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It’s time to invest in mid-market hotels in India

By Vikas Chadha, Executive Director & Chief Financial Officer, Berggruen Hotels

Wednesday, November 1, 2017, 15:54 Hrs  [IST]

Hotel markets in an evolving scenario are generally dominated by luxury hotels which are iconic and act as status symbols for owners. As markets mature and with the advent of growing number of domestic travel, improvements in accessibility, infrastructure, increased per capita income, etc., demand for mid-market hotels both for leisure and business is bound to grow.

With good properties being made available and good distribution networks including online and offline channels, even those who can afford luxury, would opt to stay in affordable hotels. The trimming of corporate travel budgets during trying periods and the buying patterns of the new millennial travellers also are bent towards mid-market hotels. They look for quality and quality doesn’t necessarily mean luxury.

Travellers are slowly moving away from the traditional luxury hotel set up to the trendy and technology-friendly hotels regardless of their star category rating. Mid-market hotels are no longer dull, room-focused developments. They are emerging as trendy, designer properties in well connected location, with clean rooms, free WIFI, Technology apps and accessibility.

From a hotelier’s perspective, the opportunity in terms of locations to build such hotels are far more than luxury properties. Mid-market hotels are most suitable for tier-II and tier-III markets which are starved of good branded hotel options. These hotels require lower Capex as they leverage a smaller parcel of land to build higher quantity of inventory. They have a faster break even and cash positive cycle and generate an EBITDA in excess of 40%. Since they are typical with no frills and have higher technology support, they have lower fixed costs like Payroll and Power. The flexibility to locate themselves closer to commercial establishments or transport hubs is available with owners. The construction time is also lower and helps the owner to take advantage of quicker start of operations.

Internationally in cities like New York, LA or London, the mid-market Hotels contribute in excess of 85% of the Total Hotel inventory sold. The trends in India are currently progressing towards the same.

Does this make financial sense?
Due to the lower room size and vertical structures, higher room inventory can be built on the same piece of land if the owners select a mid-market option. The Capital expenditure and therefore the cost of investment are lower and the overall profitability is higher, which gives the owner:

  • A faster break even
  • Higher ROCE
  • Higher EBITDA margins
  • This can be illustrated with an example of a viability analysis for an area of 1,10,000 square feet available for a hotelier to develop. Given the markets are matured and there is a demand for hotel rooms, he may make higher profitability in a mid-market option.

Some Hurdles faced by Mid-market Hotel development
  • High Land and Development Costs, in prime hotel clusters, sometimes render the development of mid-market hotels within these clusters unfeasible with comparatively lower returns compared to other investment avenues available to investors.
  • Infrastructure development including transportation and connectivity impacts development as it is a possible deterrent for the price conscious consumers given the high cost of transport and airport transfers, etc.
  • Developers Perception within the country, as many of them want to focus on the development of ‘trophy assets’ in the form of luxury hotels. However, this trend is gradually changing.
  • Low Barriers to Entry and possible competition from guest houses and room aggregators. However, guest houses are unable to compete on service quality and hence play on prices but lose out on repeat business.
  • Overall, given the current market scenario and the maturity of hospitality industry in India and compared to global trends, the time is right for development and growth of mid-market hotels in the country.
The views expressed within this column are the opinion of the author, and may not necessarily be endorsed by the publication.

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