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| Edited By: Ashish K Tiwari |Source: DNA |Updated: Jul 02, 2019, 06:30 AM IST
India's largest mid-priced hotel chain has finally debuted in Mumbai with its brand new next generation 'Lemon Tree Premier' hotel. Before the end of 2019, the hotel chain will have another 'Lemon Tree' hotel, under a management contract, operational in the Kalina/ Bandra Kurla Complex (BKC) area. And by October 2022, its largest single structure hotel with 670-odd guest rooms, under the newly introduced upscale brand Aurika, will start receiving guests in the Mumbai International Airport Ltd (MIAL) area. Patanjali Keswani, chairman and managing director, Lemon Tree Hotels Ltd, in conversation with Ashish K Tiwari, speaks about how Mumbai will change the business outlook for the company.
We were lucky to have got it at the right price and we have something to celebrate here for two reasons. One is, we needed a flag here and wanted our own flag rather than a managed hotel. Secondly, it is also a victory of sorts for us as it took 12 years to build this hotel and get approvals. It's come out very well and is the second Lemon Tree Premiere (LTPs) of the new category or the next generation LTPs as we call it.
We think it would play a major role in three ways. One, it'll make people aware of our brand in Mumbai and that's important because generally, we do not advertise. A lot of our brand's awareness comes from actual usage and physical presence. Clearly, we needed a physical presence in Mumbai and usage will happen, people will get familiar with the brand and its experience. This will in itself lead to two things, Mumbai is a very good market, in fact the best in India. So, I'm certain this hotel will do very well. Also, we will start getting more business out of Mumbai into the rest of our system. I'm quite hopeful that it will add significant value to our overall business.
How I look at it is very simple. My stable hotels did over 81% occupancy and some of the brand new hotels were in the 30% to35% range. On a weighted average, we did 78% occupancy across the portfolio. Having said that, once the hotel is stable in 12 to 18 months, then we do over 80% occupancy. The hotel industry in India is witnessing 67% occupancy, so our hotels are performing 1.2 times better than India as a market.
Now, take a city like Hyderabad that has 3,400 hotel rooms including five-star hotels, of which we own 700. That's roughly 21% of the Hyderabad market. So out of Mumbai, say 4,000 people are flying every day to Hyderabad. Let's assume half the number is returning home and balance 2,000 are Mumbaikars going to Hyderabad for work. We own 21% of inventory in Hyderabad, but our consumption share is 1.2 times. Out of the 2,000 guests, 25% who were earlier not staying with us are likely to become our customers because they will now become familiar with our brand experience. My view is, having a hotel in the source city will always lead to incremental business over and above what our hotels were already doing. While I can't quantify it, I'm certain Mumbai will have an indirect network effect. In fact, every time we've opened a new hotel in a new market, we've seen the chain synergy effect play out.
The short answer is that we hope to have more properties post-Mumbai presence with two owned hotels and one management contract. This should give potential asset owners more confidence in our brand and eventually more management contracts going forward.
The hospitality industry scenario in the recent past hasn't panned out as expected due to shutting down of Jet Airways, elections and overall slow down.
In January, we did 8.5% pricing above the previous year. In February, the price hike was 6% over last year and in March, it was 2.1%. The weighted average, I think was 4.4% odd. As far as the slowdown is concerned, it was on account of three very clear things. Once elections were announced, a lot of companies deferred plans due to uncertainty. This impacted corporate travel and some extent leisure because people don't want to go to a state where there is an election in the process. Second is the gradual disappearance of Jet Airways. As Jet seats reduced there was a shortage of supply that led to an increase in prices of flight tickets. As a result the affordability of the middle class to travel by air started declining. This, in turn, impacted demand. The third and the biggest impact, and I'm surprised that the government is not acknowledging it, was the slowdown in specific sectors like auto, auto components, consumer staples, fast moving consumer goods, non-banking finance companies (NBFCs) etc. These are all large consumers of hotel rooms. When they witness a slowdown, consumption of hotel rooms also slows down.
This segment, which contributes about one-third of our total room nights, was impacted. So, we decided to get more retail business, which is the online and the direct Indian consumer. We had to drop prices as a result average rooms rates (ARRs) were down. So, instead of a 9% increase in ARR, it became 2%. That's how occupancy went up, because ultimately our game is operating leverage, and we need to be at least 80% and we achieved that. So yes, the room rates came down but that's part of doing business in such market conditions.
The market conditions are changing and July is certainly looking better. Also, I think a lot of stuff will happen based on the upcoming budget, monsoons, how oil price plays out and credit markets. The budget, I'm assuming, will attempt to answer the problem of liquidity in the credit markets, whether through NBFC or whatever it is. There is also this question about how will the government stimulate demand? That's because, fundamentally, we are consumption and not an export economy. There is an obvious slow down which is very worrisome for any Indian business.
There are not many companies in India, doing what we are doing i.e. deploying capital left, right and centre. The current capital utilisation in India, I was told is in the mid 70s. The government needs to do two things. One is to push consumption and in the urban centres, drop income tax rates, so that there is more disposable income. I'm still undecided if they can do that for both individuals and corporates. But they will have to find some way in addition to refinancing the NBFC sector sensibly. Also, employment generation is a big area that needs attention. Hospitality and tourism sectors play a big role in generating jobs hence the government needs to take note and boost the sectors for its players to be able to create more jobs.
