New players seek to ginger up budget hotel market

Ginger Hotels, the budget hotel brand of the Tata group, has had a solo run since its launch in 2004 -- unchallenged by any international or domestic organised sector player.

Having started with an economical Rs 999 per room, Ginger, into its eighth year, currently charges Rs 1,500-2,000 per room.

Spiralling land cost and inflation have forced Roots Corporation, a subsidiary of Indian Hotels Company that owns Ginger properties, to increase room rates.

While Ginger remains the benchmark product in the budget segment, like Tata Motors' Nano, other players are not only waking up to the concept now but also rolling out similar products at the ground level.

For instance, Europe's largest hotel company, Accor, only last month rolled out Formule 1 -- a low-cost hotel that offers basic amenities best suited for short stays.

Like Roots Corporation, Accor has also opted to go the asset-heavy way for Formule 1, which is the ownership model.

Though Accor has managed to penetrate the economy segment with Formule 1, it has priced rooms at Rs 2,112 -- slightly higher than those offered by Ginger.

Offering free wireless internet, free breakfast, sound-proof rooms and a flat-screen television with extra channels, the European company believes it can sway buyers away from Ginger.

Formule 1 Hotels India Vice-President Philip Logan says: "We are offering 140 sq ft rooms, but those will be stylish, with soft colours, rounded edges and soothing lighting and lots of storage space.

"We are targeting domestic corporate clients and frequent travellers for work and leisure."

The company opened its maiden property in Greater Noida last month and plans to open 10 more by the end of next year, including four this year in Ahmedabad, Pune and Bangalore.

"Our rivals are inconsistent with their products in areas like rooms and sit-outs. We have identical rooms with trained staff.

"The unregulated market is large and the opportunities are larger," Logan adds.

Though Accor has not shared the details of building cost of the properties, Logan believes an average of 60 per cent occupancy will lead to the break-even time of 5-7 years for a

product under this category.

In fact, spike in land prices across the country has put the brakes on Ginger's expansion plans.

So far, there are only 25 Ginger hotels in India, compared to IHCL's initial plan of around 70 by 2012-13.

A senior IHCL executive explains: "We started Ginger hotels with room rates of Rs 999 and now those have risen to Rs 1,500-2,000.

"You keep rates down through lower land costs. Ginger is more active in secondary and tertiary markets than primary centres because the real estate (in metros) is costly."

Taking cues from the adverse market trends Ginger has had to face, other players have consciously placed their products at a premium over the Tata brand.

New players like Peppermint Hotels, Berggruen Hotels, Lemon Tree, Louvre Hotels, Premier Inn and Hometel (Sarovar), among others, are either in the process of opening hotels in the new category of 'upper budget' or have already rolled out properties.

These budget brands mostly offer rooms under Rs 3,500-a-night offering an array of facilities, including easy-on-pocket restaurants, a feature absent in Ginger.

The category above this price is called the mid-market position.

One of the main reasons why companies have preferred to stay away from the entry budget segment is because of the soaring land acquisition costs which form a significant part (about 30-50 per cent) of the total property cost.

Berggruen Hotels Managing Director Sanjay Sethi says: "We have seen some players who have started their budget foray at lower rates and then steadily raised charges.

Room rates have to rise if land costs and interest head northwards, there is no option."

Berggruen Hotels, with the brand Keys Hotel, is a player in the upper budget segment and has priced its rooms in the range of Rs 2,000-4,000.

According to market experts, land price can be Rs 15-16 lakh (Rs 1.5-1.6 million) a room, compared to the total room cost, which could be Rs 30-35 lakh a room for a budget hotel.

"If someone spends Rs 25-26 lakh a room and this cost goes up due to higher land and loan costs, even a small percentage increase results in reduced returns from a property.

"Interest rates today are between 13 per cent and 16 per cent," Sethi adds.