For many, India has the potential to be one of the largest and most prosperous economies in the world. Some believe it is the second China and yet, for many, India is an unknown market. India is just one of those countries that is full of contrasts and contradictions; great luxury and wealth alongside mass poverty. One has to remember that India is still a relatively young country, gaining independence in 1947, and it takes time for society to find solidity. But is it a market of opportunity?
With luxury and upscale hotels finding it difficult to make money, top global chains like Marriott, Hilton, InterContinental, Starwood and Accor appear to be focusing their attentions on mid-market brands as they expand in newer territories. More than 60 percent of the hotels that are coming up are in the mid-market category and involve less capital expenditure and quicker profits, say hoteliers.
Hilton Worldwide recognised its growth potential in the mid-market segment and created prototypes of its midscale brands — Hilton Garden Inn and Hampton by Hilton — specific to the Indian market. Accor aims to have more than 35 hotels in India by the end of 2014. InterContinental Hotels plans to add 150 hotels to its India portfolio over the next 15 years, 85 per cent of which will be under its mid-scale brands, Holiday Inn and Holiday Inn Express, in tier-I and tier-II cities. Marriott too plans to scale up with its business hotel brand Courtyard by Marriott, the recent one being its first property in Bilaspur, Chhattisgarh.
India may be best known for its luxury properties, but the mid-market seems to possess the growth potential.
The Indian economy certainly enjoyed great growth in the late noughties, averaging around eight percent per year. However, in recent times this has fallen to around 4.7 per cent growth, which is causing concern. By European standards, this sounds very impressive, but it is much lower than the rate of nearly 10 per cent achieved in much of the recent decade. Growth of five per cent reflects that there is much spare capacity and scope for improvement. Without a high rate of growth, the concern is that it will lead to unemployment and discourage future investment.
At the present time, the Indian economy faces several challenges:
- In the past couple of years, there has been a fall in the rate of growth causing concern that the period of high growth is coming to an end. Growth fell to a low of 4.4 per cent in 2013.
- India has struggled to keep inflation low. In 2013, inflation was nudging near 10 per cent, hurting the living standards of the poor who are particularly vulnerable to the price of food. High inflation is also harming confidence for investment.
- Current account deficit. India’s growth has been at the cost of a persistent current account deficit (which reached over six per cent of GDP in 2012). India needs to import crude oil, machinery and many other raw commodities. Its export sector has struggled to match the growth of imports.
- Rupee devaluation. The large current account deficit has caused the Rupee to fall, despite very low interest rates in the US and Europe.
- Inequality/poverty. Parts of the Indian economy have made rapid growth, but it has proved difficult for the fruits of economic growth to filter through to all areas of the conomy, especially isolated rural areas where there is poor infrastructure.
- Government budget deficit. Despite years of economic growth, the government has found it difficult to balance the budget. The budget deficit is 4.8 per cent of GDP in the year 2012-13. Public sector debt is 68.05 per cent of GDP, one of highest for a developing economy. Tax collection is still limited by tax evasion and corruption (tax collection only accounts for nine per cent of GDP – one of lowest in the world). The government is committed to reducing the budget deficit, but this may be at cost of the social welfare programme.
However, despite these challenges, the Indian government is confident of a return to growth and one of the key areas is an increase in tourism. A report by the World Travel and Tourism Council earlier this year noted that India’s travel and tourism industry is set to grow by about 7.3 per cent in 2014, but average spending by foreigners travelling to the country could decline sharply. In 2014, revenue from domestic tourism is expected to grow 8.2 per cent compared with 5.1 per cent a year ago, the London-based council has said in its Economic Impact Report, adding that increasing domestic travel, growth of low-cost airlines and upgrading of airport infrastructure will be the growth drivers.
“The figures of foreign spend in India is generally good, but when compared to the global forecast it is much lower than other countries, like China, which grew at 9.2 per cent in 2013 and is anticipated to grow at 8.3 per cent in 2014,” said David Scowsill, President and CEO, WTTC.
In 2013, India generated Rs 1.1 lakh crore from foreign visitors. A lakh crore is equivalent to one trillion rupees and, as stated above, the figure is likely to grow in 2014. International tourist arrivals are expected to touch 7.36 million in 2014 and 13.43 million by 2024. Expenditure by foreign tourists in India is expected to grow 4.3 per cent every year to Rs 1.74 lakh crore in 2024.
In 2013, the travel and tourism industry contributed Rs 2.17 lakh crore or two per cent to the country’s GDP. This is expected to rise to Rs 4.35 lakh crore in 2024. WTTC, which includes executives of travel companies as members, had said earlier that if five G20 countries (India, China, the US, the UK and Brazil) were to go electronic in their visas, the move could generate five million jobs and $268 billion income.
So where does the opportunity lie for growth in hospitality?
We return to the mid-market sector. There is still a gap between luxury hotels and quality budget hotels in the country and the mid-market segment fulfils that gap as both tourists and the corporate travellers are increasing in number. The mid-market segment has all the trappings of a luxury hotel, but at an affordable price. They are an alternative to luxury hotels, but not a replacement for them. A large proportion of corporate travellers in India are mid-level executives and a bulk of leisure travellers are from the middle class. The mid-segment hotels have grown rapidly to cater to this demand. They are the most important right now as everybody needs a budget hotel and not everybody wants a luxury hotel. They are in the middle and have most, if not all, amenities that a luxury hotel would provide.
With corporates becoming cost-conscious and leisure travellers always looking at value for money options, it is emerging as the preferred choice. A growing middle class has created demand for affordable avenues for the domestic traveller. The need for affordable accommodation has leveraged the demand for mid-segment hotels. Currently, mid-market hotels constitute 29 per cent of the total hotel rooms in India and this will be the battleground for growth over the next decade.
