InterContinental may nix hotel franchising, go for management deals

MUMBAI: The UK-based InterContinental Hotels Group (IHG) intends to completely change the way it has been operating in the Indian hospitality market so far. Present in India for over two decades now, going forward the global hospitality chain wants to move out of the franchise mode and focus mainly on management contracts.

Citing the company’s reasons for the change in India strategy Tony South, senior vice-president, development and asset management, InterContinental Hotels Group (IHG), told DNA Money that though franchising contributes in a big way (68%) to the company’s profit, the model is not appropriate for every market.

“If you look at the US, it is probably the most mature franchise market across the globe. However, if you compare it with India, the market here is still very immature and doesn’t make business sense at all, especially for the hotels business,” South said.

Using the management route of expansion within India and abroad is a strategy aggressively being pursued by other Indian hotel companies like Taj, Leela, Oberoi and their international counterparts Accor, Starwood, Marriott, Hilton among others. “IHG joining the bandwagon now is a better-late-than-never kind of a situation,” said an industry expert.

This move by the company is though primarily aimed at enhancing qualitative presence in the Indian hospitality market is also expected to offer IHG better control on hotels that will flag its brands and obviously build a strong management base in India.

IHG has 13-odd hotels between its InterContinental, Crowne Plaza and Holiday Inn brands. As of today, all of their hotels are under franchise agreements with various hotel owners including late Lalit Suri-promoted Bharat Hotels which operates 4 hotels under the InterContinental brand and Ravi Ghai-promoted GL Hotels which also runs a luxury InterContinental brand hotel at the prestigious Marine Drive area in Mumbai. Interestingly, IHG decided to invest in India, taking around 11% equity in the hotel.

Industry experts are also of the opinion that the strategy might come in handy for IHG with respect to parting ways with existing partners not conforming to IHG’s global hospitality standards. In fact, just about the same time last year, the global hotel chain had decided to discontinue the franchise agreement for its Holiday Inn hotel in Mumbai with the owners of Eastern International Hotels.

Now that IHG has decided to only focus on management contracts in India, how does it propose to deal with their existing franchise partners?

“There is no pressure on any of our partners to do anything, though in some cases we will have to re-negotiate the franchise agreements as and when they expire. We will work with the respective owners to find the right solution that brings in long-term benefits for all the stake holders involved in the asset,” said Paul Logan, vice-president, development, Southern Asia for InterContinental Hotels Group (IHG).

Added South, “So when a franchise agreement expires and if the franchisee is open to working with us on a management basis, we will be happy to take it up. However, in case the franchisee is not open to the idea and still wants to run the hotel his way, then we will probably have to part ways on an amicable basis.”

Elucidating further on their strategy in the past, South said that taking the franchise route way back in the 80s was the only route for international hotel companies to enter the Indian market.

“We made mistakes and there is no doubt about it. We did not really understand the market, not to say that others did, probably because franchising was in the very early stages and drawing conclusions was not possible,” said South.

Globally IHG operates through 3,700 hotels and 556,246 hotel rooms across 100 countries and territories. Of the total inventory, the owned and leased component is a minuscule 2% while franchised is 76%. The managed inventory stands at 22%.

The company recently signed six management contracts for InterContinental Pune and Holiday Inn Hinjewadi Pune in Western India; Holiday Inn Ernakulam Kochi and Crowne Plaza Cochin, the Crowne Plaza New Delhi in North India and another Crowne Plaza in Southern India. Last year, IHG entered into a management agreement with Today Hotels for the Crowne Plaza Gurgaon, which is scheduled to open in June this year.