Indian Hotel Industry and the Foreign Investment Influx - Term Paper Example

Indian Hotel Industry and the foreign Investment Influx In order to evaluate the hotel industry in the emerging markets, India is one of the nations with a huge hotel industry development potential. Indian Hotel Industry has perceived remarkable boom in recent years. Hotel Industry is unswervingly linked to the tourism industry. The upbeat in the Indian tourism industry has invigorated the growth of hotel industry in India. The blossoming economy and improved business opportunities in India have worked as a windfall for Indian hotel industry. The advent of low cost airlines and the allied price wars have set domestic tourists a horde of options. The several tourism related campaigns have helped in booming the domestic tourism and subsequently the hotel industry. By and large, the infrastructure of hotel industry is mediocre in India, which is acting as a hurdle for the development of tourism in the country. According to the Ministry of Tourism of India, there is a scarcity of 150,000 hotel rooms in the country. The increased demand of hotels in the country has appeared due to the high demand for hotels in the country has emerged mainly because of the brisk expansion in the tourism business which comprises of 75% of the overall tourism industry in India. According to the estimates provided by Ministry of Tourism and Industry, the occupancy rates of hotels in Bangalore shot up from 64% to 79% between 2001 and 2005, whereas in Bombay and New Delhi it increased from 52% to 74% and from 53% to 80% respectively. Eyeing the great potential in the Indian Market, world's renowned hotel chains viz. ITC, Accor and Hilton and are penetrating on a broad scale in the Indian hotel industry whereas, Eastern Mandarin, Golden Tulip and Four Seasons are exploring a variety of growth prospects in the country. Accor has recently publicized the formation of two joint-ventures in India where the first is in corporation with Emaar Mfg and entails construction of 100 hotels up to 2015. These hotels will be working under the brand name of 'Formule1' with a per room tariff of USD 20- USD 30 per night. The second joint-venture is with Interglobe where Accor will be holding 40% of the stake while the remaining 60% will be held by Interglobe. This joint venture, under the brand name of 'ibis', will be constructing 25 hotels in India by 2010. The reason for the influx of Big Hotel groups to enter into the emerging market like India is that the US market is somewhat reaching the level of saturation for them and markets like India with enormous tourism and demand/supply disparity in the hotel industry would provide a boost as it is a cost effective tourist destination. HILTON GROUP OF HOTELS IN INDIA After a great success worldwide, the Hilton group remained the key player in exploiting the opportunities in Indian Hotel Industry which is still in a nascent stage by coming up with a joint-venture with the Indian group DLF to open 75 hotels in the country (DLF holds 75% of the stake) in five to seven years time. Before discussing about this deal and Hilton's penetration in the Indian market, we should see the current standing of both the companies in their own particular aspects. HILTON HOTEL'S CORPORATION The Hilton Chain of Hotels hold fast to its founder Conrad Hilton's philosophy whjo said that, "It has been, and continues to be, our responsibility to fill the earth with the light and warmth of hospitality." This viewpoint is shared by all Hilton brands. Pre-February 2006, Hilton Hotels Corp. had run Hilton hotels in the USA, plus other hotels in the US & globally. In February 2006, Hilton Hotels Corp. bought all of Hilton Group's Hilton hotel operations outside the US. Hilton Hotels Corporation is the top international hospitality company, with more than 3,000 hotels in 76 countries and territories worldwide. The company holds, administers or franchises a portfolio of world's renowned and highly regarded brands, including Hilton, Embassy Suites Hotels, Hilton Grand Vacations, Conrad Hotels & Resorts, Homewood Suites by Hilton, Hampton Inn, Hampton Inn & Suites, Doubletree, The Waldorf=Astoria Collection and Hilton Garden Inn. ABOUT DLF LTD-INDIA The DLF group is one of the biggest real estate developers in India. The group has already got over 224 million sq. ft. of existing development where planned projects account to 748 million sq. ft. DLF's core business is development of residential, commercial and retail estates. DLF has recently forayed into the financial services sector, and hotel business in India. The Hilton-DLF consortium's Plan: As said earlier, the joint venture has plans to open 75 hotels in India. The projects are: 1. Hilton Dwarka New Delhi (300 rooms) 2. Hilton Garden Inn, New Delhi / Dwarka (400 rooms) 3. Homewood Suites by Hilton, New Delhi / Dwarka (100 rooms) 4. Hilton Residences Kolkata (100 rooms) 5. Hilton Garden Inn[R] Chennai / OMR (250 rooms) 6. Homewood Suites by Hilton Chennai / OMR (100 rooms) Lenny Menezes, CEO of DLF Hilton Hotels Ltd, commented, "The relationship between DLF and Hilton is yielding great results and we are on track to achieve our strategic goal of creating a Pan-India presence in the hospitality sector." Furthermore, Koos Klein, President, Hilton Hotels Asia Pacific, said, "Through our Hilton Family of Hotels we are targeting the different needs of business and leisure travellers in India, across the price points. Our alliance with DLF intends to announce more new hotel projects in India in the near future." Keeping in view the quote said by the President, Hilton Hotels Asia Pacific, and the new projects along with the projects under progress can face some prominent issues like stiff FSI norms, high land costs, HR and finance, sales and marketing, Corporate Governance, comparatively poor urban infrastructural planning and political shortcomings which we do not find in the mature market like USA. However, due to weak dollar exchange rate and economic apprehensions we see a mixed trend in the US hotel industry. ISSUES WITH THE INDIAN MARKET: FLOOR PRICE INDEX: POINT OF CONCERN For the mushrooming projects, Hilton Group's key area of concern would the Floor Space Index (FSI). As per Wikipedia, the Floor Space Index (FSI) is the ratio of the aggregate floor area of buildings on a certain location to the size of the land of that particular location. Unlike USA and the developed world, most of the Indian cities proffer some of the world's most impecunious floor spaces indices (FSI). For instance Mumbai has a mere 1.75 FSI. Latest economic researches have revealed that soaring business densities are significant in spawning synergies among companies. In quite a number of cities, planners virtually at all times set up the regulated FSI at a level higher than the FSI of existing buildings. This practice promotes the redevelopment of outmoded structures. These trends are still a remote possibility in India. Most comparable cities across the globe offer a better FSI. For instance, zoning policy differs across New York. Some parts of the city provides 0.5 FSI whereas the Central Business District is famous for allowing anywhere from 15 FSI to 18 FSI for development, which averages out to be 7.75 FSI to 9.25FSI for New York. In short infrastructional challenges pertaining to FSI are a disincentive for Hilton Hotels; However, Transfer of Development Rights program (TDR) can help Hilton Hotel to sustain in a better way in the Indian Market. Source: HVS Search HIGH LAND COST: NOT A BIG DEAL AS SUCH The land for the development of Hotel or any mass project is quite high in India. Construction of a hotel on a portion of land that costs up to 60% of the aggregate development expenditure seems like a roller coaster ride without seatbelts. However, For Hilton Hotels, when the value of the land is converted into Dollar terms its comparatively low than in the US, where the land prices in metros are sky scraping. HUMAN RESOURCE: A BIG CHALLENGE The concerns over a potential US recession are a point of concern as it remains to be seen whether buoyancy of New York's occupancy rates will carry on in 2008 or not. This would determine the future of HR in the hotel industry across the board. While on the other hand India is an emerging economy with growth potential. There are approximately 55000-60000 rooms currently under construction where the demand for rooms is doubled over a five year vista. If the overall demand materialises over next 5 years, on an average of 1.5 employees per room, 187000 new jobs are likely to be created. HR would be a key area of concern for Hilton Group as Talent scouting and retention would require a lot of emphasis. All non-operational areas would require constant attention. In this regard, Hilton Hotel needs to train the functional head where an out-and-out effort would be required to understand the cultural and social dynamics of India, and endeavours to meet, the requirements and ambition of a more demanding generation of employees than that of the US hotel Industry. CORPORATE GOVERNANCE Matters pertaining to corporate governance, talent retention and strategic development will emerge as core issues for Hilton Group of Hotels in the coming years. Currently, the corporate governance laws for the Hotel Industry are not fully formulated so Hilton Group and other Hotel companies will have to take a stern look at increasing the accountability of their top management and boards. When compared to the corporate governance guidelines in the US, the hoteliers and employees are less prone to any formalised regulations and laws in India en masse. WHAT'S IN STORE FOR HILTON HOTEL IN INDIAN HOSPITALITY INDUSTRY' In the recent years the Government of India has taken various steps to boost tourism and development within the country which will benefit the hotel industry in the years to come. The key benefits by the Indian government include the removal of the 15% inland air travel tax and removal of a number of impediments on outbound chartered flights. The government's latest pronouncement to treat convention centres as part of core infrastructure has also fuelled the demand for hotel rooms. Furthermore, Liberal foreign Investment policy would enable the hotel industry to witness a boom in the forth coming years. Though the above mentioned issues are a hurdle for Hilton group, the chain of hotels is likely to keep up its head above troubled waters and will significantly benefit by the economic revival in India. India has been endorsing its healthcare tourism by offering the visitors both from within the country and outside with private healthcare facilities. As per 'Research and Markets' forecast for Indian Tourism Industry, the number of tourists visiting India for medical treatment is likely to reach one Million by 2012, posting a forecasted CAGR of 28.09% from 2007. Furthermore, Indian outbound tourist flow is likely to escalate at a prospective CAGR of 12.79% over the five-year. Tourist influx to India is expected to increase at a probable CAGR of 22.65% between 2007 and 2011. Keeping these estimates in mind it seems that it's a Win-Win situation for Hilton Group as the concern over a potential US recession is the probable key occurrence to watch. REFERENCES: Gillian Maxwell & Gordon Lyle (2002), 'Strategic HRM and Business Performance in the Hilton Group', International Journal of Contemporary Hospitality management, Vol 14 Achin Khanna, (April 2008) Article on Hospitality India - Growing Pains 'Research and Markets' Report (2007), Indian Tourism Industry forecast. Press Release (Feb 2008) by Hogg Robinson Group, Hotel Survey 2007 www.dfl.in . Read More