OPERATIONAL MANAGEMENT

REPORT ON

GINGER HOTELS

TEAM

PEGASUS

Regd# Name Contribution1226110208 Ashok Kumar. G Introduction1226110209 G.V.Narayana Dattatreya Price Composition1226110231 T. Sriram Ratnakar OverSeas Market1226110234 Veer Raghav Reddy Competition1226110237 Sriman Reddy. V Operational Strategy1226110240 S.V.B.K. Verma.K Conclusion

GINGER HOTELS

Introduction:

The Indian Hotels Company Limited (IHCL) today announced an expansion plan of its GenNext 'Smart Basics' hotel, Ginger, for East India. Launched in June 2004, the 'SmartBasics' concept created a revolution in the world of Indian hospitality. Today, Ginger hotels has six fully functional properties. Under its current expansion plans, Roots Corporation Limited (RCL), the wholly owned subsidiary of IHCL that operates the 'SmartBasics' hotels, is taking the category across fourteen destinations in India.

The new 101-room hotel in Durgapur is the latest addition to the growing chain of Ginger hotels across the country, which includes Bangalore, Haridwar, Bhubaneswar, Mysore, Thiruvananthapuram and Pune.

The Ginger hotel in Durgapur is the second hotel to be opened in the East after Bhubaneswar. The company is exploring opportunities of opening more hotels in West Bengal at Kolkata, Siliguri, Haldia and Kharagpur.

Speaking on this occasion, Prabhat Pani, chief executive officer, Roots Corporation, said, "These locations have been identified after detailed studies across various parameters such as potential of the market, clusters of clientele and peak periods among others. The increasing business and commerce and leisure travel linked to these destinations has also led companies like ours to look at providing a branded product in this segment."

Ginger Hotels is tapping into these niche markets and targeting the customers who are looking for a branded product at a viable price making it a profitable proposition for the traveller. As this brand caters to the middle class traveller, both Indian and International, in both business and leisure categories, it aims to be present in the gateway cities - metros and mini metros, as well as class A and B satellite towns and leisure and pilgrimage destinations.

Ginger Hotels are characterised by freshness. The hotels are simple, unique, reasonable, basic, very different, light-hearted, Indian and innovative. Priced at Rs999 for a single room and Rs1199 for a double room, Ginger Hotels have created a new category in the domestic hospitality landscape, while giving a major fillip to Indian tourism and other ancillary industries. The primary objective behind the launch of these hotels is to provide a superior product offering and consistent experience to travellers, an experience far beyond the present offerings in the industry.

Ginger hotels are modern, modular and scalable, providing guests with a consistent experience. These hotels will have 100 / 200 well-appointed rooms, with a choice of single, twin and queen sized rooms. The rooms will be individually air-conditioned and provided with electronic locks, comfortable beds, a work area, a 17-inch flat-screen colour television with satellite channels, direct-dial telephone including STD facility, mini-fridge, tea / coffee maker, 24 hours hot / cold

water and toiletries. Other guest facilities at these hotels would include a restaurant, meeting room, gymnasium facilities, a cyber café, 24-hour reception, automatic checkin kiosk, digital safe-deposit boxes, 100-per cent power backup, as well as wi-fi connectivity in the public areas and individual rooms at the hotel.

Indigenously designed and developed by IHCL, the hotels had as the guiding principle behind its design, the concept of a unique 'space' that is conducive not only to guest comfort and relaxation but also suitable for their work requirements. The design of the hotel, from the rooms to the furniture and lighting systems, was thus thoughtfully created to offer users a unique sense of being welcomed.

The concept for the hotels was developed in association with renowned corporate strategy thinker, Dr C K Prahalad. The unique concept ensures that the hotels provide facilities to meet the key needs of today's traveller, at surprisingly affordable rates.

Work on new Ginger hotels has commenced in Goa, Pondicherry and Agartala and will also commence work on hotels in Pantnagar, Baroda, Tirupur, Guwahati, Nasik, Ludhiana, Jamshedpur, Delhi, Mangalore, Paradeep and Ahmedabad, amongst other destinations within the next couple of months.

It is considered auspicious to tag on a "1" to a number ending in zero. All the hotels in the Ginger chain have 101 or 201 rooms, but the decision hasn't been guided by any religious sentiment. There's a more practical reason: the last room is specially designed for physically challenged guests.

The other 100 or 200 rooms are strictly no-frills and that's exactly how Ginger likes it. The chain -- run by Roots Corporation, a subsidiary of Indian Hotels Limited, which also runs the Taj group of hotels -- is now four years and eight properties old. It's a slow start, but Ginger is, dare we say it, all gingered up for the future.

Another eight hotels will be up and running by March 2008, says Roots CEO Prabhat Pani, and the total count will go up to 50 by 2010. The Strategist took a peek at Ginger's spicy recipe for expansion and growth. Here's what we found.

The price proposition

Ginger's expansion couldn't have been better timed. Research firm KPMG estimates the demand-supply mismatch to be far more acute in the budget segment than in the luxury segment. Just about 40,000 rooms are available currently in the economy and budget categories; compare that with the 430 million domestic tourists that criss-crossed the country in 2006.

Says Nandita daCunha, manager, KPMG, "The opportunity in the space is huge, which is why international players like Accor or Choice Hotels are also looking to scale up operations in India [ Images ]."

Ginger, which operates in the three-star category, prices its rooms competitively -- single rooms cost Rs 999, while a double room won't set you back by more than Rs 1,799, inclusive of taxes. And the tariffs are the same whether you're in Bangalore or Bhubaneswar, and whether it's January or June.

That's different from how another newcomer in the budget hotel category, the Red Fox chain run by Krizm Hotels, operates. Single rooms at the Hyderabad, Jaipur [ Images ] and Delhi [ Images ] properties of the chain will cost about Rs 1,500. "But we will be flexible about the pricing," adds Chairman Patu Keswani.

Keswani reasons that since labour in India is relatively cheap, it makes sense to offer some limited services and charge a little extra. Ginger's Pani, on the other hand, believes that the young traveller doesn't mind doing things on his own and so he'd rather have price as a USP. Which is why even food is affordable(there's no room service): Rs 80-150 for the buffet.

Full house

course, a cheap meal isn't going to be enough to tempt guests to stay longer. And given its value-for-money pricing proposition, it is critical for Ginger to constantly push up occupancies.

Explains Mona Chhabra, vice-president, Ernst & Young, "Since it is a fixed price model and tariffs cannot be increased even if there is a sudden surge in demand, occupancies need to be high throughout the year."

There's another reason why Ginger needs to be able to display the "no vacancy" sign frequently: budget hotels can't depend too much on the food and beverages (F&B) segment to bring in revenues.

Margins on F&B are about a third of those for rooms because while the operating cost for rooms is low, the raw material cost for food is high. So while F&B would typically fetch over 20 per cent of revenues for a five-star chain and, in many cases, as much as 35 per cent, a budget hotel earns less than 15 per cent of its topline from F&B.

KPMG's daCunha believes that given the current shortage of rooms, Ginger can succeed with a fixed priced model. "However, in a downturn, they may want to work with a variable price model much like low-cost airlines do," she observes.

Pani reckons that occupanies need to average 70 per cent around the year for the hotels to make money and is pencilling in a 50 per cent gross margin a couple of years down the line, once costs are absorbed over a larger base.

In the right places

And that's why Ginger is targeting either smaller business centres like Tirupur or Durgapur or tourist destinations that attract visitors round the year. That is also why it has a property at Nashik, Maharashtra [ Images ] -- given its proximity to popular pilgrimage Shirdi -- but not Manali, which is deserted in the winter.

"We cannot afford to look at places where we don't clock 70 per cent occupancies through the year," agrees Pani. In fact, the Haridwar property, set up earlier this year as an experiment, hasn't been doing too well because the flow of tourists has been unexpectedly seasonal. On the other hand, Goa [ Images ] may bring in good returns since the state is beginning to see some serious business traffic.

Compare that strategy with Red Fox's. The chain plans to be in locations where it sees any kind of demand, even bigger cities like New Delhi. "We're simply looking at high-demand areas and if the real estate is too expensive, we don't mind being situated in the suburbs," explains Keswani.

If Red Fox is looking at location from a macro point of view, Ginger is taking the micro approach -- properties need to be close to the business district; metros and large cities are, therefore, out for the most part.

Even the choice of small town is determined by the level of potential demand -- Ginger hopes to tap demand in very small towns where a big corporate project may be planned. "Instead of the company having to build and run a guest house for its executives, executives can camp at the Ginger hotel," says Pani.

Getting real

The idea really is to try and minimise real estate costs, which as Krizm's Keswani points out, account for 50 per cent of the cost of a room in India compared with as little as 15 per cent overseas. Pani estimates that for the model to be viable, monthly lease rents need to be well within Rs 50 a square foot.

So Ginger is looking at ways to get around buying or leasing expensive property. For instance, it has decided to set up a hotel on the fourth and fifth floors of a mall in Ludhiana. While Ginger saves on real estate costs, the owners of the mall are able to use the space more efficiently.

Also, being located in a mall, Ginger needs to focus even less on food since the mall would most certainly have a food court. "We do make arrangements for food even when we're located in a mall, but mainly we will need to focus on breakfast," explains Pani.

The mall idea seems to be catching on -- Red Fox, too, has opted to build hotels on malls. But it is going a step further by first constructing a couple of malls and then selling them off, retaining just the top floors for the hotels.

Ginger is also working with public sector organisations such as Indian Railways (IR) to convert some of their properties into hotels -- the Rail Yatri Niwas in the capital will soon be turned into one. Ginger will run the hotel in return for a fee.

In addition, Pani plans on entering into management contracts with existing hoteliers who will use the Ginger brand and marketing network in return for a fixed fee or a revenue-sharing agreement.

Netting in customers

Real estate costs are just one worry. Given that room rates are extremely competitive so as to be within reach of the target audience, Ginger needs to rein in other costs, too. Since the chain caters to a tech-savvy crowd, Ginger believes it can increasingly sell a larger number of rooms online, thereby saving on commissions to travel agents.

Website sales are as high as 15 per cent in some places like Bangalore, and Pani believes that a higher share of website sales would not only bring down costs but would mean greater control over the inventory. Ginger is also getting into deals with corporates for block bookings and in some cities like Bhubhaneshwar, the bulk of the business has come via this route. Travel portals are next on the agenda.

Meanwhile, it's ensuring costs stay at the minimum at the properties, too. As the firm's television commercial (released in last month by creative agency Lowe) so humorously captured, there is no valet parking and no bell boys. That's no tips to fork out for the guest, and no salaries to pay for the hotel.

Since the spend on aesthetics need to be contained, all properties look more or less the same with standard rooms, corridors and lobbies. But that doesn't mean Ginger is cutting down on essentials. In fact, it is taking care to see that it provides everything that younger, tech-savvy travellers today need most -- what the hotel terms "smart basics".

That means a flat TV and Internet and Wifi connections in all rooms, an ATM on premises and a gym (swimming pools are too expensive). There's no room service but basic tea and coffee making apart, there's also a dial-a-meal facility: guests can order meals from local restaurants and collect them from the front desk. "Our brand stands for informality, simplicity and modernity," explains Pani.

The target guest is young, so Ginger needs to ensure it stays young and trendy, too. There's a Café Coffee Day on the premises at the Thiruvananthapuram property: a coffee shop that can theoretically stay open 24 hours helps improve visibility and draws in outsiders.

The Pune property has a lounge of sorts, with video games, but there are no bars yet. Since nearly 15-20 per cent of Ginger's clientele comprises foreigners, that's probably next on the to-do list.

GINGER BUSINESS MODELGinger’s national network and acceptance in the market has led to short lead periods (a few months) for individual properties to start giving returns. Our recent launches in Ahmedabad, Guwahati and Jamshedpur have received very encouraging response. Pricing at Ginger is based upon multiple factors, but we ensure that the customer continues to get great value, which has been the proposition at Ginger since the launch of the brand. We have moved away from static prices and have adopted a ‘dynamic’ pricing approach that delivers better value to the customers. Ginger operates on a ‘best available rates’ basis and hence offers the mostattractive rates if the customer plans ahead. We will shortly introduce a completely revamped new website with live rates. This will be a new in the Indian hospitality sector, and will allow customers to check on a ticker the best available tariff at any point in time in any Ginger hotel across the country.

OVERSEASWhile we believe that, with some adaptation, Ginger hotels could do as well in select international markets, we believe that the value proposition of the Ginger brand needs to be made stronger in India by optimising the footprint in the country. However, this does not mean that Ginger is not reaching out to an international audience. Currently, the Ginger customerbase consists of nearly 6 per cent international travellers. This is expected to increase substantially in the near future. Ginger hotels is partnering with international online travel agents (like Expedia, Priceline, Hotel.de, Agoda, etc) to drive traffic from international markets like Europe and Asia Pacific.

COMPETITIONA deep-pocket parent brand synonymous with world-class hospitality and an industry at the cusp of expansion: Ginger Hotels should have had a great run, but the wholly owned subsidiary of the Tata-owned Indian Hotels Company (IHCL) is still fine-tuning its brand after taking six years to establish 21 properties.

Why? Standing on C.K. Prahalad’s ‘bottom of the pyramid’ vision, Ginger serves the segment that the legendary business guru recognised as the ‘value-demanding’ consumer. Ginger Hotels was, in fact, kicked off by the late professor’s management consultancy, and he was a member of its board for a while. But intense competition and escalating property rentals have forced IHCL’s chain of ‘smart budget’ hotels to restructure constantly.

In the past four years, Ginger has seen a compound annual growth rate of 125 per cent, while its expenditure has grown by 112 per cent. Hit with losses of Rs 1.44 crore in 2004-05, the year of its inception, its losses continued to rise from Rs 8.37 crore in 2007 to Rs 10.48 crore in 2008. Analysts say a hotel in this category should take 30 months to five years to break-even.

According to a report released by business body Ficci in 2009, India’s hospitality industry faces a shortage of supply. It currently has a supply of 125,000 rooms, against a demand of 150,000 rooms.

Budget accommodation accounts for 19 per cent of the total hotel rooms in India. While 2008-09 saw 48,475 branded budget rooms, the figure is likely to reach 94,115 by 2013-14. Ginger, which hopes to expand to 30 properties by the end of this year, accounts for 2,100 of these branded budget rooms.

“The basic idea of Ginger is to cater to the mid- and low-level corporate crowd,” says Prabhat Pani, CEO of Roots Corporation, which manages and runs Ginger Hotels. “Our first 2-3 properties, built between 2004 and 2006, were experimental. As we started getting more customer feedback, alterations were made in hotels that came up later.”

Gingerly StepsInitially, a no-frills hotel with a fixed per room price of Rs 999 offered alongside limited service — which meant no room service, no bellboys, no doorman or receptionist, and food served at a relatively small dine-in in the hotel called ‘The Square Meal’ — Ginger did not find enough takers. So, it came up with bigger rooms and better conference facilities — capacity increased from 8 to 25.

Next, the fixed-price model was done away with after the first two years. “In two years, we had 4-5 hotels where it was easier to keep the same price across locations, but with a host of hotels launching, we moved to a variable pricing model,” says Pani. “The decision was a strategic one. Real estate prices escalated in 2006-07, and we realised we had to hike prices in relation to land costs.”

The average size of a Ginger property varies from 40,000 to 35,000 per sq. ft, and the average hotel has some 100 rooms. While 80 per cent of them are scattered in small industrial towns and cater to the business crowd, the rest are in tourist destinations. Places such as Pantnagar, Jamshedpur, Pune and Durg (Chhattisgarh) have per-night room rates of Rs 1,300-2,600.

Since 2007, Ginger has 24-hour coffee shops operated by partners such as Café Coffee Day and Khaja Café, and mid-sized restaurants with bigger spaces have also come up. Says Pani: “It was again a market observation. With customers checking in at late hours, food was a basic need we had to fulfil.”

But the problem of low occupancy remained. One hotel, in Durgapur, was forced to shut down in 2007 after an 18-month run. This industrial town in West Bengal has 27 hotels. Other brands such as Sarovar’s 3-star Portico has been there since 2003, and sees occupancy rates of over 70 per cent at room rents of Rs 2,000-5,000. Sarovar’s Hometel and Red Fox are competing brands. “Ginger’s low-cost hotel model has some inherent flaws, such as the lack of certain frills that

the Indian customer is still used to,” says Sarovar Group of Hotels’ executive director Ajay Bakaya. Hometel’s dozen hotels across India run on room rents of Rs 2,500 upwards.

The Business Of HospitalityIn 2008-09, the hotel industry saw an average fall in occupancy rates from 75 per cent to 65 per cent. Average occupancy rates in Ginger properties too has fallen to 65 per cent. Ginger Bangalore, which started with 80-85 per cent occupancy in 2004, too faced a similar shrink.

“Identifying the right property is crucial for a brand like Ginger,” says Jaideep Ghosh, executive vice-president of consultancy KPMG Advisory Services. “Being at the outskirts of metros and in the heart of small industrial towns, pilgrimage locations and special economic zones such as Pantnagar, places that are home to companies such as Bajaj and TVS, has worked well for Ginger,” says Ghosh.

HERE TO STAY: Prabhat Pani, CEO of Roots Corporation, which runs Ginger Hotels, says the company has moved to a variable pricing modelHowever, while Ginger continues to be present in some of the smaller industrial towns, its presence in the larger metros is sparse. An average Ginger room costs roughly Rs 14-15 lakh to put up, excluding the cost of land. In larger metros and cities, Ginger cannot afford land, and it looks at the possibility of leasing a structure built to its specifications. With an average staff of 50 for every 100-room hotel, the gross profit per room is north of 50 per cent. In contrast, hotels such as the Rail Yatri Niwas in Delhi operate on a public private partnership or contract model for a fixed fee, sharing revenues on an ongoing basis, which allows more flexible costs.

“Even if occupancy rates rise, the chain will need to open more hotels to turn profitable,” says Sudeep Jain, business head at Jones Lang LaSalle Hotels, a hotel asset management and investment services group. “They have tapped the right void in the market and seem to be going in the right direction.”

“Ginger has a cash-rich parent company that can help it survive,” says an analyst at business advisory firm IndusView. “If I was to view Ginger’s present price model, the rent of a room is way too low. What Ginger should ideally do is to hike up the scale of the hotel, along with an average price bracket that touches Rs 2,200-2,300,” says the analyst. He adds that, at the given prices and scale, Ginger would need a constant occupancy of 78 per cent for the next three years and a rev-PAR (revenue per available room) upwards of 25 per cent.