India has around 1.15 lakh rooms across all categories of hotels. Of these, 45,000 rooms are for 4 & 5-star hotels while rest is 3-star and below. By March 2008, this number would swell by 30%. Even with these numbers there is a shortage of 65,000 budget category rooms.
With increasing disposable incomes, Indian middle class is spending more on travel and looking for value-for-money options for clean and safe stay. The no-frills hotels cater to the traveller who does not relate cheap with poor standards. They include basic facilities and users have to pay for use of certain conveniences. The staff is limited and services such as maintenance and food and beverage services are outsourced.
It costs between Rs.5-15 lakh per room of a budget hotel depending on the city. The government is considering giving cash subsidy to budget hotels to facilitate growth and cater increasing demand. The subsidy could be Rs.2 lakh per room for one-star and Rs.3 lakh per room for two and three-star category hotels. If approved this would imply a savings of 25% to the investment cost of such hotels.
In the 2007 Union Budget, 2, 3 and 4-star hotels constructed before 2010 Commonwealth Games in National Capital Region were granted tax holiday for five years.
In India, the employee per room ratio for no-frills hotels is 1.5 compared to 0.5 globally. This is due to lower employee costs here, as such Indian hotels are normally 20-25% overstaffed as compared to international standards. So, ‘No-frills’ cannot be still said to be synonymous with self-service in India.
Apart from the already present Ginger hotels of Indian Hotels Co., Sarovar, Clarksinn, ITDC, this segment is attracting a lot of investment from local as well as international players owing to the tremendous business potential. IT giants, Infosys and Wipro have set up their own in-house hotels to deal with the shortage.
India’s real estate firm Emaar MGF has entered into a 50:50 partnership with Britain’s biggest hotel operator, Whitbread (which also owns Costa Coffee) to develop 80 budget hotels with 12,000 rooms and an investment of $600 million over the next 10 years. Emaar MGF also has $300 million deal with European chain Accor to develop 100 budget hotels.
Best Western will develop 100 hotels in business centres with $1.2 billion investment. Roots Corporation (owner of Ginger hotels) is planning to open 29 new hotels with and investment of Rs.348 crore. Even Hilton and Starwood are building these hotels.
Low cost foreign airlines, EasyJet in association with investment fund, Istithmar and Malaysia-based AirAsia are also planning to launch their no-frill hotel brands into India.
But amongst all this, viability still remains a big question mark. Hotel companies and real estate developers have to deal with the high land cost, price sensitivity and long gestation period. If these are not dealt with, the no-frill concept will meet with the same fate as no-frills airlines.