Room for growth
Reputed hotel chains are branching out into Tier-2 and Tier-3 cities. They are cashing in on new IT hubs, a richer local population and increased tourism
It used to be that in India, you’d find reputed hotel chains in two types of places: out-of-the-way tourist spots and prime commercial plots in big cities. But a study by realty consultancy JLL India indicates that over the past two years, topnotch hotel chains, domestic and international, are mushrooming in a surprising new segment: Tier-2 and Tier-3 cities.
The study shows that cities such as Bhubaneswar, Ludhiana, Itanagar and Nagpur are witnessing a spurt in the construction of big hotel chains.
In 2016, 40 hotels signed up to launch properties in Tier 2 cities. In 2017, twenty more companies invested in smaller cities. And by 2018, the total tally of hotels being set up in the Tier-2 segment was 65. Total room counts across sixteen Tier-2 cities went from 4,465 in 2016 to 6,113 in 2018. “Since most of these are industrial towns, with emerging businesses and great scope for change, hotels are hoping to get a slice of that business and secure early-mover advantage. We chose to assess these cities due to the rapid development unfolding there,” says Jaideep Dang, managing director of hotels and hospitality at JLL India.
GETTING AN UPGRADE
The Indian market is driven by domestic travel, which is resulting in an increased demand for hotels in the midscale category across India, says Vivek Bhalla, regional vice president for South West Asia at the Intercontinental Hotels Group (IHG). “We have recently signed on for projects in Agra, Udaipur and Goa as well as Kolkata, Bodh Gaya, Kushinagar, Shravasti and Gorakhpur.”
Many high-end hotel chains such as the Marriott, ITC, Intercontinental and Radisson are branching out to smaller towns to meet the needs of booming new IT and business hubs, the growing number of middle-class domestic tourists, and the demand created by new and increasingly busier airports. With the increase in the expendable income in the Tier-2 regions, Bhalla feels that bringing in upscale brands will be increasingly profitable.
Since 2017, Accorhotels, which owns brands such as Novotel, Ibis, Sofitel and Grand Mercure, has launched hotels in Coimbatore, Guwahati, Kochi, Lucknow, Vadodara and Vijayawada.
“While we still aim to grow in the metro cities, we are identifying new markets that were just industrial towns until recently. Development is increasing, in terms of infrastructure and employment, in these cities,” says Lokesh Sab- harwal, vice president for development and special projects in South Asia, with Accorhotels.
SPACE GAME
Most new hotel chains looking to build a presence in India’s small towns will typically not invest in land, says Dang. “Rather, they enter into contracts with investors such as residential developers, industrialists, businessmen and small-time real estate companies that own land.”
The hotels then enter into management contracts. This model was initially used and worked well in the luxury tourism sector.
For instance, Hyatt Regency and Fairfield by Marriott partners with SAMHI, a lodging real-estate firm. Holiday Inn has a management agreement with Lotus Trans Travel, a tour operator, for the expansion of their brand along the Buddhist tourist circuit — which is why they have plans in Bodh Gaya, Kushinagar, Gorakhpur and Shravasti.
Muddasir Zaidi, executive director at realty consultancy Knight Frank India, says it’s just too expensive to buy land in a Tier-1 city and expect to make a profit simply from hotel revenues. “That’s another reason hotel chains are moving into smaller cities, where input costs are lower and there is the promise of a higher rate of growth. First, they’ll target the middle-class segment. Then will come the luxury brands,” he says.
So for now, if you’re travelling to a small town, don’t be surprised to see a big-name hotel there. It’s a sign the town is upgrading too!