The government is trying to promote hospitality industry and air travel through initiative like e-visa and building more airports, but in an interview with VIVAN MEHRA of Business Today, RAJ RANA, CEO, South Asia of Carlson Razidor Hotel Group, said that overall improvement in tourism and travelling can only happen through building better roads in India. It will increase the speed of travel and also the occupancy in hotels, feels head of India's largest international hotel chain. He also talked about company's future plan in India and impact of online travel sites on hotel industry. Edited Excerpts.
Q. Even though the Carlson Hotel Group entered India quite early, your expansion started very late. So how important is India in Carlson's Plans?
A. I would say that Asia-Pacific is extremely important in Carlson Rezidor's plans and in that market India, China and Indonesia are the largest demand areas given their population and size. We have ambitious targets for these three countries. If you look at India specifically, today we are in the pole position by the number of hotels. We have 76 operating hotels with another 44 in the pipeline. We started with a great flagship at highly visible location - The Radisson Blu Plaza at the Delhi Airport, that helped us in getting traction.
Q. Does India figure in the top three markets globally? Your growth percentage planned?
A. If you look at the growth percentage, then of course India would definitely be amongst probably the top 3-5 markets, because most of the growth is happening now in either the Asia-Pacific, the Middle-East region or to some extent in Africa. These are the markets where there is more opportunity. We are targeting to grow from 110 hotels today to 170 hotels by 2020 in India.
Q. You mainly follow a franchise plan, can you explain the cost that a franchise plan entails?
A. I would like to correct you - today 75 per cent of portfolio is managed and 25 per cent of portfolio is franchised. But, the perception persists because in the beginning our portfolio split was 50-50 per cent. But in the last few years we have been pushing more into management. However, the market reality is that today owners are savvier. Their children are educated in hospitality, there are more consultants available, so we are not opposed to franchising, in fact, we are very keen on selective franchising, but dominantly we still are into management.
Q. Can you give us an idea about costing across your various chains? What is the rough costing per rooms?
A. The fees in the industry are not specific to brand, but they are definitely specific to the market and business model ie. franchised vs managed. For almost all brands, including Carlson Brand, we charge a royalty fee, marketing fee and reservation fee, as a percentage of room revenue for a franchised model. While in the managed model, we have a base management fee as well as an incentive management fee because we also drive gross operating profit. A small percentage is taken of that as well in case of managed hotels. The fee is standard across the range. If you look at the royalty fee, it ranges anywhere from 3.5 to 4.5 per cent. This is not for us but across the industry.
Q. So average room development cost would be around 30-40 lakh? Is that correct?
A. Yes room development cost are of course different than the fee that we charge. Each brand has certain specifications and the cost differs from brand to brand. A Country Inn and Suites room may cost minus the land value Rs 40 lakh a room and a five-star hotel may cost a crore. Radisson may cost Rs 85 lakh to Rs 1 crore a room.
Q. Can you give us an idea about ROI? Do you assure something? Does location play an important role on returns?
A. Yes in real estate, it is indeed location. For example, one could be on a major highway, but if you are not at the right exit then you might not really be on the highway. So location is in fact the key factor to attract the demand because the demand is all around, but there is also competition all around. We encourage owners to engage third party companies to do feasibility studies so that they are comfortable with the study and then we guide them to the right brand that fits for that location. We want the owner to be successful because it's the long-term relationship of 15 years. We don't want it to start on the wrong foot. So expectations are monitored and kept realistic. For managed hotels we develop budgets which are signed off by the owners and then it is our obligation to do our best to deliver to the budget.
Q. How long is your break-even point, or what is the lifetime span?
A. We are able to achieve gross operation profit in the first 1-2 years, which is remarkable. For example our hotel in Guwahati, or any other hotel where there is little competition, we see properties getting operating profit very quickly. Each case is an individual situation. Those having more leverage will feel slightly more pressured for getting net profit , but we deliver gross operating profit very quickly.
Q. Tourist arrivals have seen a dip in the last couple of years, how does that impact your plans?
A. Hand-in-hand, because our business is totally linked. I will link this with a few factors. One, the traveler- how many people are travelling? Whether they will be domestic or international? India is still dominantly a domestic market, where majority of people staying in the hotel are domestic travelers, unlike what some people may think. Corporate executives and leisure business mainly come from within the country. Of course there is an international component which comes in as well.
As far as leisure is concerned, the international component varies in seasonality. I wish India were a larger MICE (meetings, incentives, conferences and exhibitions) destination for inbound, which is currently a small proportion probably because of lack of large infrastructural facility such as a massive conference space available in places like Florida, Las Vegas or Singapore. And then of course we have a growing demand of other kind of travelers as well, like medical tourism. So it's a mix of all these things.
In metro cities, the larger share is corporate traveller. In secondary or tertiary cities most number of traveller are tourists, particularly religious tourists, depending upon the location. For example Ajmer, Katra, Haridwar, Varanasi are dominantly religious tourism, while other places like Goa are of course leisure destinations. But metro cities dominantly receive corporate travellers.
Q. What are your plans for tier-2 and tier-3 cities, considering it's a big market?
A. The demand in tier-2 and tier-3 is big, particularly if there is an airport. The government is pushing for more and more airports in smaller cities. In fact, I have heard the government is planning more direct investment into airports to places where there are no airports. Improved infrastructure, particularly connectivity, and states giving more incentives in certain zones are making secondary tertiary cities more viable for mid-scale brands. So, we are very focused on those brands.
As far as acquisition is concerned, we sometime find that when we conduct our studies for acquisition, existing independent hotels in many cases don't meet fire safety standards, which is very important for international brands like ours. Therefore, cost of upgrade is so prohibitive that it doesn't make sense. This spurs building new inventory. But we are anxiously trying to get into these markets with brands like Park Inn by Radisson and Radisson Red.
Q. How is India's performance in last couple of years?
A. The hospitality industry has been in pain, it is not a secret. I would say that the demand-supply equilibrium had totally fallen apart, with supply side of the equation outstripping demand. In market like Delhi NCR, Hyderabad, Bangalore, or even Pune there were a lot of problems, but we are now seeing that supply is slowing down. In many cases owners have either delayed the opening date because of funding problem or are just waiting for some more time.
The softening in the supply side and growth in demand has allowed this excess supply to be absorbed in fairly orderly manner and we have seen since the last quarter of 2015, occupancy has actually gained for the industry as well as for our own portfolio. There is a saying "with occupancy going up, rates are bound to follow". The problem with rate is that it accelerates on the way down, but take baby steps on the way up, so we are hoping that it will gradually start going up.
Q. What's the impact of AIR BNB and OTA (online travel agency) on the business?
A. OTAs have a bigger impact at present than Airbnb. OTAs are here to stay. We only look to partner with OTAs if they help us in selling our hotels, particularly distressed inventory. With partial consolidation happening in the overall industry, the hotel groups are now able to stand up or have better negotiating power with the OTAs. OTAs also realise that they have a role to play . We are seeing their margins becoming little bit more palatable to the hotels.
Q. What is the philosophy for your group regarding over inventory?
A. Rates are dynamic and rooms are a very perishable commodity. Hotels like airlines have started dynamic pricing for all available rooms. Even last room pricing has started in our hotels and many of our hotels have revenue optimising managers who are skilled just for that. It sometime becomes complex because you are also watching your competitors. So we are seeing rates becoming more dynamic than they were few years ago.
Q. The government is looking proactive but the hotel industry has hardly been benefited. How can the government help?
A. I think the government has helped in some ways. For example, the electronic Visa on arrival is definitely a step in the right direction- having them available at more airports is also a right thing. Govt had made a proposal that India should allow a single category, multiple entry Visa; which means business, convention, medical tourism or just tourism, all clubbed together as one single Visa which brings down the visa cost and facilitates ease. But it will not happen without taking bold decisions like this. The speed of connectivity and the cost of travel need to improve. For example, if you look at western countries, the cost of travel for a family of four is less and they can even travel 200-300 miles in a car in a few hours. But in India, travelling 200-300 miles becomes prohibitive because it takes lot of time and is inconvenient.
So speed of travel needs to be improved. The government has announced more airports, but we need to improve the speed of travel by road as well and till that happen, travel in India will not take off. Today I assure you that there are many families who would love to jump in a car if roads are safe. The speed of travel has to improve, particularly by road, so the mass travel starts in India and people can explore more and more.
Q. What about land pricing, isn't it the biggest hurdle for hotels at this moment?
A. Yes, for building a hotel, cost of land is still the biggest hurdle. The other challenge is the cost of funding, which is also high because we do not have industry status yet and hotels don't fall under the most-favoured category in lending. So every owner has to consider these two factors before building a hotel. Apart from that there is also the issue with tenure of funding. The loan period is also shorter and hotels have to ramp up quickly to avoid becoming non-performing assets. So we make sure to educate our partner owners that it's a long-term investment.