Mid-market hotel chains have taken the coronavirus blow on their chin

As aspirational India travels far and wide, mid-market” hospitality providers are smelling an opportunity to cash in on their wanderlust. Players such as Lemon Tree, Accor, ITC Fortune, Royal Orchid and Fern and others are in fact going back to the drawing board to bulk up plans to address this growing demand.
“We have not been able to scale-up like the way low-cost carriers have done. They had the planes and just added the routes. We have had to build hotels. While this may take another 2-3 years, ultimately customers will understand the difference between a 5 star, and a mid-market hotel, and that they are paying a lower price to get a different product and service, argues Patu Keswani, Chairman and Managing Director of Lemon Tree Hotels, the largest midscale player.

The value-driven volume customer, seeking a full- service hotel, is driving growth, leaving far behind the branded economy segment, which is yet to fully find its footing in the Indian market, feels Mandeep Lamba, President (South Asia), HVS Anarock.

Mid-scale hotels – that command pricing from $50-$70 which can go upto $100 a night -- have also exhibited highest RevPAR growth of 4.6% during 2013-18. Increasing demand for midscale hotels allowed the Midscale hotels to narrow the RevPAR gap with Upscale and Upper Upscale hotels between the period 2013 and 2018.

For the immediate quarter and probably the next, growth numbers are likely to get impacted as most witness a dip in occupancies and revenues this month following the Coronavirus outbreak in China.

But the impact has been far more acute for the luxury segment where a large percentage of clients are foreigners. The Indian Hotels Company, owners of the Taj brand said there was an impact from coronavirus on the business, but was difficult to quantify as yet and wait till March for a clearer picture to emerge.

In last decade and a half, there has been a gradual shift in the way hotels catering to the mid-market (or the 3-4 star category) segment have come up. In 2005, of the 25,000 branded hotel rooms, almost 80% were five-star and above. The explosion of the middle-income group is setting this inverted pyramid right and now approximately 43% of the total supply in the country (around 130,000 keys in 2019) is mid-scale. Almost half of the upcoming supply till 2024 is also expected to be in the midscale segment, exceeding 150,000 keys, as per HVS Anarock data.

Industry watchers say there has been an overall transformation in the hospitality industry with respect to this category. Earlier, travellers had limited options to select from predominantly luxury or non-branded budget hotels. With the availability of branded, mid-scale hotels offered by both international and domestic hotel operators ;guests have more options available in terms of full-service hotels, both in terms of locations and products, said Lokesh Sabharwal, Vice President - Development & Special Projects, South Asia, Accor, which follows a ‘densification’ strategy from a development perspective -- expanding in a key city with multiple hotels across its brand portfolio.

“We have 20 Novotel and 3 Mercure branded hotels across 15 cities in India, and this is testimony to the consistent and growing demand for this segment, said Sabharwal of Accor. Lemon Tree, controls 15% of the segment is adding another 3000 rooms in the next 2 years taking the total inventory to approximately 11000 rooms.

Typically, the mid-market hotels are the most resilient to recession or slow down. So, when cost control becomes important then the mid-market is the normal beneficiary.

“There will be major inventory coming in from mid-market hotels, as they are a much better investment during slowdown,” said Chender Baljee, founder, Royal Orchid Hotels. “Many business travellers have moved from five-star to mid-price hotels.”

“I expect there will be a shortage of mid market hotel rooms vis- a- vis demand from 2022 to 2025 when all the current supply gets absorbed and demand continues to grow” adds Keswani.

With the rising number of business travellers and millennials emphasising work-life balance, there is a huge scope in the mid-scale segment. Micro-breaks from work is a growing trend where the new age traveller is looking at squeezing in curated travel in shorter time, aided by improved transport, cheaper flights, on-demand car rentals and accommodation choices, says Samir MC, Managing Director, Fortune Park Hotels. Currently, Fortune has 52 signed alliances of which 45 are operational.

The demand drivers are majorly in the business and leisure segment so the potential here is big. The growth in domestic tourist arrivals is due to the emergence of the value-driven customer, popularisation of the weekend culture, the evolving choices of millennials, government campaigns, and introduction of low-cost airline services, increased trade and a booming service sector.

“Out of the total 750 district capitals, only 100 districts have branded hotels. The balance 650 districts can take at least 70-100 keys,. There is a huge scope for growth here , says Suhail Kannampilly, CEO, The Fern Hotels and Resorts.

The mid-market is an important supply segment in India, particularly as domestic travel gains stronger momentum. Around 67% of capacity expansion in the next 5 years is expected to be outside the luxury and Upper Up Segments. This has enabled the domestic brands to strongly penetrate the mid-market segment, aided by the fact that international hotel needs a minimum size to become practically feasible, says Vijay Thacker, director at Crowe Horwath..

International hotel companies currently dominate the luxury space and have not, so far, managed the same thrust in the
mid-market/economy space. Accor, Marriott, Radisson, Hilxton are fast pacing expansion plans in the mid-scale space.

Hotel operators say the next big opportunity for brands, both domestic and international is to manage the unbranded stand alone hotels nationwide of which there are about a million rooms. This is excluding the semi legal or illegal guest houses in India which are anywhere between 1.5-2 million rooms.

Middle is where the money is.