Trade News
Inbound/ Domestic News
Outbound News
Home Features Details


Monday, 06 November, 2017, 16 : 23 PM [IST]

Budget Hotels - Ignore or Engage?

While budget hospitality space in the country is seeing a lot of positive churning driven by some smart aggregator and cheeky management and franchisee models, the mainstream industry in the country is still stuck in the old ‘brand promise’ mindset, unmindful of the competition that is building up in their neighbourhood. As these new entrants are fast reinventing their business models and value propositions for both hotel owners and customers, the days are not far the mainstream budget players revisited their current ideological standpoint and conjured up another disruption in the budget space, writes P Krishna Kumar.

The big boom in the hotel industry driven by luxury 5-stars and 4-stars are long over. The big budget hotel opening announcements have come to a trickle or if not to zilch in India. From a media standpoint, photo ops for multi-property signings between international managers and Indian real estate honchos are history. When actions at the top of the pyramid came to a naught, a silent revolution started disrupting the bottom of hospitality pyramid. And ironically, this silent revolution was not marshaled by people who knew or understood the hospitality business. They were rank outsiders as far as hotel business was concerned, but were smart enough to sense the alienation of a vast segment of the industry at the budget and economy level and their craving for branding.

The model of technology-driven aggregation incubated by few start ups and young entrepreneurs like Ritesh Aggarwal of OYO fame caught the fancy of independent budget hotel owners and became an instant hit. Many nouveau entrepreneurs followed suit and entered the industry armed with venture funds to disrupt niche segments like hostels, homestays, etc. Although the success rate varied, all these disruptive ideas helped the larger cause of value of branding and standardisation in the otherwise fragmented segment.

The concept being put forward by them was quite new to India and still evolving. But there are studies from various matured markets where this concept is already setting trends for travel accommodation. A recent survey from Spain revealed that the number of beds listed in online accommodation rental services like Airbnb in Spain far exceeded the number of beds offered by the mainstream players like hotels and other regulated lodging units. The case can be extrapolated to some extent to India as well. The number of budget hotel rooms being offered by OYO, an accommodation aggregator and brand, is about 70,000 across the country, and no mainstream brand is anywhere closer to it.

Moreover, those behind these ‘new age franchisee’ concepts are hands-on with technology, management, and social media marketing, and above all have steady fund backing to weather price wars to acquire customers for a long time. Ritesh Agarwal, Founder & CEO, OYO states unequivocally, “We use a mix of technology and operational acumen in transforming and standardising hotel rooms, making them available for bookings via app, web, call centre and channel partners, providing tech solutions to enable better revenues and profits for our partners, and ensure delightful service and experience to our guests. Prior to OYO, budget hotels were mostly reliant on walk-in customers, and had little knowledge or acumen in investing in building customer loyalty.”

The kind of investment that these new age hotel companies are making in enhancing search, booking and in-room experience is quite big which many mainstream companies are not able to or desist from for RoI. In a recent interaction, Siddharth Gupta, Co-Founder of Treebo Hotels, a rapidly growing hotel network in the budget space, said that they will be incorporating cutting-edge customer-facing technology into their system to enhance guest experience at their hotels. The plans include introducing a mobile app to enhance the guest experience not only in terms of booking rooms, but also to enable them to remote check in, select desired room, place orders and above all raise complaints if any. They are also in the process of piloting IoT (Internet of Things) technology into the system which will enable the company to gather information, data, etc. about hotels in its network. “Budget hospitality space, has been craving for technology adoption for a long time, and the endeavour is to fill that gap with state-of-the-art consumer facing technology,” he informed.

There might, of course, be questions about lack of standardisation of products, shortcomings in terms of service delivery, etc. That is bound to happen while the focus is on scale rather than product. But there have been efforts to bring improvements in terms of standardisation and customer experience.

The government also seems to have seized up the opportunity that lies in that space to contain the shortage of accommodation in the country. They understand that if the country has to attract mid-range travellers from neighbouring regional destinations, we have to have more budget hotels with standardised offering in the branded space. With this aim, Ministry of Tourism, Government of India has constituted a committee to design a framework to accredit hotel aggregators in the country. “We are not working on it with a hotel perspective but from a homestay and Bed & Breakfast perspective. There are lot of real estate which is marginally used and which needs to be brought into productive use. One way to do that is standardise the guidelines for them so that we can build an element of trust so that the consumer knows what product he is getting. Second step would be to get the aggregators and accredit them. That process has already started, a study has been conducted by IITTM, and the paper has been already circulated for discussion. A committee has been constituted with several State level tourism secretaries as members and we will have a meeting soon to finalise the guidelines,” said Suman Billa, Jt. Secretary- Tourism, who is heading the committee.

Mainstream – yet to come to terms
It is estimated that there are more than a million hotel rooms in the unorganised sector in India which if brought into the mainstream could wipe off the shortage of branded hotel rooms. But, the mainstream industry, including midsegment players, is not enthused to look at this opportunity at all. They still consider vast chunk of this unorganised space a dirty business to be in and could damage their prestige, goodwill, and image.

Says Achin Khanna, MD-Consulting & Valuation, HVS-South Asia, “Hotel Brands are built over decades of toil as creating true brandequity is a painstakingly lengthy process. The unorganised market, while large in scale, is often not in a position to uphold the ‘brand promise’ that the consumers of these brands have come to expect from them. Simple aggregation of guestrooms under a singular brand umbrella with little to no ability to create a consistent experience wouldn’t serve the needs of both the brand and the guest. This is why established hotel brands are not jumping into the bandwagon of aggregation.”

Agreeing with Khanna, Beni Agarwal, Founder, GKHS Hospitality Consultants, said, “Brands eagerly look for opportunities to expand across all segments including budget. But they operate within the limitations of ‘Brand Standards’, i.e., minimum-acceptable standard of product, service and the kind of markets or locations they aspire to be present at. In addition, each brand carries a ‘Market Perception’ and ‘Market Expectation’ which is the result of its longstanding commitment to certain minimum standards of quality. It is mostly these set brand standards which prevent mainstream players from considering the non-complying unorganised hotel segment for expansion.” Agarwal also states reasons for earlier attempts by few domestic brands to create dedicated sub-level brand to target the unorganised hotel segment failing at the hustings. Core reasons, according to him, are – one contractual terms that aggregate brands offer are very short-term and way different from the philosophy of typical model of management contract or franchise, and evidently online room sale capability of the techy aggregate brands have been much more aggressive comparative to most mainstream hotel brands.

Offering a brand perspective to the issue, Vijay Jaiswal, Senior VP-Sales & Marketing, Sarovar Hotels & Resorts, a leading mid-market player, said that established mainstream players would rather continue with the existing model as the disruption hasn’t yet struck the business. Also majority of the players do not have the risk taking ability and are not comfortable to experiment with the existing mode of generating revenue, Jaiswal explained.

According to SN Srivastava, President & Co-founder, Clarks Inn Group of Hotels, the hotels opting for aggregator models are 3-4 room B&B facilities and mostly small inventory hotels with little or no service promises or guest amenities. “Therefore, they are not viable for us,” he stated, adding, “As a hotel management company, we need to have set parameters that define us - our brand identity, our target markets as well as customer expectations. Therefore, there are limitations to the kind of properties that we can take under a particular brand.”

It is not true that mainstream players are totally ignoring the budget and economy space, although they still have their reservations on the aggregator model. “There is no reason for us to believe that mainstream hospitality players are not capitalising on potential opportunities in the budget space. Established players have a very vibrant business model with an established clientele in place and do not need to disrupt. We operate on terms that cover an entire spectrum of development and management of hotels which adds the kind of value that the hotel owner looks for and which translates to successful business,” informs Rishi Puri, VP, Lords Hotels & Resorts, a budget and mid-market chain.

There are couples of mainstream hotel companies which are looking at the branding space in this space. Cygnett Hotels is among them with a dedicated brand, Cygnett Lite, to drive this business. “Cygnett Lite is not an aggregator model. We are pioneering a ‘manchise’ model for owners who are looking for branding,” said Sarbendra Sarkar, MD & Founder of Cygnett Hotels & Resorts. He said that both owners of as well as the customers are looking for branding as people using social media tools to search and book hotels are growing day by day. India is the third largest Facebook users and 60% of social media users are brand conscious, he added. He said that while aggregator models are more a technology play and less of hospitality, Cygnett will try to balance technology and hospitality experience to create a win-win for both property owners and customers.

There are certain others in the mainstream industry who believe that the new budget models will do a “customer education” service for their future customers. However, in the digital era where consumers search products, look for best price and convenience in terms of locations, etc. and then for past customer feedback about products, it is not prudent on the part of mainstream players to sit back thinking all the customers will convert to their brands in future. Different models are being worked out in the background by people who understand the budget business and the painpoints associated with it. Former Expedia India Country Head, Vikram Malhi has ventured into this space with Zuzu Hotels, a model boasts itself as “more involved brand” from an owners standpoint. Started in early 2016, Zuzu Hotels help owners manage the hotel better in terms of distribution, pricing, revenue, maintaining quality standards, etc. “Generally, these owners are good at day to day operations, but are not good at managing their distribution, revenues, traveller experience, etc., he said in a recent interaction. As a brand, Zuzu helps hotels to sell their inventory through all online channels, support pricing strategies, improving quality standards to deliver traveller experience, and staff training.”

“Prospects in the budget space are huge. We feel that it is a good space to be in as we are solving the real problem,” says Rajesh Magow, Co-Founder and CEO, MakeMyTrip. Both MMT Assured Hotels and GoStay are investing in basic stuff at member hotels and certifying them for customer assurance, he added. The online penetration in the domestic hotel space is around 13% against 55% in domestic air, and therefore there is enormous scope for more disruptions, he said.

Churning to continue
These, of course, show that churning will continue at this important segment of the market for some more time. The industry watchers are sure that this churning will be for the better as it will lead to more standardisation and value creation at the budget and economy level. That obviously will transfer pressure initially to the branded mainstream industry in the budget and economy space and in due course to midscale brands. “They will continue to reinvent their business model and value proposition in the interest of creating brands. The traditional budget and economy players are most certainly feeling the heat, competition is always good and will only make the overall sector elevate its game in this new environment,” says Khanna of HVS.

There are concerns among the mainstream players in the space about aggregators making gradual progression into the structured space in the market. “They are now trying to move into structured market and if they do that, it will certainly have an impact in terms of competitive offerings in the market because their strategy is numbers oriented and they have deep pockets to burn advertising fund in order to increase their market share. Budget and mid-market hotel chains in the country are busy tuning their growth strategies in the face of rising threat from accommodation aggregators,” cautions Jaiswal of Sarovar Hotels.

OYO founder expects more disruptions in the budget hospitality space in the years to come. “The budget hotel market is still at a nascent stage. Technology has enabled discoverability of these untapped budget hotels thus offering them a level playing field. We expect more innovations in both service and formats, with specialised offerings catering to short-stays, long-stays and home-stays. In OYO, we have identified a whitespace in the sub five-star segment. So, earlier this year we launched OYO Townhouse - a new category of neighbourhood hotels. Hotel apps and online booking options have also changed the travelling pattern and behaviour of customers. More Indians are travelling on impulse than ever before. So digital innovation will also influence way budget hotels respond to customer choices and trends. The speed with which hotels adapt to changes will mark the difference between the front-runners and the runners-up,” Ritesh observed.

While all agree to the view that the increasing supply into the branded inventory is good for travel and tourism in the country, there are differences of opinion regarding the role the aggregator models will play in the whole progression of the market. There are people who believe that the current models dying a natural death in the pressure of funds. “The size of the pie is huge and very diverse and therefore there will be business for all. But that said, well invested properties will continue to flock towards mainstream brands. Whereas we will see most of the current and future crop of aggregators shut shop as they are hugely subsidising their rooms in order to drive traffic. For how long can they take in and absorb these huge financial losses is a point to ponder,” says Srivastava.

More hotels, better roads, well connected airports, and internal transport facilities among other things will lead to increase in tourism – both business and leisure, opines Puri of Lords Hotels. Commenting on the new and emerging concepts, he said that they are relatively new to the country and so it may take some time before confidently stating if these are indeed satisfying the guests’ stay experience. “However what can be said for now is that the growth of such players would hamper the growth of legitimate taxpaying hotels.”

Commit for a long haul
One thing is sure that the new breed of hoteliers has shown the way and achieved something remarkable by unlocking the potential that remained unattended and unnoticed for a very long time. Even those who have pioneered that complex job know that they have been able to unlock a small fraction. “Budget hotels cater to one of the biggest traveller segments in India. And the market opportunity is tremendous. Only about 2% of this opportunity has been tapped so far. So a brand must have conviction and be ready to commit themselves for the long haul,” says Ritesh.

There might be multiple valid reasons for mainstream players for shying away from doing business with these non-standardised, unorganised and fragmented segments. However, the current situation is not necessarily existent and relevant for a very long time. Industry watchers believe that as the industry evolves further, both these models will grow in tandem and the current divide will cease to exist. “Overall, as the two business models grow in tandem, one can expect the aggregators to move closer to the traditional business model by working towards a more consistent offering (example: Oyo Townhouses), while the mainstream brands will begin to embrace technology more readily in their future avatar (example: Accor’s decision to sell rooms for non-Accor hotels in North America),” Khanna stated.
Post Your commentsPOST YOUR COMMENT
* Name :      
* Email :    
  Website :  
Receive the best of Travel content in your mailbox.
Enter your e-mail ID for our
Weekly e-Newsletter
© Copyright 2015 Saffron Synergies Pvt Ltd