What makes mid-market hotels the star of India's hospitality sector?

Betting on the mid-market segment, hoteliers have been increasing the supply of such rooms by 15% every year for the past 15 years

In recent times, a range of factors – from a surge in middle class to an increase in business and leisure travel, urbanisation, higher economic growth and the doubling of air travel over the past seven years – have bolstered the mid-market brands in India’s hospitality sector.

 

The mid-market, or mid-priced, segment refers to hotels straddling two-, three- and four-star properties categorised as business hotels, resorts, boutiques, havelis, and full-service or limited-service hotels broadly priced at Rs 4,000 a night or less.

 

In 2002, some 6,000 of the 26,000 branded rooms across India – less than 25 per cent – were mid-market ones. Since then, while the number of branded rooms has increased five times to 125,000, the size of the mid-market segment has increased about nine times to 53,200. The mid-market segment today accounts for 43 per cent of all branded rooms in the country, according to data from global hospitality advisory firm Horwath HTL.

 

Between March 2002 and March 2017, while the supply of chain-affiliated rooms grew at the rate of 11 per cent a year, the mid-priced segment expanded at a compound annual growth rate of over 15 per cent, show Horwath HTL data.

 

According to Managing Director Chander Baljee, Royal Orchid Hotels added 10 properties through the management-contract route in the past year across Ranthambore, Kanpur, Pushkar, Jim Corbett Park, besides other cities. On an average, Royal Orchid hotels range between 50 and 70 keys, and they offer standardised amenities like quality mattresses, a mini-bar, tea and coffee hook-ups, and a full-service breakfast buffet for about Rs 3,000 a night. “Hotels in India are among the cheapest in the world for the value that they offer,” Baljee says, adding that Royal Orchid, which reported around Rs 3 billion in revenue, plans to add another 15 hotels in 2018 with a focus on smaller towns and cities.

 

Like Baljee, Lemon Tree Hotels has also been on a ramp-up drive, adding 14 hotels over last year. The company will soon be coming out with its initial public offering.

 

A senior executive at a mid-market hotel chain says, beyond just a swell in travel and economics, it is also the customer that has evolved over the years. “From a preference of staying with family and friends earlier, people have now transitioned to ‘value-for-money’ branded hotels,” says the executive, adding that a lot of that has to do with a change in lifestyle, demand of professionals who travel, and the spread of business in smaller cities.

 

Historically, mid-market brands fell short on standardisation. According to one market analyst who did not wish to be named, “it is like an airline that uses a Boeing 747 for travel between Delhi and Mumbai, a Dakota for Kolkata-Delhi, and a Dornier for Bengaluru-Pune”. A traveller just never knows what to expect.

 

Accor’s economy resort brand Ibis Styles, which launched in Goa in 2016, is another example of how brands over the years have pushed to assume a more uniform product profile, with product coherence and consistent hotel specifications. In part, blame that on the unorganised nature of the hotel industry where wealthy businessmen with little experience in hospitality set up hotels – with ‘RoE’, or ‘Return on ego’, being the prime driver. That has changed with the coming of international brands which now control close to half the market, besides investments being made by private equity players.

 

Partha Chatterjee, a veteran hotelier who was part of the management teams at Ginger Hotels and Keys Hotels, says the past few years have seen an influx of around two dozen mid-market brands, and the international ones like Garden Inn, Hyatt Place and the Courtyard by Marriot all expanding. The important thing to remember, Chatterjee says, is that the average cost of building a mid-market room is between Rs 3 million and Rs 7 million; that breaks even in six years, against the 12-year timeframe required for a luxury five-star room, built at a cost of Rs 15 million or more.

 

Besides, for the first time in a decade, occupancies at hotels have been higher than 65 per cent, and average room rates have grown by 8 per cent since 2008. In addition, supply is growing by 8 per cent but demand is growing at twice that rate, so occupancy is likely to grow even more, says Achin Khanna, managing partner (strategic advisory) at consulting firm Hotelivate. He adds, barring external factors, “it is an upcycle phase and the next three to four years will be a good one for hotels across segments”.