Budget hotels are in

There's plenty of room for everybody. With the demand for low-cost accommodation on the rise,  a whole host of hospitality firms, both foreign and local, is planning to set up budgets hotels. Everyone's looking  for a pan-India footprint with a strong presence in the tier II and tier III cities.

While Choice Hotels will roll out its new  Sleep-Inn brand of hotels early next year in Pune, the US-based Berggruen group plans to  have at least 38 "Keys" hotels,  up and running in the next five years. And no one's holding back on investments: a back of the envelope calculation shows that  close to Rs 3,000 crore (Rs 30 billion) could flow into the segment over the next few years.

As Patu Keswani, promoter of Krizm Hotels, which runs the Red Fox chain, points out,  "As I see it, the supply  of rooms today is possibly half the demand at the top end of the budget space. And at the lower end, I can't see any supply at all." Much of this is endorsed by consultancy firm KPMG which estimates that  there are just about 40,000 rooms available today in the budget  category whereas  the number of  domestic tourists last year was more than a hundred times that number. 

It's not just tourists that are being catered for; the target clientele caters  more  for the business  traveller looking for no-frills accommodation.  In fact, Berggruen Hotels plans believes 75 per cent of its guests will be businesspeople which is  why it's creating an environment where it will be  possible for guests to work and  it is making sure they have access to the Internet, Wi-Fi services and business centres.

Roots Corporation too is focussing  on the business traveller and has chosen to put up its  most of its properties in emerging commercial centres such as Bhubhaneswar or Durgapur. 

Given that budget hotels don't earn a very high proportion of their revenues from the food and beverage (F&B) segment-less than 10 per cent compared with 25-30 per cent for five star hotels-- they need to make sure that occupancies are high. That's why most hotels are pricing the room rates attractively.

Prabhat Pani CEO, Roots, keeps rates unchanged throughout the year and says his hotels record average occupancies in the region of 70-75 per cent.   Says he, "Our tariffs vary from city to city but they remain the same  all the year round." Berggruen  plans to charge a "bottom of the pyramid" price of  between Rs 1,600-2,400  for  its rooms and Sethi  is confident that occupancies will  hit 70 per cent.

Says he, "In Goa today one and two star rooms cost Rs 2,500 and our quality will be far better."  Rooms at Red Fox will be priced between Rs 1,500-2,000 depending on the city, but Keswani says  he intends to be flexible about the pricing. Says he, "Since labour in India is relatively cheap, it makes sense to charge a little more sometimes and offer additional services."

Adds Reyaz Mama, director Choice Hotel, " Our objective is to price our rooms at a 25-30 per cent  discount to full service hotels. So, with room rents of around Rs 1,500-2,000, it should not be difficult to achieve occupancies of 80 per cent plus."

With real estate costs remaining high, everyone's attempting to find a way around them. Roots and Red Fox, for instance are building their hotels on malls. Roots, which leases most of its properties, is also teaming up with Indian Railways to run some of the latter's properties like Yatri Niwas in Delhi. Berggruen is trying out a model where it both owns and leases properties.

Says Keswani, "In India real estate costs account for about 50 per cent of the cost of a room compared with just 15 per cent overseas." However, Mama  says leasing  land is becoming difficult and Choice is locating most  hotels  on the outskirts of cities.  "We are sure  that a couple of years down the line, we will get people to stay with us even if we're slightly far away because the market is changing,"he explains.

With other costs such as labour and electricity under control -- most hotels do not provide room service -- payback periods are reasonable. Says Mama, "If the cost of the land is at or below 15 per cent of the project cost, the investment can be recovered in five to seven years."

At Roots, Pani is pencilling in gross margins of 50 per cent once a few more hotels are up and costs  on sales and marketing can be absorbed over a larger base. And Sethi's confident that in a couple of years, he'll make a  return  of 14 per cent on the capital he's put in. If they're not cutting corners on their investments, they're  not willing to compromising on the returns either.