So Who’s Down To Start A Chain Of Budget Hotels In India?

Submitted by: James McMillan

Professor Carr Addendum and Intro to James’ Post: This is a post I asked James to make as a follow up to his earlier post, It’s Called Days Inn in China But It’s Nothing Like It, and For Good Reason (see also the comment thread). (Thank you James, for doing so and for taking the time.) As the below shows, we have found that finding a hotel in India that can accommodate a group of our size is a challenge. Rates are very high, which in turns impacts the price you pay for the trip. Moreover, the current hotel market there tends to be very high end (we can’t afford) or very low end (you will not want to stay there), with not much in between to choose from (our challenge to find and compete to get). Step back and think of this — a country of 1.3 billion plus people, with a hotel room supply of roughly only 105,000. My memory is that China has roughly 1.1 million hotel rooms in the country (see below for James’ US figures — roughly 4.4 million; we are a developed economy with money for fun and travel, while China and India are developing economies and emerging markets with much less money). Please be aware of this planning and business issue and constraint, and, business opportunity, as James touches on below. By the way, there are some very good and understandable macro reasons for this hotel market and supply condition in India and my memory is that your Khana book, Billions of Entrepreneurs, also has a nice chapter (Chapter 4 as I remember — “Fiat and Fairness”) re: how and why real estate development projects can be a challenge to launch, complete and make any money on in India. Be sure to read and think of this post and business environment issue as you read that chapter and as we travel in India and China. Also keep in mind that one (not the only) reason China has more rooms is that it has boatloads of peasants looking for work from rural villages who will work for cheap (in comparison to US wages, that is). The CCP in China is also operating more from a “build and they will come” mindset on the hotel issue. One model is not better than the other, they are just both different.

James’ Post:

>Did you know there are only about 105,000 hotel rooms in all of India while the US has about 4.4 million? If that’s not shocking enough consider that New York alone has about 110,000 rooms and Shanghai has about 135,000. Is it any shock to you that the prices for basic rooms in India are through the roof? With India having almost 4 times our population, why do you think such a disparity exists and why are the business men in India not capitalizing on such obvious demand?

According to some hotel executives, the blame can be placed on the government for not revising decades-old laws that limit the amount of land for sale which obviously drives up the prices. The Indian Railways has vast land holdings that could easily be converted into track-side hotels but at the moment they are just not willing to give these up. According to the Taj group of hotels, a chain with 7,000 rooms in India, the price of purchasing land at an auction is often just too high to make building a hotel financially viable.

For comparison purposes, a similar quality room in Delhi cost on average $187 versus $122 in Beijing. With India already struggling with infrastructure problems it?s no wonder that hotel room shortages and high prices are at the root of India?s lagging tourism industry. In 2005, New York attracted 6.8 million foreign tourists while India only had 3.9 million. This resulted in $22.8 billion for New York and only $6.7 billion for India. To put these numbers in perspective that translates into about $2,850 per New York resident as compared to $6 per India resident.

Fortunately, there seems to be some progress for the hotel business in India but they definitely have their work cut out for them. It is expected that there will be about $6.5 billion invested in hotel building which will allow for approximately 140,000 new hotel rooms to be built by 2010. Some of the hotels expanding into India are some of the worlds best know names (Hilton, Wyndam, Pan Pacific, etc.) that are all recognizing the huge potential.

So before these big corporate hotel companies come in and dominate the market, who?s down to take on the Indian government and start building some hotel chains? It sounds like if the political front could be worked properly, sky’s the limit!

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15 Responses to So Who’s Down To Start A Chain Of Budget Hotels In India?

  1. I hate to be the voice of reason, but if local Indian business people can not convince the Indian government to change, how are a group of foreigners going to succeed in taking on the Indian government? That aside, investing in anything in India over the next several decades is likely to succeed simply by being in the right place at the right time; just like Japan in the 1980s.

    From what I understand, the “decades-old laws that limit the amount of land for sale” is a property tax law. Property that is unoccupied does not pay any property tax. Thus, an owner can hold a property indefinitely so long as they are not strapped for cash. In order to convince them to deal, it might be best to partner with a land owner than buy their land outright.

  2. I agree with Alex. Sounds like the goverment and land owners do not want to sell of their land, especially if it is unoccupied. Whether its the Hilton empire or a group of Cal Poly MBA’s, there may be an opportunity to lease land for an amount the will cover the new property take and provide a profit for the land owner. Unfortunately I do not think that the GSBA budget can afford the investment, but it may not be a far cry for big US corporate hotel companies. Once the big guys from the US come start investing, maybe the Indian government will realize the benefit of expanding the hotel market and revise the decades-old property laws that are currently inhibitiing growth of the industry.

  3. Erika Bylund says:

    I (and I’m sure many others) take it for granted that the seleciton in accomodations to which we are accustomed here in the U.S. and in other developed countries is the standard. I would never guess that India of all placeswould have such severe shortages of something as basic as hotel rooms, especially considering that the country is quickly becoming a hot spot for international travel and business.

    But this issue isn’t isolated to India or China. During my travels in Suriname, a minimum price for a half-decent hotel room would run a tourist no less than $300 per night. The next category up (resort quality) ran 1500 euro per night! I spoke with a some of the guys I worked with about the paltry selection and exorbitant rates, and they told me that the primary barrier to hotel development (and building in general) is the country’s difficulty in obtaining raw materials like rebar, concrete, lumber, hardware, and paint. Other issues, also inhibit real estate transactions. In Suriname, one cannot “buy” a piece of land; one can only lease it from the government for a period of 70 to 100 years.

    Another example is Indonesia. On some Indonesian islands, it’s next to impossible for locals to purchase land (and therefore build) because the country lacks a uniform agency to record property deeds, titles, and property boundaries. Furthermore it is very difficult to enforce property rights there.

    I never realized how much I took for granted the opportunity to own property here in the U.S. It’s no wonder that our forefathers took such great pains to protect property rights. Who knew that so many other issues could affect something as simple as a hotel room!

  4. Phil Hamer says:

    The facts in James’ post were really surprising to me. With all the tourism and sites in India and with the economic growth and need for business travel, I would have expected hotels to be dotting the land, and I would also have expected cheap prices.

    Today’s WSJ actually had an article about the opportunities being utilized by the big name hotel chains in China and India. Here is the article. It didn’t mention anything about the complexities in starting a hotel in India, but I do not doubt they exist. I’m sure the bureaucracy of land ownership will slacken as many other strict government regulations ihave in India over the last 10 years.

    It does sound like a great opportunity. Where can I find a couple million in capital?

  5. William Ary says:

    There are no hotel room because there are no people who need them. Unfortunately, the vast majority of Indians cannot afford hotels at any price, and with the advent of the Internet there are relatively few reasons for business travelers to come to India, barring a few high powered executives. We are the exception rather than the norm: a group of middle class people who will be staying in many cities and demand a certain level of service. As more people find reasons to go to India, I’m sure we will see the trends shift and there will soon be demand sufficient to justify the larger number of hotels we’d expect.

  6. John Barry says:

    I’m down to start a chain! This is clearly the perfect time to do it assuming the figures from last year still hold. Growth in China is not expected to rival that in other BRIC nations, namely Brazil and India, as China has already had a huge run up in recent years. This leaves the doors open for people looking to get in cheap before the prosperity torch is officially passed from the Republic of China to India. As India continues its ascent as a recognized business center, the demand for hotel rooms where business travelers, and eventually vacationers can stay will surely increase tremendously. While close family ties keep the Indian need for hotel rooms low, foreigners will surely make up the difference.

  7. Danielle Steussy says:

    I definitely see an opportunity for any entrepreneur in this case. As many have already said, India is becoming more of a tourist and business destination and as demand continues to rise for new hotels, there is no better time than the present to capitalize on foreigner’s needs for hotel rooms. There might not be many rooms available currently because there may not have been the increased need until now.

    Taking a slightly different perspective, I can see why the rooms haven’t been in demand until now. Domestically, it doesn’t sound like many people have the resources or ability to travel and vacation around their own country, a luxury that we have in the United States. Until people have that luxury, it will be hard difficult to rationalize building more hotels.

  8. Michael Minasian says:

    It seems to me that this for the most part is all a problem of space. In the urban areas, both China and India tend to be very tightly packed.

    When the government is putting up roadblocks it will always stifle small business. The government is democratically elected, and there are enough political parties, that it is up to the citizens to decide if they want a change.

  9. Very interesting post James! Not too long ago my dad toured India for two months or so. When he showed us the (millions of) pictures he took over there, I noticed that he always stayed in pretty shabby hotels. Knowing my dad to be very low key I was not expecting him to stay in a Ritz-Carlton but what I saw was really substandard.
    So I asked him why he chose these hotels and he told me that European/US style hotel rooms are at least as expensive as somewhere in Munich and he had not anticipated this in his travel budget.
    I had no idea that a shortage of land is the reason for this situation. It is really surprising to me that a country like India that is all about economic growth stifles its development by basically restricting the development of an essential business resource.

  10. Jeff says:

    I agree with William Ary. There hasn’t been a market for Hotels because in general, Indians didn’t need them. With the condition of their roads being what they are, and low incomes, they haven’t had a “car culture” like we have in the United States. They don’t, as a rule, cart their whole family back and forth across the country to visit Wally World. Many stories I read talk about people not really leaving their village their whole life. India hasn’t been up to this point very mobile. There are signs that this is changing. Domestic tourism is rising as middle class incomes rise and there is an awareness that there is a severe shortage of hotel rooms.
    Because of this awareness of need, and because available land is scarce, people that can sell land are doing so at a high price…lowering the attractiveness to developers, or forcing them to build high-end hotels that aren’t really the type generally needed.

    http://hotel-online.com/News/PR2004_4th/Nov04_HVSIndia.html

    Looking at Google Earth or satellite view of India, it’s also curious to see how the whole country is cut up into a patchwork quilt small parcels.

  11. Chris Phippen says:

    This is very true about tourism lacking in India due to outrageous pricing. India has a good transportation system with all the readily available bus and taxi services, so creating a decently priced hotel system would have an overall effect of greatly boosting the tourism market. My best guess for why India does not already have Holiday Inn type hotels is because of the difference in quality and standards between American people and Indian people. Although some Americans will sleep in their cars if they have to, most would prefer a nice queen bed with a mini-fridge and possibly a continental breakfast served until the late afternoon. Even though it would cost a pretty penny for India to invest in a chain of Holiday Inns or Best Westerns, in the long-run the income from tourism will greatly surpass it.

  12. Stephen Allison says:

    Uh oh, this is NOT pumping me up for the trip! I wonder what the state of the hotel business is now in 2013? Did that entrepreneur start his hotel chain? Are land tax laws any different? What is the total number of rooms now?

  13. Austen Diliberto says:

    After reading this post, it’s obvious that there is a serious lack of hotel rooms in India. Comparisons are made with the number of hotel rooms in New York and Shanghai, world destination cities. Although I am excited to visit India, I wonder if a large amount of people around the world are also looking to visit India. This is a bit of a chicken and an egg scenario. Will India become an economic superpower first, or will it develop a strong tourist industry first? Shanghai hasn’t always been a destination, but with the city’s immense growth and international draw it has attracted a lot of tourists looking for a place to stay. My bet is India will continue to grow and as it does, become a more popular destination. At that point, the government will probably create land incentives for hotel development and hotel construction will shoot up exponentially.

  14. Bryan deRegt says:

    I don’t think New York and Shanghai are the right places to compare India to when looking at hotel situations. These are huge international business and tourist destinations. People are consistently going to New York for business from all over the world. I would think New York probably needs the most hotel rooms as anywhere in the world. I do agree India needs more hotels but don’t think just looking at comparisons to other cities and prices of the rooms is the right argument. I would be interested to see how often hotel rooms sell out in a city. This is a true sign that more rooms are needed. It goes back to Econ 101, is demand greater than supply?

  15. AliyaZ. says:

    I was quite surprised to find out that Shanghai or New York have nearly as many hotels rooms that the entire India. I understand that you can’t really compare New York let’s say and India. It’s like comparing apples and oranges. However it is interesting why such a densely populated country has so limited hotel rooms available. The other interesting aspect of it is that the rooms are either too luxury or the ones in really bad conditions. The country seems to lack the room for the middle class. I did some research online and I found the article “Room in the middle” on http://businesstoday.intoday.in that talks about how more and more hotels chains acknowledge the deficiency of the room for the middle class and are planning to open hotels targeted this segment of the population. It is a very interesting article and I suggest that you read it.

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