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Tuesday, April 5, 2011

'It will be very hard for new hotel management companies to compete in India in the long run'

Vasant Prabhu
Vasant Prabhu, vice-chairman and chief financial officer, Starwood Hotels & Resorts, in an earlier interaction delved upon the global hospitality major's business approach to the Indian market, competition from domestic and international players, introduction of new brands, investment thesis etc. Edited excerpts...

What are the challenges of developing and operating a hotel in India? Should people really invest in hotels or stay away from it?

Challenges in India are primarily in the form of cost of land and cost of capital. These are significant issues and partly linked to infrastructure. Owing to limited infrastructure land values go up significantly wherever there is related development. Once infrastructure gets more widespread I think land prices will become more reasonable.

In the hotel industry there are two ways to make money, one is through profits generated by the hotel and second is appreciation of the asset itself. In Asia, because of large and growing population land is scarce and very often asset appreciation has been enough to generate a good return on investment. So it's possible that in big cities where land is expensive, one may think the returns are insufficient purely on a RoI basis. However, what most owners have realised is that asset appreciation over the years can actually give good returns.

The mindset is not unique to India because people perceive this business similarly in many parts of the world. More so in places like Hong Kong, Singapore etc. a lot of hotel owners have made money not from profits but appreciation value. Hotels can create appreciation by creating infrastructure around thereby enhancing the asset value. From an operating performance stand point, I don't think RoI alone will determine whether people should invest in hotels or otherwise. But one has to be careful when playing the game, because if the site is completely commodity like and the hotel is not unique, one may not get the appreciation. In such a situation, RoI is the only deciding factor.

How does Starwood view the Indian hospitality, travel and tourism industries? Where do you think the sector is headed in the near and distant future?

We are very enthusiastic about the Indian market and we think the space will continue to remain very attractive for the next few decades and more. The primary reason, we think, is that India is still very under-served as far as supply of hotels is concerned. With the country's infrastructure viz. roads, airports, railways getting better we certainly foresee a lot of action in the inbound and domestic travel and tourism space going forward.

For Starwood, India is a very long term focus market which is evident from the fact that we have been operating in the country since 60s and 70s with the Sheraton brand. The year 2010 has proved to be a better year vis-a-vis 2009 and business scenario in 2011 is looking very good not just in the Indian market but globally. The sector has seen significant revenue growth in the western countries and Asia including India in the previous year and we see the momentum continuing in 2011.

But growth in India has largely come from the domestic market as compared to overseas business.

Travel patterns are changing everywhere and we see that happening in the Indian market as well. Twenty years ago, in a typical Chinese hotel, 80% of the guests would be non-domestic travellers and the scenario today is completely reverse. I think those patterns will change everywhere including in India. Domestic is a long-term story and I don't think hotels business in India can be built keeping only the foreign travellers in mind which used to be the case earlier. Indian business travel will largely dominate the hospitality sector in the country.

Hotel asset owners in India associate with foreign chains for their global network and value add-ons. Given the domestic focus you spoke of, will the scenario change in the coming years?

Not really. There are various benefits for a hotel asset owner when joining hands with a foreign chain and I think that will continue. In our case, Starwood Preffered Guest (SPG) is a very powerful loyalty programme that assures one out of every two rooms in a Starwood branded hotel globally, being occupied by a SPG members. So we certainly can fill hotel rooms with this unique offering.

Our reservation systems provide our partners with a much broader access than anything they could do on their own. Our sales offices call on corporations globally so a lot of business in India could be because we have a contract with IBM that was negotiated in the US on a global basis. The same would be true for a contract with a Korean company negotiated in Korea which has a big presence in India. So it may very well look like domestic business but it was really sourced through a global contract.

Has the influx of foreign hospitality brands posed any challenges for Starwood in terms of the development pipeline in India?

There is a lot of competition for sure and there is nothing wrong with it. In the end, I think, people who are going to do well are the ones who can make the most money for their owners and offer guests the best hotels. A good hotel is a combination of design and service from the brand's perspective. As for the asset owner, the deciding factor largely revolves around return on investment. Influx of foreign hotel companies in India is because there isn't much growth outside the developed world and many of them do not have a strong presence outside India. I think it will be very hard for them to compete in India in the long run.

While the new entrants might succeed in the short-term because asset owners may get tempted to go with people offering better deals, willing to do it for less, giving them money to put their brands on hotels. I think an owner should remember that they are handing over an asset that may be worth $50 mn or $100 mn to a company to run which is bit like giving your personal money to a wealth managers not because they gave you the lowest rate. It is always advisable to hire someone who can give you the best return which is true with our business as well. I think people have to be very careful when they make such decisions. What will happen over time is there will be a separation between companies that can actually deliver and vice versa.

Some of your brands are still to establish presence here. What are the possibilities of them showing up in the near future?

Brands like Sheraton and Meridien have been in the country the longest. In the recent past we have introduced Westin, The Luxury Collection, Aloft and Four Points brands. Going forward we would very much like to see our W and St Regis brands in India. They will take some time considering hotels take 2 to 3 years to come up but they will definitely come.

Will you be very selective expanding W and St Regis brands in India?

Yes. We would like to have more W hotels going forward in addition to establishing St Regis in two major Indian metros. St Regis is our highest rated brand and we are very selective with its development. Among various parameters include right location, right owner, very high quality product etc so that we don't make any mistakes because it will hurt the brand. The same approach applies to W Hotels as well which competes with the likes of Four Seasons globally.

With Four Points you got into the franchise model, something most leading foreign chains do not approve of in the Indian market. What was the rationale behind taking this route?

I agree. Franchising is certainly a tricky proposition and we prefer not to franchise outside of the US. We have chosen to franchise and will continue to do so in India only with players who have the management bandwidth / capability or a efficient partner to manage the hotels. We pursue franchising in the US because there are more companies that can manage hotels which is tougher when you look at markets outside (the US). Our plans going forward is to include Four Points and Aloft in the franchising bouquet (under the right circumstances) but we will not franchise brands like Sheraton, Meridien, Westin and if we do so, it will be very unique situations. There certainly will be no franchising for the St Regis and W Hotel brands.

But, you also have a marketing / franchising relation with ITC Hotels for The Luxury Collection brand.

The ITC relationship is a very different one and has been in existence for a very long time. The promoters (ITC) have very deep management capabilities and that's precisely what I mean when I said unique situations earlier.

ITC will be managing third-party luxury hotels going forward. Will you extend The Luxury Collection association for their management contracts as well?

We will have to wait and see.

You'd earlier expressed about managing over 100 hotels in India by 2015. Could you tell us which category of hotels will contribute significantly to this pipeline?

Our strongest brands are in the upper upscale and above segments. In fact, 90% of our existing hotels portfolio is in the upper upscale and luxury category. As a result, our India pipeline is also skewed that way wherein 80% of the developments will be upper upscale and luxury. We'd certainly like to do more Four Points and Aloft hotels in India and a lot of that will clearly depend on our ability to persuade owners to have faith in those brands. Asset owners will certainly watch how some of our new brands that have opened up are doing in terms of business and I am sure they will realise the potential of these new brands after speaking to our existing real estate partners and that will slowly build overtime.

Will Starwood ever look to invest in the Indian market?

We would consider investments if it made sense. To invest one has to make several things fall in to place, feel comfortable with the partner, return expectations should be roughly similar, and make sure that partnerships are set up in a way that issues and differences can be easily resolved. Joint ventures are never easy and if we can do a clean arrangement where we manage and they own, that's always best. If we own a piece and we manage then we are on both sides, that can get complicated at times. That doesn't really mean we won't do joint ventures but we will be very carefully doing it in India. We have done a lot of joint ventures globally and are part owners in 40 hotels around the world and they are all working fine for us.

We used to be big owner of 150 hotels and have so far sold about 90 of them and continue to own the balance. We have another 50 hotels in joint venture arrangement, so we are very comfortable investing and owning hotels while simultaneously pursuing management contracts. Over time we will sell the assets as our goal is not to be big owners of hotels but it certainly won't be zero. And if we need to own hotels or be joint venture partners in India we will do that. A lot of asset owners have not wanted our money because they have had a lot of faith in our brands. I think the hotel management company is asked to put money only when the owner is not exactly convinced about the brand and hence they want the management company to take some of the risks thereby bringing their skin in the game.

Is there a sum earmarked for investment in India?

No. We don't have numbers because for us it is strictly a function of what is the opportunity. If you say I am going to invest $100 mn in India, you'll invest that sum and end up loosing all of it. So one should have objectives, what is the return on investment, right partner etc. If we find the right partner we will be willing to invest $50 mn, $100 mn or for that matter even more.

Update from Starwood:

Starwood, Jaguar mark India debut of W Hotel

Over 350 room property will be part of iconic 55-storey Namaste Tower in Mumbai

Continuing with its global expansion plans, W Hotels Worldwide has set its foot in the Indian hospitality market. Part of Starwood Hotels & Resorts, the hotel company has signed a management contract with Indian firm Jaguar Buildcon Pvt Ltd to mark India debut of this iconic luxury brand in Mumbai. The asset owning company (Jaguar) has already identified a three acre land parcel for the W Mumbai hotel which is likely to start receiving guests sometime in 2015. This development was first reported by DNA on February 1, 2011.

Confirming the development Frits van Paasschen, president and chief executive officer, Starwood Hotels & Resorts Worldwide Inc, bringing the W lifestyle to Mumbai is another step in W's global expansion into the world's most exciting and vibrant destinations. “Introduction of W Mumbai will take the total number of Starwood's hotel brands to seven in India out of the nine brands globally. The hotel will offer a contemporary take on design, fashion and music in the heart of one of the city's most vibrant districts, bringing an innovative and distinctive experience to Mumbai,” Paasschen said.

Located in bustling south central Mumbai overlooking the Mahalaxmi racecourse, the W Mumbai hotel will form a part of the Namaste Tower, which will be an iconic 55-story mixed-use development designed by international design firm WS Atkins.

According to Gurinderjit Singh, managing director, Jaguar Buildcon, the hotel will feature over 350 guestrooms, including two signature suites christened WOW Suites and one Extreme WOW Suite (W's version of presidential suite. Among the food and beverage offerings will include two contemporary restaurants and one destination bar. “The hotel will also house stylish spaces for luxury designer retail stores and boast a full calendar of exclusive and exciting W Happenings events that showcase what's new and next in design, fashion and music for both guests and locals alike,” said Singh.

While India's first W hotel is still under construction, the hotel management company is optimistic about generating more owner interest in developing this brand in other key leisure and business destinations in the country. Dilip Puri, Managing Director, India and Regional Vice President South Asia, Starwood Asia Pacific Hotels and Resorts, said, "Locations such as the Delhi NCR region, Goa and Kerala are targets for developing W Hotels and Retreats."

Starwood is also enhancing its leadership position in India and will be opening seven new hotels in 2011 taking the total portfolio to 37 hotels by 2011 end. One of the leading hotel and leisure companies in the world with 1,025 properties in 100 countries, Starwood is on track to operate 50 hotels in India by the end of 2012, doubling its presence in the region in just two years. The hotel company expects to have 100 hotels (open or under development) in its India portfolio by 2015. Among Starwood's hotel brands in India include W Hotels, The Luxury Collection, Le Méridien, Westin, Sheraton, Four Points by Sheraton and Aloft.

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