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India’s opportunities: The Hotel Industry

Having traveled and stayed at some of the major Indian cities the one aspect which I find most disturbing (and with most opportunity) is the business of hotels. India as a country has a huge population, huge density in the major cities, and an unbelievable number of travelers. But the problem lies in providing these travelers with a decent, hygienic hotel to stay which is not extremely expensive (I don’t believe it is too much to ask).

taj_mahal_palace_hotel_at_nightTypically the most common routes taken to find accommodation are: Firstly to go and stay at a relative / friend / connections place. The informal network in India is very very strong and it is generally not difficult to find some relative at whose house you can spend a couple of days. Secondly is ofcourse going to a 3 Star – 5 Star Hotel and shelling out a lot of money. I really can’t believe the hotel rates for 5 Star hotels in Delhi and Mumbai. Thirdly is to look for a cheaper place to stay and this of course becomes very very difficult since almost no information is available online and you can find brokers everywhere who want to make their commissions.

I think I do not need to explain why this is really a problem. The lack of information and inconvenience to find a decent hotel to stay in budget is enough! But lets look at why this is also an opportunity. Indian middle class is growing and it is expected to become the biggest class in India over the coming years. Moreover the culture in India is changing where people now want to take vacations, travel around and see new places. Most people prefer pre-packaged foreign tours but when Indian Hotels and Travel become cheaper and better, this market will definitely explode.

Who is currently targeting these markets? Almost all the travel websites, MakeMyTrip, ClearTrip, Yatra and others. By providing information about various hotels on their website and allowing booking, they are making it much easier for people. The only problem is establishing trust. When I book with the website I do not know what will happen if I don’t like the room or its condition or locality, the trust has not been built into the system as yet. However it is a good attempt and I hope it becomes successful. Also the Tata initiative of Ginger Hotels is another great initiative aimed at the hotel industry keeping the middle class in mind.

The whole point is to provide a good place to stay for the masses and also make money from it. Moving from the 5 Star Busines of high margin – low volume to a good budgeted hotel with high volume – low margin. Such innovation is probably yet to be seen in India. Thus when I read about the initiative by ITC Ltd to invest Rs 8,000 crores in the hotel industry I felt excited! Maybe something is moving in this direction but it will probably take a lot of time to come out. I feel it is a great industry to target but somehow have not seen much movement in it. The only movement is in the 5 Star Hotel market. Come on PEs / VCs invest in India, invest for the middle class and I am sure they will make huge returns for you.

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6 thoughts on “India’s opportunities: The Hotel Industry

  1. Interesting article Shubham. There definitely lies an opportunity for the hotel industry, but there are limitations that they face because of which things become difficult.

    I would like to say a few things here:

    ITC’s investment – ITC has been known for being in the premier segment, be it in their hotels, or their apparels investment – they believe in showing that they are of top quality (especially in terms of their prices 🙂 ). And I am sure that their complete investment is going to be for that very 5 star segment. They wouldn’t want to “tarnish” their brand image by going to anything under 5 star.

    Secondly, about not having good, decent, and affordable hotels in places like Delhi and Mumbai – let’s just take our good old supply demand curve into perspective. Mumbai is a jam packed city and there is only a handful of place to setup hotels in places which are worth having hotels in (within the city and suburbs). Further, even if we do have good hotels which are affordable, just think about the number of people who come into Mumbai everyday and are going to try and get accomodated in those hotels.. And when the demand increases for that, so will the price. And that’s why the prices are going to always be inflated for quality hotels in important cities. When quality hotels start putting higher prices, then we will have extremely cheap players coming in, who will setup low quality but extremely affordable lodges, and thus enter the market by this offering.

    Finally, about the extremely extremely expensive hotels in Delhi and Mumbai, I’d like to say that people who normally visit those places are on official visits, and their companies show their stature by making their employees stay there. So that’s why those hotels exist and I doubt they are going to invest in the common man by even marginally reducing their prices.

    I also want to ask you a question Shubham – if there is a focus area for hotels, do you think the hotel industry should invest for Indian travellers or foreign visitors? Where do you think it will be more profitable for India as a whole?

  2. Debit says:

    @Atul : Hotels can either play the volumes game or the margins game..in cities like mumbai where space comes at a premium it makes sense for most to be choosing the later, however as the cities expand to envelop adjoining areas and communication to and from the city becomes easier, developers are bound change their target segments too.
    As to your argument about high demand for pushing up prices, the incremental price which the middle class consumer(assuming the upper class individual has too much of money and will continue to choose 5 start hotels) will be willing to spend for a certain category of room (read comfort) will plateau at a certain level which should stabilize the prices of hotel rooms.

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