Role of multinational chains/groups of Hotels in the Indian hospitality industry and their contribution to the Indian Economy

Dr. Padma Srinivasan
Senior faculty on Management & Consultant
Laksha Global Consultancy Services

The role of the multinational companies are significant with their increasing contribution to the Economy. Basically Services are intangible deeds, processes and performances that cannot be touched, seen or felt but can be experienced. The Service sector is characterized by its diversity. Global opportunities are growing due to accelerated growth of the service economy.

In the hospitality industry, Average room rate (ARR) and occupancy are the two most critical factors that determine the profitability, since most of the marginal revenue gets added to the bottom-line. ARR in turn depends upon location, brand image, star rating, quality of facilities, pricing of value added services, complementary services offered and the seasonal factor. The hotels to manage and invest their fund in India adopt many business strategies to establish their place of business and create innovative service packages to their custom. In a long-term perspective, these measures bring significant financial returns.

CURRENT SCENARIO: The hotel industry in India has a latent potential for growth. This is because India is an ideal destination for tourists as it is the only country with the most diverse topography and relative political stability. At present India attracts approximately 2.5 Million tourists every year, which is just 0.4% of the world tourist arrivals.

Normally the Multi national hotels operated In India can be owned, leased or acquired under management contract basis. Hotel operators want the leverage on their management expertise and brand equity without making enormous capital investment. In management contract agreements a fee calculated as a percentage of revenue and/or operating profit is charged. Typically, the management fee is to the tune of 3% of the total revenue and 7% of gross operating profits.

Most players, with the exemption of IHCL and EIH, have entered into a marketing tie-up with major international hotel chains. Thus we have Hyatt Regency a renowned international hotel chain having tied up with AHL, Leela having tied up with Kempinski and ITCH having a franchisee agreement with ITT Sheraton to use the latter's brand name.

For the Indian hotel owners and the international hotel chains the benefit is mutual, tie-up with an international hotel chain puts the hotel on the global map with access to chain's reservation network worldwide. For the international hotel chain they can ride on the boom of the industry without making enormous capital investments on infrastructure and facilities. Associations with international brand also play a major role in image building and attracting foreign tourists. However the value of the international brand gets diluted if a foreign entity enters an agreement with several Indian companies.

SOME FINANCIAL ISSUES : Luxury hotels operate under single tariff structure whereby the foreign tourists are charged in dollar terms whereas the domestic guest is charged the equivalent amount in rupees. The luxury hotels earn about two-thirds of their revenue from foreign tourists. Leisure travelers constitute approximately 76.5% of the total tourist arrivals whereas business travelers constitute 21% of the total arrivals. The remainder is accounted by students. The hotel industry is the second largest foreign exchange earner and between 1991 and 1998 there has been a 100% growth in foreign tourists.

Hotels benefit from rupee depreciation as over 60% of revenues in the luxury hotel segment are in foreign currencies. Thus any depreciation of the rupee goes directly to the bottom line (FOREX income is also fully tax exempt), as none of the costs are directly linked to the exchange rate.

The hotel debt environment is also improving. While many countries are hampered by a still sluggish economy, those with a low interest rate environment with relatively stable-banking conditions will provide opportunities for hotel investors to raise capital. For hotel lenders, from a risk/return basis, there has never been a better time to provide new capital to this industry in India.

SO…. TO CONCLUDE: Currently, guest retention and repeat clientele is the name of the game. Hotels those are able to provide guests a product where the service is consistent and of a level required by the target market, will only survive. The Hotel industry, always ready with innovative ambitious business plans and the spirited management plotting the right strategies, is contributing its might to improve the position of the Economy. So the role of multinational chains/groups of Hotels in the Indian hospitality industry and their contribution to the Indian Economy is significant. There have not been many exploratory researches in this area. But there is every need to work on the economics for a proper planned growth at a macro level. Also the WORLD definitely looks better and happy with ALL the hospitality it can muster.

Dr. Padma Srinivasan
Senior faculty on Management & Consultant
Laksha Global Consultancy Services

Source : E-mail March 20, 2006



Articles on Management Main Page

Important Note :
Site Best Viewed in Internet
Explorer in 1024x768 pixels
Browser text size: Medium