The Rise of Economy Hotel Segment

Factors like surge in middle class, increase in business and leisure travel, higher economic growth, urbanisation etc. have resulted in bolstering mid-market or mid-priced (often referred to as economy/budget) hotels in India’s hospitality sector. Historically, the mid-market hotels fell short on standardisation. However, things have changed. Over the years, a more uniform product profile with product coherence and consistent hotel specifications have been observed with several international brands entering the market. The past few years have seen an influx of about two dozen mid-market brands. This has been mainly due to the expanding domestic tourism, increasing foreign tourist arrivals, forex earnings growth etc., which has put the Indian hotels industry – particularly the mid-market segment – on an upswing. Ashok Malkani examines various aspects of the midmarket segment and finds that macroeconomic data suggests that the road ahead will be bright.    

For over half-a-decade, the big boom in the hotel industry, which was driven by 5-stars and 4-stars, has waned. The announcements of opening of new big budget luxury hotels have come to a trickle. And while the action at the top of the pyramid seems to be fizzing out, a silent revolution is believed to be taking place at the bottom with the rise in the budget/economy hotel segment. It is believed that OYO (Own Your Own) Rooms, Airbnb, Zo Rooms, et al have been the game changers. The technology driven aggregation of this format has led many nouveau entrepreneurs to follow suit resulting in a surge in the growth of budget/economic hotels.  

The influx of these budget brands could be attributed to the extremely competitive pricing introduced by them. This, in turn has given a boost to domestic tourism. Figures f r o m India’s ministry of tourism show that the number of tourist visits within India across the different states, or domestic tourism visits, totaled 16.5 billion in 2017, up 2.3% over the previous year and rising f r o m 526 million visits a decade earlier.

So, is price the only factor – or a dominant reason for the growth of budget/economy hotel segment?  

Sunil Bhatia, Director Sales & Marketing, The Mirador Hotel Mumbai, declares, “There has been a perceptible presence of Budget Hotels in the last 2 decades or so and their increase has purely to do with the quality offered at an acceptable price. Till the start of the 21st century, the budget category hotels were always there, however in the non-branded segment.  This segment has now become more streamlined in terms of offering customer experience and a standardised product”.

Thameem Mohamed, Director of Sales, Courtyard by Marriott Bengaluru ORR (Outer Ring Road) is of the opinion that budget hotels have grown in  popularity because “the investment cost, f r o m an owner’s perspective, is much smaller compared to a full service hotel and hence the overall risk of the investment. Saving on items such as swimming pool, room size, multiple restaurants and manning are just a few big ticket items f r o m a long list of advantages of select service hotels. Also, cost of operating a smaller facility lead to higher profitability and healthy GOP’s.”

Mayukh Ray, General Manager & Chief Operating Officer, Altair Boutique Hotel, Kolkata declares, “In the hotel business the larger profit margins are generated by room inventory. Budget hotels are doing well because the cost of set up is low and they offer very limited F&B options. The amenities and services offered are minimal which means the cost of operations is very low helping in achieving higher profit margins.”

Sarbendra Sarkar, Founder & MD, Cygnett Hotels & Resorts disclosed that Cygnett, which provided a wide range of hospitality solutions, Upscale – 5 star to Midscale, Budget and Economy, was responsive to the demands of a rapidly changing world without compromising on the founding tenets of hospitality – quality, comfort, and outstanding service. “These three are our major focus areas followed by technology. We are running a hotel management company like other competitors, but we are stepping it up with a clear difference in our offerings f r o m the competitors.

“The previous couple of decades have seen Indian hospitality grow exponentially, offering diversified solutions to cater to various categories of consumers. With the rise of the middle class and disposable income, the demands and behaviour of the customer are changing. For the value-driven volume customer, seeking a full-service, the hotel continues to drive the growth in mid-scale space. It is leaving the economy segment far behind, which is yet to fully find its footing in the Indian market. In addition, guests are looking for experiences. Cygnett focusses on such customers.” He added that Cygnett had a portfolio of 7 brands among which were Lite and Express which catered to budget travelers looking for selective service.   

Role of Aggregators in Promotion of Budget Brands 

Since it is believed that aggregators like OYO and Airbnb are responsible for the promotion of budget/economy hotels can they be considered as budget hotels? The answer would be ‘No’. OYO Rooms” is a hotel aggregation based model that merely helps customers book a room with good facilities at low fares in hotels. It takes commission f r o m these aggregated hotel rooms after a customer pays for the stay at that particular hotel. Airbnb is an online marketplace which lets people rent out their properties or spare rooms to guests. It takes 3% commission of every booking f r o m hosts.

So how do these aggregators compete with budget/economy hotels which are keen to do business on their own?

Mayukh states that Airbnb affects budget hotels only located in tourist sites. “OYO hasn’t been able to build a strong brand apart f r o m a few pockets.”

Sarbendra avers that companies like OYO and Airbnb operate in a different business model and have different concepts. 

“India being a highly populated country offers all types of guest profiles seeking different experiences and offerings. We bifurcate with them via offering full-service hotels as compared to BnB concepts. Cygnett will continue to grow with its values delivering high value to our guests and clients. While these companies (Airbnb and OYO) focus on technology more than on service we, at Cygnett do the opposite. Even though our USP is technology, the core will always be the warmth of service and the true ‘Cygnetture experience’. We have specially designed services to cater to this niche segment of the audience with our Cygnett Lite and Cygnett Express brand. Here, we lay emphasis on budget accommodation, without compromising the service quality. It’s like getting the service of a midscale hotel at the price of a homestay.”

Sunil disclosed “ Airbnb has been around for a while now and is extremely popular in destinations where families would like to vacation. Of late their offerings have prompted the corporate traveler to consider them in Major cities. At a price point perspective, even OYO may be a brand to look at for a traveler; however there are stark inconsistencies in their pricing and customer experience offerings.  There is an initial impact on budget hotels due to brands such as these, however the conscientious traveler understands the value of safety and security, hygiene, food standards, and 24x7 customer service which the established budget hotels can provide, along with years of their understanding client needs.”

But while most feel that aggregators like OYO and Airbnb are popular only in vacation destinations Thameem is of the view that “Airbnb & OYO is a win win for both consumers and service providers (predominantly smaller chains and standalone hotels). Consumers are spoilt for choice with hotels at competitive prices and hotels get much needed online visibility and footfall gained f r o m these platforms. The same cannot be said about larger hotel chains who have ventured into this segment as their primary focus will be to get these customers to directly buy f r o m them.”

Budget Hotels’ Growth 

While a recent industry report shows that there has been a downturn in investment of capacity building in the luxury/premium hotels, there is a belief that the growth of economy hotels is possible only in Tier II and III cities. So is the budget hotel growth possible only in these cities?   

Thameem does not agree with this view. He iterates, “Current trends show massive expansion of select service hotels in metro cities. India is deemed as a price sensitive market and majority of travel in metros are f r o m corporate clientele who look to save costs by choosing quality economy hotels compared to premium of full service hotel options”.

Sunil too agrees with the view that metros too have a potential for budget hotels. He adds, “They are very much needed here as one always requires value for money places to stay at, whether on an official or personal basis.”

Mayukh concurs by stating, “They are popular with a certain segment across cities and mostly in metros where the star hotels are priced on the higher side.”

Different aspects of Budget Hotels 

Budget hotels have made it possible for people seeking affordable accommodation to add to the growth of tourism sector. International companies are also increasingly looking at setting up such hotels. There have been several pros and cons in the growth of this segment. 

Mayukh believes that increasing number of hotels provides more employment opportunities in the sector however, “the flip side is the sliding ARRs (Average Rate of Return).” He also adds, “Brands always have a better success ratio. The reason being that first time traveller will book a branded hotel while searching online. The adaptations that have to be carried out by this segment is in providing personalised service which our culture is accustomed to and F&B preferences to suit the local palette”.

Sarbendra avers, “Factors such as the rise of middle sector income and massive infrastructure development are opening new doors for economy hotels’ sector. Indian travellers have steered away f r o m unbranded, unorganised, low service accommodations – which was the norm for the nation for decades. There is, however, a change in this mindset.”

Sunil says, Budget hotels sector has opened up and brought more confidence in the Leisure/Tourist Market segments. Travellers have an ease of locating and staying at a good hotel. Also with the Udan domestic airline plan taking off, many airlines look at such budget hotels for their Crew Stay provided the basic safety and hygiene standards are met. Even those flying on these routes need an affordable place to stay as per their requirement.

“Brands, with their reach and loyalty programs, do offer a certain experience which frequent travellers are used to, however standalone economy hotels in that segment offer unique experiences as many services and facilities can be customised as per client experiences.” 

Thameem disclosed, “It has to be noted that larger hotel chains have realised the potential of economy hotels in South Asia and have already began expansion on this front over the last 5 years. Majority of the hotels opened by these chains in the recent past have been select service brands. This by itself speaks volumes of the long term potential this segment holds.

“As far as the concept that brands or chains having an edge over stand alone hotels are concerned, I would say that currently it is a level playing field. OTA’s such as Makemytrip, Yatra, Expedia & and aggregators such as OYO & Airbnb have a formidable online presence and actively compete with larger hotel chains. This is healthy for both customers as well as hotels. An advantage larger chain possesses is the loyalty points and service standards maintained across cities, which is a strong influencing factor for consumers.”

Large Chains Investing in Budget Segment  

With popularity of budget hotels, several global branded luxury hotel chains have also ventured into budget hotel segment under different names. 

According to data f r o m global hospitality advisory firm Horwath HTL, in 2002, some 6,000 of the 26,000 branded rooms across India – less than 25 per cent – were mid-market ones. Since then, while the number of branded rooms has increased five times to 125,000, the size of the mid-market segment has increased about nine times to 53,200. The mid-market segment today accounts for 43 per cent of all branded rooms in the country. 

Thameem disclosed, “Larger hotel chains such as Marriott, Hilton, Accor & IHG have already ventured into this segment and have seen tremendous success in the recent past. This trend seems to be growing and we will eventually have a strong portfolio of branded hotels across metros as well as tier II & III markets”.

He continued, “International chains have numerous brands under their portfolio. The introduction of a certain brand is done after taking into consideration various factors.  Each brand is unique and holds its own identity which customers relate to. Since India is a relatively new market for these brands, a lot of investment is made into educating customers about these brands and their identity.”

Mayukh states, “The larger hotels have invented their second level brands as they want to have a larger share of the pie. Their existing presence in the market helps in garnering business. As far as their popularity, as compared to stand alone economy hotel, is concerned I think they will always have an upper hand.”

Sunil adds, “International brands would be interested in investing in economy hotels in India if the local laws and taxation encourage an ease of setting them up. International as well as Indian Brands does a proper survey of the area before setting up a hotel with anticipated demand, business and tourist potential and surrounding community eco systems which would help the entity to sustain and grow. Factors like cost of land and construction, manpower, break even time are all considered. The scope on entering this market for companies is always directly related to the economic activity of the area and country at large, however with the current economic cycles which we are going through, a calculated action plan would work better.”

He continues, “Several international luxury hotel groups have also segmented into economy hotels under a different brand name so that it does not liquidate the effect of the higher end brand/s of the hotel group and a clear perception is created as to what the client can expect f r o m each brand and segment.”

Tech Savvy 

As technology becomes increasingly pervasive in everyday life, travellers are becoming more tech savvy which, in turn is compelling hotels to make technology the key weapon in their arsenal. 

Sarbendra avers, “Technology can be a game-changer in any industry if used rightly. Cygnett is a very strong tech-savvy and progressive brand. Technology is a core enabler in our USP. We have our own state-of-the-art, next-generation technology platform called the “Cygnett CX”. This platform seamlessly integrates with our cognitive website. We are also brainstorming to identify how we could use Artificial Intelligence in our system as well. Our use of advanced technology has enabled us to receive an award for “The Best Technology Driven Mid-Market Hotel Chain” in India.”

Mayukh iterates, “New age economy hotels have to be tech savvy, as they need to save on manpower and rely on automation. Also they need to be present in the digital space as guests mostly book online. These hotels are investing in technology, like having smart electronic gadgets across the hotel. The rooms are more functional with less frills. Voice activated devices like Alexa is very common. We, at Altair Boutique Hotel Kolkata, invest in high speed internet connectivity, easy to use wardrobes, functional washrooms and healthy food options across our group economy room inventory.”

Sunil disclosed, “Technology, f r o m using a phone as a key card to Internet of things (light switches, TV remote etc controlled by one device) is slowly being incorporated in certain new age hotels.  There is pre booking of rooms via the Hotels App, doing Pre registrations which are also possible. Slowly, more automation may take place in the form of vacuum cleaning robots (which has already started in certain public areas of Singapore), Self-check in Kiosks (Already there in the Airline Segment) and revenue management.”

Thameem is of the view that hotels, in general, need to keep updating themselves to stay relevant with new age travelers. “Improvements such as internet speed, AV facilities such as smart TV’s in room, mobile check in and interaction with guests on social media platforms to serve and engage are a few of them.”

Future of Economy Hotels

India’s population, according to a report, is expected to grow to about 1.5 billion by 2030. The middle- class, which comprises one of the main target clientele for the economy/budget hotel segment, is expected to grow f r o m 80-90 million to 750million. So, what according to industry are the prospects for the growth of this segment?

Sunil declares, “It is very bright provided the hotels get it right in terms of product designing, placement and pricing. Guests are always looking for new experiences and any stays which are value for money with great services and facilities would always be accepted. International and Domestic Tourists and even Corporates look for such hotels as there are travel and stay budgets which need to be adhered to. Even tourists paying on their own whether directly or via a Travel Agent, look for the best deal which includes stay in a safe and decent hotel.”

Mayukh concurs, by adding, “There is not only growth in business but also a considerable growth in the tourism industry over the years. In Kolkata, the increased growth in room inventory will result it to be a ‘Convention City’. We now have huge convention centres and one of the finest in the country with adequate inventory across categories to host large MICE events. With the growth and development of tourism in both the hills & sea side accessible f r o m Kolkata, the transit travel is also bound to grow. The economy hotels play a vital role in growth as they help accommodate all segments of business.”

Thameem too believes that there are plenty of opportunities in this segment. “However,” he adds, “it can be further propelled if the government introduces some incentives for such investments to be made. With India still emerging as fertile investment grounds the opportunities are limitless.” 

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