Decoding the growth of Indian mid-segment hotels

Contributing around 7% of the GDP, the tourism sector is set to become one of the major pillars of Indian economy. Tourism is the third largest foreign exchange earner after gems, jewellery and readymade garments. The tourism sector has had a cascading effect on the hospitality sector in the occupancy ratios and average room rates.  

India, after china, is one of the most lucrative hotel markets in the world. It has the second largest construction pipeline in Asia. As per World Economic Forum, India stood 12th in the Asia Pacific region and 55th in the list of the world's attractive destinations.

With 1,70,000 hotel rooms already and an addition of 60,000 over the next 3-4 years, the sector is still expected to fall short to meet the long term demands of the economy, which is growing at 7-8% per annum.

Foreign Tourist Arrivals (FTA) grew to 80 lakh in 2015, up by 4.4% compared to the same period last year. USA, UK, Germany are major countries which account for 55% of the business in most of the premium hotels. However, the growth rate of FTA has dropped significantly from 10.2% in 2014 to 4.5% in 2015. Euro crisis and the recessionary environment in other countries have impacted Indian hospitality causing decline in both leisure and business. This has also resulted decline in FTA in India. For operators, high inflation escalated raw material prices which further added pressure on margins. On the other side, domestic tourist visits (DTV) are on an upward trajectory. The recorded DTV in 2015 was 1431 million, growing at 11.6% per annum.

The current market is competitive with almost all the major hospitality companies focusing on India. Some Tier-1 cities will witness a new supply in the coming years which will slow down RevPAR growth in the short term. The rising land prices and high financing costs have resulted in high room tariffs and long gestation periods. Luxury hotels calls for huge investment and have longer gestation period as compared to mid-segment hotels. It becomes more difficult when industry faces the biggest challenge related to approval process, varying from state to state in a bid to set up a hotel.

Mostly driven by the above factors, there has been a major shift in the nature of the hotel industry with mid-segment hotels forming a majority share (nearly 45%) of the total room inventory. This segment has witnessed an expansion primarily owing to the rising number of corporate travelers particularly of mid-level executives, growing DTV comprising the middle class, etc.

There is no official definition is available to describe this mid-segment hotel. The segment bridges the gap between luxury hotels and quality budget hotels. The said gap is wide and the mid-market segment fulfils it. An ideal mid-segment hotel offers an experience of standard quality services with affordable price. They are an alternative to luxury hotels, but not a replacement to them. With corporates becoming cost-conscious and leisure travellers looking at affordable options, this segment is emerging as the preferred choice. A growing middle class has created a need for affordable hotels for the domestic traveller, thus increasing the demand for such hotels.

While there are no direct policy initiatives by the Government for this segment, substantial focus on infrastructure will benefit this segment. Allocation to revive 160 non-functional airports will increase connectivity and accessibility to domestic travel from Tier-I to Tier-II & III cities. The government has initiated ‘Project Mausam' under which it has proposed to establish cultural linkages and to revive maritime cultural and economic ties with 39 Indian Ocean countries. The government plans to cover 150 countries under e-visa scheme and release a fresh category of visa- the medical visa, to encourage medical tourism in India. Fund allocation for infrastructure development under ‘PRASAD’ (National Mission on Pilgrimage Rejuvenation and Spiritual Augmentation Drive) will boost pilgrimage tourism. Eventually these initiatives will lead to further growth in the mid-segment hotels.  

There are many grey areas which need to be looked into to sustain the growth of mid-segment. I will pick this up in my next post.

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