The ARR downtrend

Anup Menon

THE DOWNTREND in the average room rate (ARR) is rather more pronounced on a year-on-year basis compared to the occupancy levels.

For instance, according to an FHRAI survey, on an all-India basis, the ARR declined from Rs 2,530 in 1998-99 to Rs 2,123 in 1999-00, a drop of around 16 per cent. This means that on an average, coupled with the decline in the occupancy level, the net realisation for the hotels will be lower.

A location-based analysis shows that in most major business districts such as Delhi, Mumbai, Bangalore and Kolkata, the ARR has gone down. The room rates are the highest in Delhi and Mumbai.

Given that most major listed stocks operate five-star and five-star deluxe properties, it would be interesting to note the price trends in the segment. As in the case of overall trends, the ARR in the five-star segment declined by around 4 per cent to Rs 3,092 in 1999-2000 compared to Rs 3,218 in 1998-99. Given that these rates are likely to have persisted into the first half of fiscal 2001, the performance of the companies is not surprising. This apart the demand-supply dynamics add to the woes of the industry.

Room economics

The hotel industry is being plagued by a number of problems. One of the main reasons for the fall in realisations is because of demand not keeping pace with supply. For instance, over the next few years, Delhi and Mumbai are set to witness a dramatic addition to rooms. The FHRAI study states that in Mumbai alone 22 projects are to come up. The question is what would be the future for these projects.

Given the overall trends in room rates and occupancies, the new capacity is not likely to be fully utilised from the start. Further, the gestation period for hotels, which has a high proportion of fixed cost, is long. Therefore, most new projects are likely to bleed, at least in the first few years of operations. This implies that only companies sitting on a pile of cash can manage to sustain operations.

Given this scenario, the preferred strategy for the hoteliers would have been to not rush to add capacities or to look for locations where the demand is outstripping supplies. For instance, instead of raising capacities in the metros, some of the tourist locations could have been preferred. Demand and supply are not only a function of increasing capacities but also of rising competition.

More players offer more room

Though the concentration ratio in the industry is very high, the trend may not sustain. This is because of the increasing competition. Many international hotel chains have shown interest in setting up shop in India.

The two major players -- EIH and Indian Hotels -- dominate the industry. To a lesser extent, other players, such as ITC Hotels, Asian Hotels and Hotel Leela Venture, have also been in act. But this equation may change in the near future.

For instance, international chains such as Radissons and Nikko Hotels have set up shop in the country. We can expect more to come in in the near future. This apart, most international players are flush with funds and have plans for expansion, thereby likely to worsen the existing over capacity situation in the market. This being the case, the domestic players may see some pressure on their bottomline.

While competition creates problems, it also helps in terms of improvement in the overall service levels in the industry. Therefore, the key to managing competition would be not to curb it but welcome it in such a way that the capacity situation is not affected. One way around the problem is for domestic hotel chains to tie-up with some of the international majors. If this happens apart from an improvement in the overall service levels, the domestic hotel industry will also see an improvement in terms of brand-identity.