Market feasibility of Indian Hotel Industry

Service sector industry is growing in India and it contributes 57 % of total GDP (Central
Statistical Organization, India). Hospitality is one of the service sector industries which are
booming.

Presently, in all category of hotels in India around 1, 10,000 rooms are available which is
expected to increase by 100 percent by year 2015 (HVS, 2007). All global players had planned to
tap Indian market and big player like Starwood, Hilton Group, Westin and Accor had already
either directly invested in India or they made collaboration with any Indian company. Also IT &
ITES2 and low cost domestic airline fueled hotel industry in India.

Hospitality is all about offering warmth to someone who looks for help at a strange or
unfriendly the commercial context refers to the activity of hotels, restaurants, catering, inn,
resorts or clubs who make a vocation of treating tourists. Helped with unique efforts by
government and all other stakeholders, including hotel owners, resort managers, tour and
travel operators and employees who work in the sector, Indian hospitality industry has gained a
level of acceptance world over. It has yet to go miles for recognition as a world leader of
hospitality. Many take Indian hospitality service not for its quality of service but India being a
cheap destination for leisure tourism with unlimited tourism and untapped business prospects,
in the coming years Indian hospitality is seeing green pastures of growth. Availability of
qualified human resources and untapped geographical resources give great prospects to the
hospitality industry. The number of tourists coming to India is growing year after year. Likewise,
internal tourism is another area with great potentials.

Major Highlights of Hospitality Industry

 The Indian hotel industry, a significant stakeholder of the tourism sector, witnessed the
trickledown effect of the global crisis.
 No of foreign tourist arrival in India is around 5.11 million in 2009 (Ministry of Tourism).
 Foreign Tourist Arrivals in India during the Month of July 2010 were 4.52 lakh as
compared toFTAs of 4.35 lakh during the month of July 2009 and 4.32 lakh in July 2008.
 Foreign Exchange earning from tourism during the month of July 2010 were Rs.5444
crore as compared to Rs.4983 crore in July 2009 and Rs.3870 crore in July 2008.
 Over 42,000 new rooms are expected to be added to current inventory across 10 cities
by end-2012.

Market Feasibility of Hotel Industry (India) Page 1

 INDIAN HOTEL INDUSTRY – AN OVERVIEW

According to an estimate, international tourist inflow in India by 2020 would be 10 million

(World Trade Organization, 2002). This makes the country one of the fastest growing tourist
destinations in the world. India accounts for 0.5% of world tourism (HVS, 2007). Strong GDP
growth, improving infrastructure, confidence in the country’s economic prospects, open sky
policy and the 'Incredible India' campaign has improved the outlook for India. This positive
outlook would increase the tourist arrival in the country. Hence hotel industry is expected to be
the major beneficiary. Even domestic tourism is gaining momentum. Rising disposable incomes,
cheaper airfares and better connectivity would continue to increase the demand for rooms.
Many international hotel chains either have or are on the lookout for setting up shop in the
country. This clearly shows that India is on the international tourism radar. The five star hotel
segments have grown the fastest during the last five years clocking a CAGR 3 of 12% (World
Trade Organization, 2002).

Economic liberalization has given a new impetus to the hospitality industry. The current gap
between supply and demand expected to widen further as the economy opens and grows
(DATAMONITOR, 2009). The country is ranked fourth among the world’s must see countries
(HVS, 2007).

The financial year 2008/09 was an unforgettable one for the Indian tourism industry with the
Mumbai terror attacks and the global economic downturn affecting the industry’s performance.
The hotel industry, too, observed an overall decline in occupancy and Revenue per Available
room (RevPAR) in most cities in India. Indian Hotels industry has successfully passed the
downturn. The recovery started in the latter half ofFY'10 (October 2009) with steady increase in
the foreign tourist arrivals better than expected and completely recover in by the end peak
season (March 2010). Foreign Tourist Arrivals (FTAs) to India has grown 1.7% to 3.54 lakh for
the month of April 2010 over 3.48 lakh in April 2009.Foreign exchange earnings (FEE) during
April 2010 recorded impressive 11.3%% rise in Indian rupee terms to Rs 4518 crore from Rs
3773 crore in April 2009. World Travel and Tourism Council, India, data says, India ranks 18th in
business travel and will be among the top 5 in this decade. The hotel and tourism industry’s
contribution to the Indian economy by way of foreign direct investments (FDI) inflows were
pegged at US$ 2.1 billion from April 2000 to March 2010, according to the Department of
Industrial Policy and Promotion (DIPP). According to industry data, India is expected to double
the number of branded hotel rooms from 100,000 now in just three years.

Indian Economy and Hotel Industry:

India’s GDP recorded a growth rate of 6.7% for the financial year 2008-09 (Central Statistical
Organization, India) after recording growth above 9% for three consecutive years. The
economic recovery of the country can be further kept on course by a stable political
environment provided by the Congress-led United Progressive Alliance (UPA) returning to
power through a comfortable majority in the general elections last year. Policies of the newly
elected government of leaning towards disinvestment and infrastructure development have

Market Feasibility of Hotel Industry (India) Page 2

helped sustain economic growth. The increased spending on infrastructure development will
boost the tourism industry and backbone of tourism i.e. Hospitality will also grow although the
last year began under high inflationary pressures; there were concerns about negative inflation
towards the year end. This financial year saw low inflation levels and even fears of deflation due
to the dropping of the WPI. In its downward slide from the previous year's all-time high of 12.38
% (August 2008), W PI for June 2009 turned negative (-1.3%) The drop in commodity prices can
benefit hotel developers, who can take advantage of cheaper construction materials. This week
period is probably the best time to make investments into the hotel sector. Leading
macroeconomic indicators GDP are correlated to the performance of the hotel industry.
However, though the hotel industry is amongst the first to be hit by a downturn, it is amongst
the slowest to recover since the spending on travel is considered as discretionary for most
leisure travelers and some business ones as well. The increased spending on infrastructure
development will boost the tourism industry and backbone of tourism i.e. Hospitality will also
grow.

The driving force:

If the country is able to sustain its economic growth especially in the service sector, it will have
a direct influence on the hotel industry. This is directly related to the incoming foreign
investments, not just in the hotels but the economy as a whole. Also equally important is the
fact that India has now discovered the power of marketing and with campaigns like Incredible
India, there are also the various large scales regional and global events like the upcoming
Commonwealth Games, Asian Games and the recent Indian Premiere League that builds
interest about the nation. Apart from these external factors there are other factors where the
industry can be given a great boost. For instance if land prices became more realistic, the
process of getting approvals and licenses to build and operate hotels are streamlined, together
with strong infrastructure development and investment and more tax/levy incentives being
provided to build hotels, it would prove very fruitful for the industry.

Performance of Tourism Sector during July 2010:

Ministry of Tourism compiles monthly estimates of Foreign Tourist Arrivals (FTAs) in India and
Foreign Exchange Earnings (FEE) from tourism on the basis of data received from major
airports. Following are the important highlights, as regards these two important indicators of
tourism sector for July 2010.

Foreign Tourist Arrivals (FTAs) in India:

 FTAs in India during the Month of July 2010 were 4.52 lakh as compared to FTAs of 4.35
lakh during the month of July 2009 and 4.32 lakh in July 2008.
 There has been a growth of 4.1 % in July 2010 over July 2009 as compared to a growth
of 0.6 % registered in July 2009 over July 2008.
 The growth of 4.1 % in July 2010 is lower than the growth of 8.0 % in June 2010. But the
number ofFTAs in July, 2010 increased to 4.52 lakh from 3.70 lakh in June, 2010.
 FTAs during the period January-July 2010 were 30.85 lakh with a growth rate of 9.8 %, as
compared to theFTAs of 28.10 lakh and a negative growth rate of 7.6 % during January-
July 2009 over the corresponding period of 2008.

Market Feasibility of Hotel Industry (India) Page 3

Foreign Exchange Earnings (FEE) from Tourism in Indian Rupee terms and US $ terms:
 FEE from tourism during the month of July 2010 were Rs.5444 crore as compared to
Rs.4983 crore in July 2009 and Rs.3870 crore in July 2008.
 The growth rate inFEE in Rupee terms in July 2010 over July 2009 was 9.3 % as
compared to growth rate of 28.8 % in July 2009 over July 2008.
 FEE during the period January-July 2010 were Rs.36817 crore with a growth rate of 24.1
%, as compared toFEE of Rs.29676 crore with a negative growth of 0.1 % during January-
July 2009 over the corresponding period of 2008.
 FEE in US$ terms during the month of July 2010 were US$ 1163 million as compared
toFEE of US$ 1028 million during the month of July 2009 and US$ 904 million in July
2008.
 The growth rate inFEE in US$ terms in July 2010 over July 2009 was 13.1 %.
 FEE during the period January-July 2010 were US$ 8005 million with a growth rate of
32.6 % as compared toFEE of US$ 6035 million with a negative growth of 17.2 % during
January - July 2009 over the corresponding period of 2008.

Progress of Tourist Visa on Arrival´ (VoA) Scheme: January ± July, 2010:

As a facilitative measure to attract more foreign tourists to India, Government has launched a
Scheme of ³Visa on Arrival´ (VoA) from January 2010 for citizens of five countries, viz.
Finland, Japan, Luxembourg, New Zealand and Singapore, visiting India for tourism purposes.
 During the period January-July 2010, total number of VoAs issued under this Scheme
was 3516.
 The number of visas issued under this scheme, during January-July 2010 for nationals of
the five countries were Singapore (1164), New Zealand (856),Finland (847), Japan (625)
and Luxembourg (24).
 Total number of VoAs issued during July, 2010 were 365 with country wise breakup as
Finland (45), Japan (104), New Zealand (88), Singapore (124) and Luxemburg (4).
 During the seven month period of January ± July, 2010, the maximum number of VoAs
were issued at Delhi airport (1838), followed by Mumbai (769), Chennai (727) and
Kolkata (182).

Key Parameter to Measure Hotel Industry Health:

The three key parameters in measuring industry’s health are showing improving signs (Source:
HVS Hotel in India):
1. Occupancy rate
2. Average Room Rate (ARR)
3. Revenue per Available Room (RevPAR)

Revenue per Available Room (RevPAR):

A performance metric in the hotel industry, which is calculated by multiplying a hotel's average
daily room rate (ADR) by its occupancy rate. It may also be calculated by dividing a hotel's total

Market Feasibility of Hotel Industry (India) Page 4

guestroom revenue by the room count and the number of days in the period being measured.
The reason for downturn in 2008-09 is global downturn and Mumbai attack but the tourist
arrival rate shows that in 2010 will improve the condition.

Occupancy Level of Different Category of Hotels in India:

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Average Room rate of Different category of hotels in India:

Trend and opportunity of indian hotel:

Market Feasibility of Hotel Industry (India) Page 6

 Hotel meaning classification and analysis:
Hotel-Definition:
 Commercial establishment providing lodging, meals, and other guest services. (Business
Dictionary.com)
 A hotel is an establishment that provides lodging, usually on a short-term basis.

Type of Hotel:
Classification of Hotel industry in India: source Ministry of Tourism

A description about Classification:

Market Feasibility of Hotel Industry (India) Page 7

 SWOT ANALYSIS:

As per the Travel and Tourism Competitiveness Report 2009 by the World Economic Forum,
India is ranked 11th in the Asia Pacific region and 62nd overall, moving up three places on the
list of the world's attractive destinations. It is ranked the 14th best tourist destination for its
natural resources and 24th for its cultural resources, with many World Heritage sites, both
natural and cultural, rich fauna, and strong creative industries in the country. India also bagged
37th rank for its air transport network. The India travel and tourism industry ranked 5th in the
long-term (10-year) growth and is expected to be the second largest employer in the world by
2019.

Strengths:
 Variety of Hotels in India
 International players in the market such as Taj and Oberoi & International Chains
 Cheap manpower cost
 A readymade tourist destination with the resources
 Natural and cultural diversity
 Government support

Weaknesses:
 The cost of land in India is high at 50% of total project cost as against 15% abroad.
 High tax structure in the industry makes the industry worse off than it’s international.
 SUPPLY GAP- Only 97,000 hotel rooms are available in India today.
 Limited value added services
 Poor support infrastructure
 Susceptible to political events

Opportunities:
 Demand between the national and the inbound tourists can be easily managed due
to difference in the period of holidays.
 In the long-term the hotel industry in India has latent potential for growth.
 Unique experience in heritage hotels.
 Rising income level of domestic and international tourist.
 Globalization and Liberalization of business houses that increase business tourism in
India.
 Common Wealth Games.
 Software services sector pushing the Indian economy skywards, more and more IT
professionals are flocking to Indian metro cities.
 Hotels in India' has a shortage of 150,000 rooms fueling hotel room rates across India.
 Banking on the government’s initiative of upgrading and expanding the country’s
infrastructure like airports, national highways etc, and the tourism and
hospitality industry is bound to get a bounce in its growth.

Market Feasibility of Hotel Industry (India) Page 8

  The government has allowed 100 per cent foreign investment under the automatic
route in the hotel and tourism related industry.
 The Government of India has announced a scheme of granting Tourist Visa on Arrival (T-
VoA) for the citizens of Finland, Japan, Luxembourg, New Zealand and Singapore.
 The scheme is valid for citizens of the above mentioned countries planning to visit India
on single entry strictly for the purpose of tourism and for a short period of up to a
maximum of 30 days.
 The tourism master plan, the first for Karnataka, envisages initiatives to attract
private investment ranging from US$ 2.2 billion to US$ 4.4 billion in the next three to
five years. The plan is prepared based on the Vision 2020 document prepared and
adopted by the Karnataka State Planning Board. The state government aims to generate
200,000 jobs in the tourism sector in the next five years. The master plan is aimed at
making Karnataka the number one destination for tourism in the country by 2020,
according to Mr G Janardhan Reddy, Minister for Tourism and Infrastructure
Development.
 Growing popularity of medical tourism in India.

Threats:
 Guest houses replace the hotels.
 Political turbulence in the area reduces tourist traffic and thus the business of the
hotels.
 Changing trends in the west demand similar changes in India.
 The economic conditions of a country have a direct impact on the earnings in hotel
industry.
 Lack of training man power in the hotel industry.
 Fluctuations in international tourist arrivals.
 Increasing competition among international tourism destination.
 Global economic slowdown.
 Terrorist attacks at Mumbai.
 Swine flu.
 Volcanic eruption in Iceland.

In India, Opportunity of hotel industry is very huge. It calls for right marketing strategy and
Govt. support India, as tourist destination, is very popular.

Market Feasibility of Hotel Industry (India) Page 9

 MARKETING MIX FOR HOTEL INDUSTRY:

The hotel industry is dependent on tourism and travel industries, and together they constitute
the hospitality industry. The demand variation in the hotel industry depends on various factors
like the economy, socio-political conditions, government regulations, business cycle, weather
and seasonal changes, festivals etc. The hotel service is a perishable service with a fixed or
limited supply. It is characterized by high investment and low variable costs.

Pricing, promotion, place, process, people and physical evidence, all have to be handled with
discretion and innovativeness. The recent trends in the hotel industry owing to the
technological developments and the changing demographics have had a major impact on the
way hoteliers conduct their business. The Indian hotel industry has also come of age and is
ready to set new standards in customer service.

The above chart shows you the possible marketing mix for a hotel Industry. To meet the global
standards and customer expectations, service providers in the hotel industry have to adopt
technological developments. They also have to be customer-oriented in their approach if they
have to withstand the competition in the market, which has further increased with the entry of
global players. Marketers have to adopt the marketing mix elements to suit their marketing
needs. For example, the product should carry more augmented services to differentiate itself
from other service packages in the market.

Market Feasibility of Hotel Industry (India) Page 10