Building India's leading budget hotel chain
We've made our first investment in the Indian travel sector!!! Bessemer has invested (along with New Vernon Private Equity) Rs. 38 crore ($ 8.5 million) in Sarovar Hotels, to build out a chain of budget hotels in India, under the Hometel brand.
The simplest way to express Bessemer's investment philosophy is "We back strong entrepreneurs addressing large markets". Our investment in Sarovar fits squarely with this philosophy.
Sarovar is India's largest hotel chain in the mid-market segment, managing 35 properties in the 3/4-star category. Sarovar's MD - Anil Madhok - has 40 years of hotel management experience, including the last decade as an entrepreneur, having founded Sarovar in 1994. Anil and his team have the unique combination of extensive hotel management experience in India, expertise in the mid-market (as opposed to premium) segment and a successful entreprenurial track-record with Sarovar. They have scaled up Sarovar into India's leading hotel management company in just over a decade.
You've probably read at least one article on India's hotel room shortage (India has fewer hotel rooms than Manhattan)! If you've travelled in India recently, feel free to share your personal anecdote on paying an arm and two legs for a hotel room. India's hotel room shortage is most acute in the budget hotel segment. If you are looking for a hotel room under Rs. 3000/night ($65), you have very few options where you know what you are getting into. Hotels in this price range are highly variable in quality, cleanliness, safety and service. Except for one Tata IndiOne hotel in Bangalore, there are no brands or hotel chains in this segment. As I've written in an earlier post, the largest opportunities in India are for those offering good quality products/services at prices that are affordable to the mass market. Hometel aims to do precisely this.
So, what does Hometel offer? All the basics - central a/c, hot/cold water, TV, direct-dial phone, mini-fridge, tea/coffee maker, writing desk, electronic locks, WiFi - at an affordable price of Rs. 1500-2500 per night ($35-55). What is doesnt provide are the frills - multiple restaurants, large lobbies with chandeliers, swimming pool.
Similar to low-cost airlines, budget hotels need to be designed and operated very differently from their full-service counterparts. Budget hotels are about consistently good service, value-for-money pricing, low capex per room and reduced opex (fewer staff, no-frills). The first two factors ensure high utilization (revenues) and the next two drive profitability. This is clearly an execution game, where Sarovar's expertise is critical.
We believe that Sarovar's team can execute to plan and become India's leading hotel chain in this segment. Sarovar plans to cover both metros and (more importantly) smaller cities where finding good accommodation is even harder. The first Hometel will open in Bangalore in January 2006. Pune, Mumbai, Jaipur and Hyderabad are in the pipeline. 50 Hometels in 5 years is the target. Personally, I think the opportunity is large enough for a lot more!
posted by Anand Sridharan @ 4:53 PM
65 Comments:
Anand:
You've got interesting things to say on your blog. I live in New York, am ex-IITM (88-92) btw.
Anyhow, do you think wi-fi is critical for this budget hotels? Are business folks staying in a budget hotel ready to plunk down 1500 a night?! Wouldn't providing broadband access (wired) be more affortable? Afterall for Rs. 250 a MONTH you can get broadband, so for a Rs. 3000 a night hotel room, that broadband can be free or a small charge like Rs. 25/50.
Just my 2 paise worth. :-)
kk
Business travellers are one of the main target segments for Hometel. Not the high-fliers, but lower and mid-level managers across Indian companies! Example - travelling salesperson. These rates make Hometel a good option, compared to other mid-range hotels and companies' own 'guest houses'. Providing internet access is important, for this segment. Frankly, we've not analyzed WiFi vs wired internet in depth, as it is a relatively small cost head (which can be recovered through a small pay-per-use charge). WiFi seems more convenient and future-proof!
On a related note, the Rs. 250 a month is the most basic internet plan meant more for a household using internet in a limited way (e.g. this has a 250MB bandwidth cap). Even for an SME, actual internet costs are a lot higher.
Congratulations! It sounds like a smart investment at the right time to catch the wave of business travel.
Was the build-out of the golden quadrilateral a factor in your decision? It would seem to provide a major boost in business travel, esp to decent mid-market hotels near the exits (as in US).
You have probably seen these but two recent articles of interest in this regard:
http://www.nytimes.com/2005/12/04/international/asia/04highway.html
http://online.wsj.com/article/SB113391562899315675-search.html?KEYWORDS=india+hotel&COLLECTION=wsjie/6month
Arun
(ex-ITBHU/Intel/Sequent; cofounded web software company; currently pursuing research interest in neuroscience in US.)
Thats one of the sectors I am "long" on (borrowing from your post itself). I have seen their Park Inn in Lucknow. Though I never stayed there.
Another note - I read long back that ITC was also getting into budget hotels. Dont know how good, fast and huge they are in this area now, and how would Sarovar stack up against them? Probably ITC budget hotels are still more upscale than Sarovar. (Not to mention the Maurya Sherton etc :)
One thing for sure - if you need to get into hotels, then get in a BIG way. Something like one thousand hotels dotting the whole of India! From the adventure skiier in Ladhak, to the businessman in Delhi, to a film crew in Northeast, the tourist in Lakshadweep - everyone should be using your hotel! If that is Sarovars aim, I must say, your investment has been great!
Animesh.
http://animesh.wordpress.com
(IITK, HeadStrong, BankAm - now in Retail and Finance)
Their desired price range should be 1000-1750 per night. It is possible to drop costs without sacrificing quality.
Finally.... someone who understands what the Indian industry needs. Coming from a small startup, I know for a fact, how imperative it is to keep costs down and yet not sleep on the footpath.
The Wi-fi does'nt hurt either!
But yes...try not to exceed 2000 Rs. It will be very hard to justify that.
Budget hotels is definitely a growth sector and I had rated that as a big opportunity. But I guess there are two price points that will crack the market . One is the 3-3.5 k range that Sarovar seems to have spot on. This is for salesforce and other low to middle management staff of probably the top 500 companies. The next is the 1.5 k price point. The operations could be similar to the Formula One hotels of Accor in Europe. Here you could straddle the middle class budget tourists and the SME/self employed sector. This might require greater operational innovation but the potential could be huge.
Gr8 blog.
From Morgan Stanley research
"Hotel accommodation is key for sustaining tourist traffic. Currently, India has about 95,000 rooms compared with over a million in China. If tourist arrivals grow at 10% pa over the next five years (the last five-year average is 7.7% pa) to about 6 million tourists a year, India will need to increase its hotel room capacity to 160,000 rooms by 2010 to accommodate this traffic"
Sounds like you have done an excellent investment ?
Good luck to you and your team
cheers
Navin
My suggestion would be that you take another look at the business model and bring the lower range of the prices down to as much as 750 rupees a day. It will get you volumes provided you can market yourself well enough. There are plenty of hotels offering higher tariffs.
You can always have an upper end range of 1500-2000 if you want. But if you plan to start a no frills hotel and then charge minimum 2000 rupees a day, I am afraid you are not looking at the right audience.
Wi-Fi is really immaterial. Wifi hardware is dirt cheap these days. Maintaining a high bandwidth internet pipe isn't going to cost you more than 5000 rupees a month for the entire hotel if you get the right deal. In any case, Wi-Fi isn't meant for bleeding edge bandwidth. It should be good enough to surf, check mail, etc. So it isn't a USP.
On room rate, I hear you guys on the need to keep the price reasonable and drive utilization up. The key is to retain pricing flexibility, both across locations and seasons. Land cost is an important part of capex, and varies by location. Similarly, demand varies by location and season. Hence, its important not to paint oneself into a corner by stating that all rooms will be priced below 1000 or 1500, at all times. If the market in Bangalore in peak-season can support a price of Rs. 2000, so be it (In fact, IndiOne is supposed to be running at near-100% occupancy, but there is no room for a price increase from Rs 950). The same room in Madurai may sell for Rs. 1000, in summer. In a cyclical, capex-intensive industry, retaining pricing flexibility is important to manage highs-and-lows.
Hi Anand ... nice blog ... wish we can read more from you. For us NRIs, its like listening from one out in the frontline.
Looking at price/feature, this doesn't sound like a "budget stay" for average Indian. But surely a huge potential in 2nd and 3rd tier cities, we need franchises, you know what to expect before you sign in.
Do you know of anyone out there planning on restaurants for the 'bottom of the pyramid', a.k.a. our own McDonald's. We need 'desi' WalMarts and McDonalds to eradicate poverty and streamline the supply-chain.
- Pradeep
Hi Anand,
I have increasingly been a keen follower of the VC / PE space in India. The increasing interest in the hospitality industry shown by VC's is interesting. The focus is more on the "Business Traveller". Do you think the same numbers could be extrapolated to the "tourist / casual traveller"? Or is it more of a cyclic trend for the "tourist traveller"?
Ajit
Sounds really good and on right track as per your earlier blog on big money in India being in basic industries.
There was an interesting comment about the hotels being located on the Golden Quadrilateral. Is there anyone who has some idea about the detailed plans for the project, the actual route and so on. I am sure that the new Reliance retail project and others are going to exploit this opportunity.
Cheers!
Anuj (IIT'00/ Michigan'03/ Mckinsey)
I looked up a Sarovar Hotel in Cochin for tomorrow night. It rang up Rs.4000. That is expensive!! Close to $95.00!!!
Hey Anand,
Good job with 'seriously clueless'.
1500/night with all the facilities you mentioned is pretty good. But has hometel started offering. I think the prices are really good for what hometel is ready to offer.
I am new to blogging but I am glad I have come across some interesting posts like yours and folow ups/responses. Back to the point- one of the factors that will be a big factor in the success of your businesses would be aligning the marketing initiatives with your target customer base...what kind of channel mix do you guys want to have reach out to your customer(online retail presence - does Indian has enough Orbitz/expedia type patrons, or outbound sales force- which i think will compress your margins, ...is there enough media splash? Assuming you want to reach to budget oriented class- again would depend on who are you targetting individuals or small businesses. Not sure if med-large corporations would have very tight reigns on their travel expenses, especially in a fast growing country like India....which cities are your target locatios- tier 1/2 cities i.e outside metros? what are your thoughts on these...
i too have an opinion that INR 1500 seems a little higher to me for a budget type hotel ( pardon me- i have been out of India for about 6-7 years now and I am sure things have changed a lot). would like to ask you if you can share the current market share of hotels in that range, how is their capacity utilization rates, how does the competitive landscape looks like-
Good, Its ideas like this and also the implementation of such ideas that can develop this country.
all the best for the venture
There is a opportunity for setting up a Budget Hotel in Bhubaneswar, Orissa, India near the Railway Station on 20000 sq.ft. of space. If you are interested you can get in touch with me and we can construct the hotel and your chain can mange the property.
Hello Anand,
Your article is very interesting. In fact we are in advanced stages of seeking a franchise in this space for a prime property at Jaipur. The property is right across the Jaipur Railway station. It is opposite to the Sheraton in Jaipur. Who should I get in touch with for franchise development?
Regards,
Manuj
Hi Anand
Budget or No frill hotels is seeing a flurry of activity in India. Good investment for the time being .
With substantail capacity build up in the top and medium end hotels , the average prices are going to fall. as the infrastructure is playing the catch up game as always. In Delhi topd end hotels average anythig from 300+ usd , bangalore and mumbai same . With capacity addition in the future , these prices will comke down to 150-160 usd . My Prediction is that Bangalore and Delhi markets occupancy will be around 60% in 2010 for five to six years, bacause supply is increasing three or four fold., as optismistic yoy 10% growth in volumes will still lead to below 60% occupancy from 2009 to 2015. ( Thats my guestimate for delhi and and bangalore ) .
Hometel needs to grow at a furious pace .
- Low cost distribution will be key ( third party wibeside , own webside , book through sms, book through atm , it shoudl be at hands reach to book , 24 hour online reservations with chat facility )
- Need to build the brand ( through consistency in product/ service design , and communication , price and image . ( this will be crucial as time passes there will be enough well known brands )
- Investment in technology and processes ( for service delivery ) , since the most is cost driven , people will cost more in the future and will be difficult to get by . The staff to room ratio's need to come down without compromising on quality of delivery
- Human resources ( this is a tricky one , getting good quality at low cost ) . Need to see if if we can grow people from Hoemtel to the other brands of sarovar and some integration/ leveraging that can happen. else people will not stay . Also hometel needs to have an talent aquisition plan to bring in more to the table.
There should be constant thrust to innovate by driving down cost and increasing utilisation and at teh same time keep ahead of new no frills .
Bye for now
hay anand !1
can you tell me the exact difference betwen a budget hotel and a low frill hotel.a hotel with no f$b outlet can also be called as a low frill hotel?what are the critrias for a low frill hotel which makes it different from budget or economy hotel?
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Major things that worry are two things. The first is the housing and construction market which has already corrected, but so far long term holding their ground quite well. Some markets were overbought and they are having the biggest correction. Those areas would include real estate and construction and sure there are other areas, but there are also areas that are seeing continued growth, to include the telecom, cement and media.
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bhattathiri
great, indians need this, indian five stars are overpriced!!
i remember Anil Madhok, he was heading The Oberois in mumbai when I was a catering college student trainee. (1991)?
isn't this a small world, I remember Zubin Ghiara too. He trained in Oberois with me :-),
Well i have spent my most impressionable years managing hotels in california. I am back in mumbai now and i am shocked and suprised to say the least.
There are hotels coming up left and right all around the country. Most hotel companies are venturing into budget hotels and that has to do more with the lack of space to build humangous properties.
The fact remains that in order to run a budget business hotel the companies need to stop hiring 200 people to operate a 50 room property.
yes labor is cheap but its not free. the actions of a cheap unskilled hotel employee can do more harm to the operations than any good.
The focus should be on having the right kind of people and not focus on ellabrote F&B setups.lets face it every major hotel company in the world knows that Guests go where locals go when it comes down to food and beverage.Major hotel companies in India are being run like a government setup there is tremendous red tape that hinders employee growth and hence there is a high rate of turnover.Autrocatic leaders seldom enjoy long term sucess.
Keep it simple,managable and small, if the size of company dictated its sucess then wipro should have been the biggest sotware company in the world.
pgdyfgmHi Anand!
This model will not work. Call me and ask me why.
I believe i have solved the mystery of keeping it down to 2500 a night tops!. A funding of $4 million will allow me to operate 7500 hotel rooms in 3 years. Then on its exponential.
Regards,
P
Hi, Has the Hometel hotel chain started functioning? To be honest, this is the first time I am hearing this name.
Thank you for the useful information for my India vacation!
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Thats one of the sectors I am "long" on (borrowing from your post itself). I have seen their Park Inn in Lucknow. Though I never stayed there.
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Hi Anand,
Budget hotel brands whcich start of at a projected arr of 2000-2500 do not sustain these attarctive rates for long for obvious reasons,the need of the times is volumes in terms of rooms in units in single locations.2000-3000 rooms in a unit at an arr of 1200-1500 ,no frills,but option of food courts,wired connectivity and other basic necesities.We are doing just that and have closed two parcels of land in NCR and in Hyderabad.The clu is in place and we are now taling to various Vcs who would like to partner us.Planning 7 such properties in phase one of our project across metros and tier 2 cities.Domestic travel is the main focus.Locations have been identified in such a way that the city would reach where we are located by the time we have our pre-opening excercise(yr 2010).Land prices with their CLU as of now is cheaper than in existing CBD areas .Please let me know your thoughts on the above concept.
Arvind.
Truley said. We really need some budget hotels in India.
Truley said. We really need some budget hotels in India.
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do you have any information on avg cost of room incl and excluding land. What sort of EBITDA are you guys seeing on your properties
Room cost @10 lacs excluding land ,get in touch for more details.
Hi,
I am bpo company india, searching for cheap and comfortable hotel in Jodhpur to spend at least one week.
Can any one help me to find or suggest me top class hotel in Jodhpur?
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