Formule1 and Tune Hotels step up supply

Both business and wedding travel are fuelling demand

If you are the kind who likes to travel on a shoe-string budget, chances are that in the next three years, you are going to have a lot more hotels to pick from than ever before. Over 18 per cent of the expected supply of branded hotel rooms will come from budget hotels, according to a recent HVS study. This works up to an additional 16,000-plus branded budget hotel rooms by 2016-17. The total increase in the room supply across all categories is expected to be around 93,355 rooms by then.

The Indian hospitality sector has suffered from an acute shortage in the budget space. "It is a tough market and there are many barriers to entry. We are not a charity. The property prices are very high, especially for the budget segment of hotels," says Philip Logan, vice president, Formule1 India - the Accor Group's no-frills chain of hotels.

Despite hurdles, international brands such as the Formule1, Tune Hotels (owned by Air Asia's Tony Fernandes) and HolidayInn Express, and the domestic chain, Ginger, see immense opportunity in this under-fed segment in hospitality. All of these hotels operate with tariffs in the range of Rs 2,000-3,000, offering no bells and whistles. You get what you pay for.

So, if you were to check into a Tune Hotel which is planning to open its first property in Ahmedabad next month, you can expect a clean room and a bathroom, but no room service. If you want a towel or toiletries, be ready to shell out more. Mark Lankester, group chief executive officer, Tune Hotels, says he is confident that the model will work well in India.

But not all hotels are taking that chance, as Indian travellers expect a lot even in the budget sector. Moving away from their international business models, hotels have started to include restaurants in their design, for instance.

The Accor group has opened two Formule1 hotels in Greater Noida and Ahmedabad with another 14 in the pipeline, all expected to open by 2016. Ginger, owned by Roots Corporation (which is a part of Tata's Indian Hotels Company), is planning to treble its presence in the next four years from the current 26 hotels in the country.

Corporate travel is the biggest source of demand. The erstwhile corporate guest-house crowd too is finding its way to budget hotels. Logan explains, "It is not easy for companies to manage multiple guest houses and transportation if they get a large group of say, 30-40 people, for training. We give them hotel service at guest house rates."

The wedding market is another driver. "In India, weddings are a three-day affair and while you can make the bride and groom stay at a premium hotel, affordable lodging is needed for the extended family. We are seeing a huge demand from this segment," says Logan.

The rise in institutional investors in the budget hotel space is expected to lead to thorough market research and due diligence before the launching of new hotels.

This would ensure that "unfeasible" projects are not developed on a whim and that new supply is not added to markets indiscriminately.

Such an approach will ensure that any development is purely based on Return

On Investment (ROI) instead of Return On Ego (ROE) and also inspire confidence amongst lenders and other stakeholders," the HVS study concludes.