HVS Hospitality Services HVS India

Indian Hospitality – Game Changers in the last decade…and the next!

The year 2000 was an important one for HVS India; we grew from a team of two members to
four. The year 2010 is also an important one as we have grown ten-fold in as many years. Our
growth story seems to mirror that of the Indian hospitality sector.

It is only fair to assert that we had started from a very small base. The next decade will thus be
even more pertinent as it helps the hospitality sector define its personality and carve its niche.
As the Indian hospitality sector gears up to welcome an era of growth, there are several critical
influencers or what we think of as game changers that will play a key role along the way. This
article aims to touch upon the ten game changers that have facilitated the metamorphosis of the
sector in the past decade and will continue to do so in the years ahead.

The Indian Economy

Not only is the elephant dancing today, but it’s actually one of the only few circuses around. It
has been a fantastic growth story for a country that in 1990 attracted only US$ 150 million of
Foreign Direct Investments (FDIs), and then received US$ 4 billion in 2000 to over US$ 90 billion
in just the past three years.

The millennium year of 2000 was hyped to be doomsday for the computers of the world with
Y2K. Well, 2000 came and went by and as we all know the computers did not collapse; instead,
Indian technology companies grew considerably and allowed the emergence of the BPO and
KPO sectors. This led to a rising middle class and an ever-growing service sector. The opening of
the telecom sector a few years earlier also had its role to play. From the most expensive to the
least expensive telephone systems in the world – the Indian telecom story is certainly one for the
books.

India’s GDP has grown at an impressive 8.5% during the six years spanning 2003/04-2008/09.
The recent global financial crisis has only reduced the rate by 2-3 percentage points and even
then the economy continues to grow at the annual rate of 6% following the three quarters after
the meltdown. Several domestic and global agencies have recently applauded the Indian
economy's resilience and have projected a growth rate of 7% in 2010 and 7.5% for 2011. India
reduced its central fiscal deficit from 8% of the GDP in the early 1990s to 2.5% in early 2008. This
gave the government ample breathing space to increase its expenditure (the deficit subsequently
rose to 7% of the GDP), and boost demand in the country which enabled the economy to sustain
itself during the critical months of the crisis.

Additionally, the Indian demographics continue to cater to the global audience very effectively.
An enormous English speaking workforce that is highly educated (more college graduates than
any other nation) and ingrained in a service culture that is touted as among the best in the
world, makes the Indian employee a worthwhile investment. So while our friendly red
neighbour to the north has its own growth story to boast of, we believe that the Indian economy
has a lot more dancing left to do before the elephant finally settles down to some silent grazing.

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Key Game Changers:

• India’s exponential FDI growth likely to continue

• Indian demographics, the right fit for global business audiences
• Continued growth of projected GDP, at more than 7% in the years ahead
• Resilient economy, only marginally affected by the global financial crisis
• Exponential service sector growth, with emergence of BPO, Telecom and other sectors

The Maturing of Indian Hotel Markets

About a decade ago, there were really only a handful of major hotel markets in India, namely
the four metros and possibly a Bangalore or a Goa, a result of businesses primarily being based
in and needing hotel rooms in these cities. Thus, while visitors to these major cities had a choice
of several luxury and upscale hotels, affiliated with both domestic and international brands, the
availability and quality of hotels declined significantly when venturing to the smaller cities.

In the last decade, as the major cities developed rapidly, real estate prices soared, and the cost of
setting up and sustaining business operations in these cities became prohibitive. Companies,
therefore, started looking at other cities in the country where costs were lower which resulted in
the ascent of cities such as Hyderabad, Pune, Jaipur and Ahmedabad. As a result of these
dynamics, there are currently about 10 to 12 main hotel markets in the country, all of which offer
a variety of branded product offerings across different positionings. The emergence of these
secondary and tertiary cities led to an aggressive increase in hotel development activity and
provided avenues for expansion of hotel brands, which were previously dependent on new
opportunities in just the five main cities.

Another trend that has now emerged in the various major markets is the growth of micro-
markets, especially in the primary cities. As commutes in larger cities are increasingly measured
in amount of travel time rather than distance, people are choosing to stay at hotels that are
located closer to their place of work, thereby saving crucial travel time that might otherwise
have been wasted in traffic. Thus, while it might have been feasible previously to build only one
Holiday Inn or one Marriott in the market, the presence of independent micro-markets now
allows the existence of multiple hotels with the same brand affiliation without fears of
cannibalization of demand.

The Ministry of Tourism’s ‘Incredible India’ campaign has started to strike a chord and will
likely play its role in increasing visitations to India. That being said, the general sentiment is that
although India has a varied bouquet of destinations to offer, relatively mediocre efforts have
been made to market Brand India. The future of the Indian markets and their ability to mature
into destinations relies on concerted efforts, both by the relevant government bodies and the
private sector players. Creativity will be of essence and perhaps it is time to start marketing
Brand India under several subsets such as cultural tourism, eco-friendly vacationing, medical
tourism, religious circuits, adventure sports tourism, wildlife safaris, beach destinations and
wellness vacations.

Additional influences that attract or deter foreign tourists and thus need to be addressed are the
quality of infrastructure-related developments, ease of attaining a tourist visa for India, perhaps

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offering a visa on arrival option to nationals of certain countries, the country’s image as a safe,
secure and friendly destination, amongst others. Several Southeast Asian countries serve as
prime examples of leisure destinations that managed to witness exponential growth in
international visitations, primarily because of a well planned and effectively executed tourism
strategy. India, too, will need to set clearly defined goals and work towards increasing foreign
tourist arrivals if it aims to grow into a balanced, mature tourist destination.

Key Game Changers:

• Emergence of secondary and tertiary cities

• Emergence of micro-markets
• Continued marketing of Brand India
• Continued improvement of infrastructure in Indian cities and towns
• Ease of attaining Indian visas
• Development of India’s image as a safe, secure and friendly destination
• Development and marketing of niche tourism like medical tourism, religious circuits,
adventure tourism etc.

Hotel Brand Explosions in India

In the year 2000, hospitality in India was primarily dominated by the domestic players, namely
Taj Group of Hotels, Oberoi Hotels & Resorts, ITC Hotels, and the government owned ITDC
(The India Tourism Development Corporation Ltd) Hotels, with only a handful of international
brands having a token presence in the form of marketing alliances in India. Also, while some of
today’s home-grown hotel chains like Leela, Bharat Hotels, Sarovar and Asian Hotels were
around at that time, they were for the most part single-asset owners. There was a perception
that India was a tough place for foreign companies to do business in and that a strong local
presence with excellent contacts was required to be able to penetrate this market. Additionally,
several businesses and consequently most international brands were more focused on fast-
growing markets in the Middle East and China, which offered more opportunities for growth at
that time.

The economic downturn, at the beginning of the decade, led to a paradigm shift among these
businesses as they could no longer depend solely on the more mature economies and they
started gauging the vast opportunities that a country like India had to offer. The fact that India
was less impacted by the global downturns - one at the beginning of the decade and the other at
the end of it - as compared to the rest of the world has emphatically proven the inherent
strength of the Indian economy and its consumer base of over a billion people. As Indians
travelled more frequently around the world, they experienced international hotel brands first-
hand, as a result of which these brands enjoyed greater recognition and acceptance in India.
Additionally, as international visitation to India increased, the foreign brands were better placed
to attract these visitors due to their strong reservations networks around the world. With the
continued growth in India’s GDP, improvement in the per capita income, and increased
aspirational spending, the Indian hospitality sector is expected to grow faster than most
countries around the world. Most major hotel brands such as Starwood, Hilton, Marriott, Hyatt
and Accor already have a growing presence in India and they have an even stronger pipeline.

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Additionally, the emergence of a branded budget and economy segment presents tremendous
opportunities and will attract many new players to an India going forward.

Key Game Changers:

• Entry of most major international brands

• Changing perception of Indian markets as a lucrative opportunity among international
brands
• Growth of the Indian middle class offering a large consumer base of more than 1 billion
people
• Educated and well exposed Indian audiences, likely to accept global brands
wholeheartedly
• Expected emergence of branded budget and economy hotels

India – The MICE Business Opportunity

In 2000, we had only 2.6 million international visitations. India played host to 5.13 million
arrivals in 2009, slightly down from 5.37 in 2008, owing primarily to the contraction in the global
economy. When compared to some of the other Asian countries this is still a sad story, but one
with immense potential and a tremendous growth opportunity. While the state and central
governments focus on ‘Incredible India’ to bring in tourists, we believe an equal interest needs
to be adopted by them to attract and grow the MICE (Meetings, Incentive, Conventions and
Exhibitions) segment as it has the potential to change the face of several upcoming Indian cities.
The overall international visitations are likely to grow many fold due to MICE as it allows for the
sale of several hundreds or even several thousands of room nights as opposed to the transient
travellers who utilize only a few room nights at a time. Additionally, most delegates often travel
before and after the event, thus adding to the overall growth of the hospitality industry.

The MICE business is a key contributor to the overall hospitality industry in several nations
across the globe and has the potential to add to the overall development of India as a
destination. HVS research reveals that Convention or Meetings tourism accounts for over 20% of
all international arrivals worldwide. Till the late nineties, North America and Europe had
dominated the conventions and conference markets. The US still holds the top spot for the
highest number of meetings as a single country destination. However, several Asian countries
have successfully captured a growing portion of MICE business in recent years. With the
emergence of India as a key economic hotspot along with China, convention tourism has
enormous possibilities in the country. India’s growing strength in the Information Technology
arena has prompted a few prominent international bodies to host trade shows and conventions
in the country and similar prominence in bio-technology, pharmaceutical and manufacturing
sectors is also expected to bring convention revenues to the country in the coming years.

India, however, remains woefully inadequate in its abilities to attract large international
conventions. One of the biggest reasons continues to be the lack of world class convention
centres in India. The Hyderabad International Convention Centre (HICC) is India’s only
branded (Novotel), large scale convention facility – something that we at HVS are very proud of
as it’s one of our success stories. While a few additional convention centres and large format
conference facilities are in the pipeline (Bangalore and Mumbai), clearly the Indian hospitality

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industry needs to make several strides towards developing its MICE facilities if it has any hopes
of becoming a contender for this lucrative business segment in the years ahead.

Key Game Changers:

• Growth of science and technology related industries like biotechnology and

pharmaceuticals that then host large conferences
• Growth of the manufacturing sector
• Increased interest in India as a travel-worthy destination
• Successful and replicable model in HICC
• Expected emergence of dedicated convention centres in more cities

Hospitality Marketing Trends

Ten years ago, the marketing mantra that worked best for hotels was the creation of a brand;
make it exclusive, market the experience as surreal and the customer’s decision to purchase was
expected to automatically follow suit. This worked at that time because there was a narrow
playing field with few domestic and international hotel chains in the country. Not surprising
then that in 2010, India has seen an increased supply of international and domestic hotel chains
that now volley with independent hotels for market share. Moreover, consumer generated
media and mobile technology had yet to hit India in 2000 where the foremost influencer for
the customer in making a purchase decision was the brand. The brand was conceptualized by
its custodians – the internal stakeholders – to reflect the persona of the product, which made
branding a one-way stream of communication mostly. Hence, Brand 2000 was a product of the
internal stakeholders accented with high flying Brand Promises which translated into the
Consumer Purchase Decision of 2000.

The year 2010 is a different story as the consumer is well educated, travelled, experienced and
looks beyond the gloss of the brand to the value proposition and the actual delivery of brand
promises. Thus, in the Year 2010, the marketing mantras are differentiation, consistency,
customer satisfaction, delivery of brand promises and customer retention. Today, Brand 2010
has evolved from a one-way communication stream to a two-way one that is more flexible and
accommodates the customer’s needs and wants. Hence, Brand 2010 is a product of the
External Stakeholder – the needs and wants of the Customers – accented by experience led,
sustainable Brand Promises which now translates into the Purchase Decision of 2010.

Today, the state of economic flux wherein each dollar spent is being analyzed, renegotiated and
then minimized, the marketing dilemma of marketing spend vs. incremental revenue assumes
more importance. How do marketing resources of the Indian Hospitality sector continue to
build their brand and market their product successfully? Consistent delivery of a superior and
differentiated product experience that offers a greater perceived value will result in the
acquisition and retention of customers. The pressure on consistent delivery of brand promises is
further maintained by online customer feedback which impacts the attraction quotient of the
product for other prospective customers. Customers in the coming decade will want to ‘Find
Even Before they Seek’ and the advent of social networking has given a new power to
customers like none other before.

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In addition, to make things just a bit harder the new technology paradigm will make customer
decisions even more fickle. In this decade, the customer will make purchase decisions based on
the entire experience offered, its perceived value and the consumer feedback it has received as
against just the brand, brand promises and product offerings alone. The customer of the coming
decade will evolve to be the real custodians of the Brand. Key Game Changers:

• Broadening of the playing field with entry of many domestic and international hotel
chains
• Well educated, travelled and experienced customer base
• Evolution of the brand from a one-way communication stream to a two-way one that
accommodates customer needs and experiences
• Consistent delivery of brand promises and customer experiences
• Marketing equations changing in favour of the customer with online channels like Web
2.0 and social networking

Hotel Development Costs

In the past ten years most commodity prices have gone up. Development costs have always
been a challenge for anyone looking to build a hotel in India. The land cost has increasingly
become a significant portion of the development cost for any project, accounting for 30-50% of
the total development cost, while the same equates to about 15-20% internationally. The high
density of development within Indian cities and the shortage of vacant land parcels suitable for
hotels had led to aggressive bidding wars among prospective buyers and forced prices upwards.
With the increased pace of construction activity around the world, especially in the Middle East
and China, the price of construction material such as steel and concrete increased steeply in
recent years. While this was offset by sourcing furniture and fixtures from China by several
recent hotel projects, the additional concern regarding the quality of Chinese goods is one that
now needs to be addressed.

HVS observes that hotels built in India very often exceed the brand specifications that might
exist for these brands internationally and that developers often tend to spend more money on
their hotels than required. A typical mid-market business hotel in the US or Europe, thus, does
not cost nearly as much to construct as it does in India.

The lengthy cumbersome process of obtaining licenses and permits and construction delays
serves to increase costs even more. Given the time and expense involved in working through all
these issues and finally opening a hotel, developers who managed to do so were not interested
in selling their hotels or asked for prices that were far in excess of replacement cost. As we look
into the next ten years, we believe that as long as asking prices remain significantly higher than
the replacement cost for the product, developers and investors will choose to build rather than
buy.

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Positioning Typical Development Cost per Key (INR)

Luxury 12,500,000 and above

Upper Upscale 8,500,000 to 12,500,000
Upscale 6,000,000 to 8,500,000
Mid Market 3,500,000 to 5,500,000
Budget 2,500,000 to 3,500,000
Economy 2,500,000 and below

Key Game Changers:

• Likely rationalization of land costs, due to the recent economic conditions

• Increased import of material from global sources, as long as quality goods are available
• Expected rationalization of costs, with government intervention in relaxing the license
process
• Expected rationalization of per key development costs, with entry of brands across all
positionings

The Debt, Equity and Valuation Paradigms

VALUATIONS −Ten years ago, when HVS had just about entered this market, many people had
passed silent smirks at the idea of a valuations-related consulting firm’s presence in India. Why
would anyone need valuations done? No transactions in the industry had ever taken place! Last
year, HVS did more valuation-related assignments than market studies and/or feasibilities.
There have been only a few big-ticket transactions in the hospitality world in recent years. The
future will, however, see a lot more activity as private equity players and hospitality funds start
investing in this space.

DEBT − Development of hotels in India was historically undertaken by high net worth
individuals who would approach banks for debt to finance a portion of their construction cost
and then raise equity through personal resources or from family and friends to cover the rest of
the costs. Unlike the US or the UK, where a developer historically could obtain 75-85% of his/her
construction costs in the form of debt from banks on a long-term basis (30 years), Indian banks
have typically lent only upto 60% of the construction cost and that too for a much shorter
duration.

Additionally, since the hospitality sector was previously considered a part of Commercial Real
Estate (CRE) and was subject to the same risk exposure, the cost of such debt was high. In
September 2009, new guidelines on CRE released by the Reserve Bank of India (RBI), asserted
that the hospitality sector would no longer be treated as a part of CRE and risk exposure would
be based on the profile of the borrower and the nature of the project. These new guidelines will
be especially significant for the more established hospitality players who will now benefit from a
lower risk weightage and consequently, lower interest rates. While the RBI’s decision is a step in
the right direction, what is really required is the conferring of infrastructure status to the

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hospitality, which will make debt financing much cheaper and give further impetus to new
hotel projects around the country.

EQUITY – Given that banks would typically only lend up to 60% of the construction cost,
developers were forced to then raise equity by tapping into personal resources to cover the rest
of the costs. Such a process was often an inefficient and time-consuming one, with no
guarantees that the required amount could be raised eventually. The entry of Private Equity
(PE) funds into India has made the task of raising equity for projects much easier, as the major
players have access to significant levels of capital and have greater appetite for risk than banks.
Availability of PE funds has also enabled existing hospitality players to attract investments at the
company level as opposed to a project level, thus giving them the flexibility to use these funds as
they deem fit. Over the next ten years, we believe that PE players will become increasingly
involved within the hospitality industry and look at opportunities at all market positions,
especially in the budget and mid market level. While the Indian hotel industry has not seen
much transaction activity in the last decade, the next ten years will bear witness to a larger
number of transactions, especially in the form of mergers and acquisitions, as companies take
advantage of the lower costs of debt and easier access to equity capital.

Key Game Changers:

• Expected rise in valuations and sale / purchase of hospitality assets

• Strong likelihood of infrastructure status for hospitality
• Increased possibility of securing debt at reasonable rates and for extended periods
• Growth of private equity investments and hospitality funds
• Expected rationalization of asking price of hotel assets

Food & Beverage (F&B) Concepts

Ten years ago, when one talked about ‘eating out’ at a standalone restaurant, for the most part it
meant going to Kwality, Gaylords or Nirulas. Today, F&B offerings in India have evolved and
are fast making a mark for themselves in the global F&B arena, too.

Until recently, five-star hotel restaurants were considered the epitome of fine dining experiences
in the country; however, the rapid growth in standalone restaurants is seriously challenging the
former for top honours. With a well travelled upwardly mobile consumer, new and trendy food
concepts are a rage in the Indian F&B business. Of late standalone restaurants like Indigo, Tote,
Olives, Tetsuma, Trishna, Zest, Smoke House Grill, to name a few have raised the bar for the
F&B offerings across major metros; each outlet has a unique selling proposition (USP) that has
become its claim to fame. However, the concept of standalone restaurants is still in a nascent
stage and will benefit immensely if provided the right impetus with regards to ease of acquiring
licenses, clearances etc. Standalone restaurants, historically, have been funded by the owning
families or by a group of individuals; however, with the entry of restaurant-focused funds, we
can expect heightened activity in the standalone restaurant space. All in all, we can rest assure
that the Indian F&B industry is in for some exciting and great times ahead. Another aspect of the
Indian F&B industry that has witnessed a radical change over the years is the design element.
With more emphasis being focused on the aesthetics of the place, the touch and feel aspect is
becoming of foremost importance. Restaurant design over the years has evolved from just a

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touch and feel of the cuisine at offer, but is now focusing on creating an impression which will
remain with the customer and will act as product differentiator in the times to come. The
element of WOW, and creation of an experience are key focus areas for contemporary restaurant
designers. Over the recent years a host of international design firms like Super Potatoes, MIAJA,
TID etc. have already put their designs to test in the local arena. A few interesting trends in
restaurant design include kitchens moving into restaurants, gigantic wine display walls, bar
areas as a focal point, private dining areas and the heightened use of colours and lighting.

Key Game Changers:

• Rapid growth of standalone restaurants

• Well-travelled customer open to fine dining experiences
• Entry of restaurant-focused funds
• Focus on Interior design, a priority for restaurants

Manpower − The Human Element

In the year 2000, Human Resource Managers were gearing up to recruit large numbers of
manpower for the ambitious expansion plans that hotel companies had envisioned, post the
opening up of the Indian economy. Additionally, managers were also beginning to experience
the occurrence of attrition, an event that had been relatively low in frequency in the past.

With the opening of the Indian economy, several international companies rushed to establish
their base in India. They, however, soon realized that their plans would need to be
supplemented by effective and expressive liaisons that were somehow not available in bulk in
the market. This created a spate of high-salaried job profiles whose primary function was
identical to those of the employees within the hospitality industry – service. It was, hence, only
natural that hotels saw an increased number of resignations from team members that were
digressing from their core competencies to join high-paying jobs in call centres, banks and
airlines. Several hoteliers even explored their chances with real-estate firms and infrastructure
companies in the then burgeoning Dubai, and the Emirates.

The year 2010 is a sea change in these phenomena. The hard-hitting economic recession has
forced several of these poaching multinational companies to relook at their staffing
requirements and downsize their current teams. This has resulted in the availability of
employees who are now being absorbed into the resurgent hospitality sector.

The year and the decade ahead are also expected to see oversimplification of job roles. With the
advent of new types of accommodation products and need for standardization, hotel companies
have considered preparing manuals detailing the procedural handling of every conceivable
situation in a hotel operation scenario, thus reducing the reliance on age and experience. This
has resulted in younger individuals taking on the helm of operations for a unit. Past HVS
Surveys show that the average age of a Unit General Manager has dropped from 45-50 years to
30-35 years. The reduction in age profiles is prominently visible across all positions of the hotel
hierarchy.

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The evergreen area of concern – availability of sufficient number of staff – has also seen a change
with the requirement now being changed to “availability of sufficient number of trained and
qualified staff”. Hotel managers have realized the difference in service levels achieved through
trained staff and otherwise and have made a transition for the better. This has created a specific
requirement that is currently not being catered to by most of the educational institutions across
the country.

Key Game Changers:

• Continued good-quality talent crunch

• Increasing growth opportunities for the global Indian to relocate to India
• Continued hiring from and attrition to related service sectors
• Expected offerings of Employee Stock Options and Competitive Healthcare plans by
more hotel chains
• Innovative solutions to the continued challenge of attracting and retaining trained
employees

Technology & Hospitality

Ten years ago, the most popular way of planning a trip was to visit a travel agency to get your
itinerary made. Besides direct hotel reservations, the Central Reservation Systems (CRS) and
Global Distribution Systems (GDS) thus served as the primary channels of sales for hotel room
nights.

The growth of the internet since then has played a key role in truly globalizing the sales efforts
as well as the marketing opportunities for the hotel industry. The advent of third party travel
websites such as Hotels.com, Expedia.com and Travelocity.com as well as a few home grown
websites like Makemytrip.com and Yatra.com has also been witnessed in recent years. These
channels of distributions quickly gained strength and their contribution to the overall pie of
reservations has been growing with every passing year. Additionally, independent hospitality
review and opinion websites like Tripadvisor are also very popular with the travelling
population of today. While these websites offer the tech-savvy traveller the opportunity to see
pictures and read actual guest comments about almost every hotel in every major and minor city
of India, they also offer the hotels an opportunity to showcase their products and services to a
mass audience.

The future of online marketing is now one of consolidation. Hotel brands recognize the strength
of the internet as a medium of sales and are increasingly working towards making their
Brand.com websites user friendly. Several brands have launched ‘Best Rate Guarantee’
programmes that promise the consumer the best available online rate on their brand.com
website as opposed to the third party online vendor. Seamless integration of Brand.com
websites with the latest Property Management Systems (PM Systems) enables better yield
management and pricing strategies as well. Companies like HVS also jumped onto the
bandwagon and our Web Strategies division has grown faster than any of our other verticals in
recent months. This relationship between technology and hospitality will only grow stronger in
the years ahead.

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Key Game Changers:

• Continued significant contribution of third party travel websites to hotel reservations

• Increasing role of Brand.com sites in the overall sales and marketing strategy of all hotel
brands
• Increasing reliance on search engine optimization, web advertising and e-marketing

Conclusion

India – known the world over as the land of hospitality – is today in the defining stages of the
business of hospitality. While the possibilities for growth are immense, it will take an earnest
effort, both from the industry’s key stakeholders in the private sector and the relevant
government bodies to truly change the Indian hospitality’s landscape in the years ahead.
Perhaps, the industry is in need of a champion who will work towards the several reforms and
ideas discussed in this article with the same zeal and enthusiasm as is characteristic of our
industry’s service culture. The ten influencers discussed in this article are but a drop in the
ocean. Hospitality India has come a long way since 2000; however, it has a steep climb ahead
and HVS looks forward to being an integral part of this journey.

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