The Overseas Push -- The Indian Hotels Company Ltd

The company has identified specific properties in the US and the Gulf countries, and has begun negotiations to acquire management control of these properties through equity participation or management contract.

The company has recently bagged a management contract for a 258-room hotel in Dubai. The property is under construction, and will become operational from the beginning of the next financial year. Alongside, management contracts for smaller properties are being brought to an end.

In addition, the company has identified locations in Africa and Morocco, and the Asia Pacific region. The company is now examining properties in these regions.

Indian Hotels has been interested in the far east and the Asia pacific, but could not enter these markets because of the south Asian economic crisis, which prevented companies and individuals from selling properties, fully or partially.

 

Explaining the decision to expand overseas, Taj chief operating officer (international division) Rajiv Gujral says, it is important for a hotel chain of Taj's stature to have presence in 'source' and 'common' markets.

'Source' markets can be roughly defined as those from which the company gets tourists, while 'common' markets are those which are tourist destinations, but not necessarily home to many tourists. While Morocco is a common market, the US is a source market. The necessity of a presence in wider markets is being felt by other hotels as well.

Take EIH Ltd for instance. It has decided to tie up with a foreign partner to increase its marketing reach and visibility in the US and Europe.

Taj's international operation yields about a tenth of its domestic revenues. In value terms it's a shade over Rs 56 crore. Taj sources say the company intends to double its overseas revenues in five years time.

But more than direct revenues, the point of going global is gaining visibility and brand strength, which translates into revenues not necessarily generated by properties abroad.

It is impossible for any hotel company to own properties all over the world, and in such a situation where one must have presence at as many places as possible, a management contract comes handy.

Take for instance Indian Hotels' property under construction in Dubai. It is going to be called Taj Palace, Dubai. A management contract enables Taj to bypass capital expenditure while not compromising on presence. Besides, Taj will be earning a share of its turnover and net profit as fees.

EIH

The downtrend in the domestic hospitality industry over the past four years has finally forced companies to seek alliances.

East India Hotels (EIH), which operates the Oberoi chain of hotels in India and abroad, has announced that it is in talks with foreign majors Four Seasons and Ritz for a possible tie-up. This leaves the Tata-owned Indian Hotels the only major hotel chain to manage its resources without seeking foreign help.

The marketing and co-branding alliance by EIH should see the Oberoi Hotels including the name of the foreign partner. This could turn out to be a win-win situation for both the parties. EIH will benefit as it will get more international visibility and presence, helping it getting more customers sans the required marketing and promotional expenses.

It will also have access to the foreign major's international reservation network. Earlier, both EIH and Indian Hotels had refrained from getting into any tie-ups on the ground that the brands were well recognised. The foreign major benefits since it gets a presence in the emerging Indian market without the high capital expenditure required in starting business.

The company also gets the benefits of the prime and irreplaceable prime properties of EIH across the metros and other tourist destinations in India.

This move becomes more relevant against the backdrop of the threat of room oversupply in major metros across the country. The entry of foreign majors like Le Meridien, Renaissance, Hyatt, Radisson along with expansions by domestic players has resulted in supply growing faster than demand. This leads to lower occupancies, higher competition and ultimately undercutting.

EIH has been performing better than the industry over the past few quarters. For the quarter ending June 2000, it reported an 11 per cent sales growth to Rs 106.5 crore from Rs 96 crore in the corresponding quarter.

Net profit growth was much better at 28 per cent to Rs 16.67 crore (Rs 12.97 crore). This was due a 200 basis point improvement in the operating profit margin to 21 per cent, indicating a revival in room rates. This is commendable, considering that all other industry players including the leader Indian Hotels reported depressed margins.

Emcee (with contributions by Aniek Paul and Aman Chowhan)