioned over Taj Aravalli, Trident and a step below Leela Lake Palace and Udaivilas.

BK: What was the thought behind launching Aurika in Udaipur ahead of Mumbai?

PK: Because it was a place that lends itself. While, it would cost more to develop it up the Hill and we could have just developed an elementary property at the bottom of the Hill, but we said: we shall go up the Hill even if it costs more, but make a statement and showcase Aurika and also with an eye to on our asset-light strategy. Udaipur made better sense to do Aurika first. Mumbai was planned only later as an Aurika.

BK: How does MICE impact you and what is it that you're going to do to attract the MICE and Wedding market?

PK: So here is what I feel. In the last 15 years the hospitality business has gone through a major up and a major down. The one segment that has remained growing all the time has been MICE, fundamentally weddings and of course meetings and conferences. So Lemon Tree was always designed not to have MICE, because we said, that rather than give 10 percent of the hotel space for banquets, we will give 10 percent more rooms. By selling the rooms cheap enough we would be able to fill them up around the year. That was a situation 15 years ago.

That's why we lean back on banquet spaces only for in house conferences typically for 40 to 50 people because our hotels were all below 150 rooms. Our first 20 hotels, none were over 150 rooms, then after that our average hotel size went from 150 to 250. And as we got larger and larger, we didn't want to miss out on this segment, as this segment today accounts for 15 to 20 percent of the total demand. So if we are building a large hotel, then it makes sense that I allocate 670 rooms and give a nice convention centre.

So, as a first case, we had bought this small hotel in East Delhi called LTH East Delhi Mall. My first concern was half the banquet business there is settled in cash and we were very clear we would not take cash, every rupee we took had to be accounted for. This is a mid-market hotel and this banquet hall is on top of the PVR which is in the mall. Thus, our first learning was that in the three star space, to build a banquet hall, you either are ready to accept cash or your market is half of the other guys. So we didn't build more banquet halls. We built the regular conference rooms, which companies would take and pay obviously in cheque.

We acquired a hotel in Aurangabad on a long lease with large banquets, that’s when we started doing wedding banquets and started examining this market. We realized that it is recession proof market. So while it has a disadvantage that it is not occupied every day as opposed to rooms, it has the ability, however, to help you in a downturn. Therefore we built a very large convention centre in Sector 60 Gurgaon. And then we also acquired some hotels with relatively large banquet halls like the Sector 29 in Gurgaon again and what we understood was that if you have a large enough inventory and a classy enough hotel, then you must offer it, as you want to target that 20 percent of the market.

And, also it will not be a cash transaction because the customer is different. He is not a trader who deals in cash and therefore wants to pay in cash and save tax. Therefore, if you notice, Mumbai was already designed and built as a Lemon Tree Pemier, but Pune we re-designed for a banquet hall, as was also Kolkata that was re-designed.

Udaipur which is of course a very heavy wedding market, we designed with a very large banquet hall and a really large open space. So, it was an evolution as the market itself has changed and shown us that MICE today is a very important segment for the Indian customer.

People get married in Mumbai as well, so we see no reason why we should not target that market, besides the fact that we can give 670 rooms, seating of over 1000 people, who can come and use the banquet hall and basically book 200-300 rooms.

BK: Tell us more about your leadership team. Who all have made it all possible for Lemon Tree to be where it is?

PK: For at least the first 10 years, from 2002 to 2012-13, we didn't hire people from outside, we promoted talent internally. Remember most people who joined us in the beginning of the company, were young and therefore relatively junior. Rahul Pandit, who became the President of Lemon Tree, was actually a Front Office Manager when he joined us as a General Manager.

I used to joke, that the only guy who had experience was me, because I had run the Taj Business Hotels, which were 22 hotels with over 2000 rooms. Every other colleague who joined us had not even been a General Manager of a hotel. They'd all been Assistant HOD or HOD at best. The initial start-up team was very enthusiastic, very focused, very dedicated, but did not have the right set of experience. They took the risk of joining me without anything behind me to showcase to a new hire.

Looking back, in 2004, we were one hotel of 49 rooms in one city, with one brand called Lemon Tree, with 60 employees in the company and a turnover of five crores.

Five years later in 2009-2010, we were 10 hotels, a 1000 rooms, we were in about eight cities, with 1000 employees and 2 brands - Red Fox and Lemon Tree. Another five years later in 2016, we were 4,000 rooms, we had 35-40 hotels in 14-15 cities with three brands: Lemon Tree Premier, Lemon Tree and Red Fox.

Today in 2019, after four year, we are 8,000 rooms, 7 brands, Aurika included, after acquiring 3 Keys brands, we are in 65 cities with 8,000 employees. Now imagine you are the head of a department, of say sales or engineering, every 2 years the size of the company has doubled. From 50 to 8000 rooms, it is a growth of 160 times in the last 14 years, from one city to 45 cities, I mean from one hotel to 80 hotels. Just imagine what this wonderful team has delivered as I look back with pride.

Let me talk a few, for want of space and time:

Rattan Keswani, is our Deputy MD of Lemon Tree Hotels Ltd. and Director Carnation Hotels. There was a time we would constantly restructure internally, till it was time to go out and look for talent to take Lemon Tree to the next level. That’s when Rattan came on board with his Oberoi grounding and industry experience. He also drives our asset-light business with Carnation.

Ritu Ranjan, Chief Design Officer, Lemon Tree Hotels Ltd. Ritu joined us in 2014 and has a very strong design sensibility that she gave the new set of Lemon Tree Premiers and now Aurika, I must say a large part of how they've turned out is because of Ritu.

JK Chawla, EVP Project and Engineering, Lemon Tree Hotels Ltd. JK is the head of our projects and engineering, phenomenally experienced, very focused, and is very competent. He was my perfect match; he challenged me, helped me and leads a great development team.

Davander Singh Tomar, Executive Vice President – Corporate Affairs, Lemon Tree Hotels Ltd. Davander was the Area Security Manager of Taj in Delhi, had worked with me there when I was the GM. I remember a couple of weeks after I had left AT Kearney and come back to Delhi, I was sitting in my house designing the first hotel… he mocked me, took off his jacket and said, “So I have resigned, what are we going to do?” I mean, this was a great leap of faith he took with me. He handles Administration and Security, but he also plays a big role in compliance. He is an auditor for the company and what's going right and wrong, specifically relating to the culture.

Kapil Sharma, our CFO, oversees Finance, Procurement and Technology. Kapil was in his 30s when he joined us as a GM Finance 15 years ago. He has been another amazing talent who has reskilled himself every year. He came from Leroy-Somer, where he was an Accounts Manager.

Vikramjit Singh, President, Lemon Tree Hotels Ltd., he is the Head of Revenue. Formerly with me at the Taj, he was a management trainee there. Here is an amazing thing, many of our guys who leave us, 90% come back to us, as did Vikramjit, who got back and is our President today.

Sareena Kochhar, Vice President House Keeping. Formerly Head of Housekeeping for The Lalit, she's also another great talent and a fantastic person. Involved heavily with Ritu in design and brand, she is also independently runs housekeeping, which is one of the biggest departments in the company. She has been phenomenally successful in integrating people with disability in the system we've hired from every disadvantaged group from India, be they special children, orphans or differently abled. This program is closest to my heart.

Harleen Mehta, Sr. Vice President Sales. Harleen is our newest hire. She was the Head of Sales of Hyatt Hotels in India. Here, she drives a very critical part of our business today. With such a proven and solid industry track record, she is already at it and up for the game.

Prasad Iyer, Vice President – Digital, eCommerce, Distribution and Rewards. He has a very critical role to play as we scale up and he comes with a lot of promise and reputation behind him with his industry experience.

Bringing in Harleen and Prasad is all an attempt to make a larger rubber band at Lemon Tree.

BK: This one last question I have had in my mind before we close this chat Patu. On a scale of 10, how satisfied are you with what you have done?

PK: My life has been a series of fortunate events and I think I was satisfied in every job that I had. It’s in my nature to enjoy what I do and if I don’t, I would’ve found a way to get out of it, which I think I did in one or two cases. So I'm happy.

Look, I'll tell you one thing: Money doesn't matter. I mean, none, not one of my habits has changed, barring may be driving a fancier car, but other than that, what I eat, what I wear, where I go for holidays, I’m doing the same things. What gives me pleasure, is the employment that we have generated and hopefully the impact we would make on society, on Indian society… civic society

So, it’s still work in progress, ask me after 3 years later, I’ll rate myself. Cheers.