Analysis: In India, hotel operators invest and educate

Reuters News
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Posted: Jun 16, 2011 4:47 PM
Analysis: In India, hotel operators invest and educate

By Helen Chernikoff and Abhishek Takle

NEW YORK/BANGALORE (Reuters) - In the United States, big hotel chains get to float above the fray. India brings them down to earth.

At home, and in some markets abroad, companies like Marriott International, which owns the Courtyard and Fairmont brands and Starwood Hotels & Resorts, owner of Sheraton and W, have virtually eliminated real estate risk.

They have sold all or most of their own hotels, and instead make money by franchising their well-known names. This business strategy of minimizing in-house resources is known as "asset-light."

But in India, hotel companies are finding it hard to grow without getting bogged down in bulky assets like land and, well, hotels.

"All the brands, they still want to do the asset-light model, but they understand in some cases the price to pay for entry is to put some capital, some equity into it," said Sri Sambamurthy, whose real estate firm West Point Partners is investing in India. Sambamurthy used to manage global real estate projects for Barry Sternlicht's Starwood Capital.

Rapid expansion in China lends credence to the lodging industry's claim that its future lies mainly in emerging markets. But in India, growth will be slower, and more expensive.

CRITICAL MASS

In India, foreign operators see providing affordable lodging for middle-class domestic tourists and business travelers as the best growth opportunity, as the country already has a longstanding luxury hotel tradition.

The key to developing mid-level product lies in quickly building enough properties that consumers become familiar with the brand and confident that they will find the hotels where they need them.

Investment helps speed things up, said Christian Karaoglanian, chief development officer for French hotelier Accor, which has put $250 million into the country.

"In China, it's easy to be asset-light. They're building hotels and they're looking for managers," Karaoglanian said. "In India, we like to be a part-owner. The only way to grow, and to grow fast, is to invest."

Family-owned Carlson, which owns the Radisson and Park Plaza brands, acquired one of its Indian partners outright and owns 24 percent of another venture, said Chief Executive Officer Hubert Joly.

COMPROMISES

Karaoglanian believes that other operators looking to tap demand from India's middle class will increasingly need to invest in order to stay competitive.

Even Starwood is not ruling out investing its own equity.

Distribution is key to the growth of brands in the middle of the market, said Dilip Puri, managing director in India for Starwood.

Marriott recently announced a joint venture with hotel developer SAMHI to build a portfolio of 15 Fairfield by Marriott hotels targeting the Indian business traveler. Marriott has invested $30 million in the effort.

"It's not our business model to own hotels or to put equity into hotels. That's not to say that if our equity is required to make a project work we won't put equity in," said Navjit Ahluwalia, senior vice president of development in India.

Some companies, like Hilton Worldwide and Wyndham Worldwide, maintain they are exporting their asset-light model to India despite others' insistence that it will not work there.

Even Hilton acknowledges that expansion in India requires more investment in staffing and support to owners, said Abhijit Das, who directs development there for the company.

Hilton does not intend to actually invest in any of the Indian properties that carry its brands. But doing business in India still implies an unusual degree of commitment from foreign brands, Das said.

"We have to do a lot more education in India," he said. "We have to walk the developers through international standards."

(Reporting by Helen Chernikoff and Abhishek Takle, editing by Matthew Lewis)