Low Budget Hotel Industry in India - Introduction

Travel & Tourism continues to be one of the world’s largest industries. The total

impact of the industry means that, in 2011, it contributed 9% of global GDP, or a

value of over US$6 trillion, and accounted for 255 million jobs. Over the next ten

years this industry is expected to grow by an average of 4% annually, taking it to10%

of global GDP, or some US$10 trillion. By 2022, it is anticipated that it will account

for 328 million jobs. or 1 in every 10 jobs on the planet.

Budget travel in India for the discerning traveller has always been hard to negotiate.

Luxury hotel brands are predictable and standardized. But not everybody is at the top

end. The changing trends in the Indian travel and tourism market have altered the

course of the hospitality industry and the growing affluence of the Indian middle class

has opened up new opportunities. The country’s economic growth, coupled with

increased tourist inflow and more domestic travel thanks to cheaper domestic flights,

has resulted in a boom in hospitality and the need for quality accommodation at

affordable prices.

As per the latest data available, the Sales of the Hotel Industry in India is

Rs.28,28,42,00,000 (Year Ending Jan 2012). Thus there is witnessed great potential in

the hotel industry sector and the first to recognize the requirement for high quality at

small budget hotels were the larger hotel companies. But budget hotel chains, as a

separate segment in India, are not yet there. The large gap between demand and

supply can be seen in the tourist inflows - 4.2 million visitors and 400 million

domestic trips made by Indians in the last year, and the total capacity of all listed or

classified hotels is just 120,000 rooms1. The two-to-four-star hotel category is

practically untouched by any branded player. Competition is thus poor, with only 20

percent to 25 percent of the market catered to by a known brand.

Source : World Travel and Tourism Council and the Corporate Information website

1 Great potential for budget hotels in India; Chitra Balasubramaniam; 28 Oct 2008; Hotel News Now

Some Players

Ginger, a TATA enterprise, from Roots Corporation Ltd. – a subsidiary of the Indian

Hotels Co. Ltd. (Taj Group of Hotels) has been among the first to set up low cost

hotels with no compromise on comfort and standards. It now has hotels in 14 cities,

with a special emphasis on Tier-II cities, and with many more coming up. Ginger

Hotels believes the dependence on sub-par, unclassified, hotels needs to go and

service quality needs to become the motivator. Ginger operates in the three-star

category and its prices range from a competitive Rs.999 for a single room to not more

than Rs.1799 for a double room, inclusive of taxes. And the tariffs are the same across

destinations and seasons.

One of the other new brands in this sector is Lemon Tree. Lemon Tree Hotels,

financed by Warburg Pincus, offer full-service, moderately priced hotels for business

and leisure travellers. Typically, each Lemon Tree Hotel has about 125 smartly

furnished rooms with facilities designed for safety, security, hygiene and comfort.

They offer a spate of facilities that feature on any larger hotels tariff. Multi-cuisine

dining, a bar, recreation and fitness facilities, a swimming pool (where possible) as

well as a business centre, meeting rooms and state of the art conference halls along

with basic services like housekeeping, laundry and room service. Their marketing

motto is the picture of youth, spirit, efficiency, and genuineness.

Hometel by Sarovar Hotels initially came up as an offering to the IT traveller. It

positioned itself as a classic, conveniently located stop-over for business travellers. It

offers all modern facilities at affordable prices, something the corporate world was on

the look out for. Hometel now has a presence in three cities and has another four

properties in the pipeline. 50 hotels in the next 5 years is their target.

Red Fox properties are slated to come up in 148 locations in the next 12 years, with

one each in Delhi, Hyderabad and Jaipur in the next two years. The founder of

Deccan Aviation is planning to open a chain called Deccan Hospitality. New York-

based Berggruen Holdings' Indian hospitality venture Berggruen Hotels is also in the

process of setting up the their brand of 38 boutique budget hotels called "Keys" in

India at an investment of $100 million. Walton Street Capital, a US-based real estate

private equity fund, has invested in Shriram properties, which is opening up 70 budget

hotels. Foreign investment and international joint ventures include French Accor

teaming with Emaar to bring 100 Formule 1 and Ibiz hotels to India. Hilton Hotels

International has tied up with DLF Group to offer the same service. Super8 Motels,

CountryHearth, America’s Best Inns and Best Value Inn are also all set to enter the

Indian market through the franchisee route. Even the railway ministry has leased out

land at 11 places for budget hotels and plans to upgrade its Yatri Niwas properties

across the country.

GINGER HOTELS – INTRODUCTION

In June 2004, what is now called Ginger Hotels, launched the Smart Basics™ concept

that changed the game for the Indian hospitality industry. A new generation of hotels,

Ginger signifies simplicity, convenience, informality, style, warmth, modernity and

affordability. This unique concept was developed in association with renowned

corporate strategy thinker, Dr C. K. Prahalad, with the hotels being designed and

developed by IHCL.

The Ginger hotels are built around a unique concept that provides facilities to meet

the key needs of today's traveller, at surprisingly affordable rates. The primary

objective behind the launch of these hotels is to provide a superior product offering

and consistent experience to travellers, beyond the present offerings in the industry.

Value pricing by providing intelligent, thought-out facilities and services is the central

idea. Ginger offers this affordability using product design and simplicity to make as

many service gateways controlled by individual guests themselves. For example, there

are no bellboys, no lift operators, etc. and computerization and IT-enabling ensures

minimal use of physical man-hours.

Vision, Mission, Values

The vision statement “Ginger is a fresh and warm experience, of an unsurpassed

value”.

Their mission : To provide smart, clean and safe hospitality offerings by adopting

next-practices that constantly enhance value for patrons. They are driven by respect

for people and nature and passion for our stakeholders.

Values :

Customer-driven excellence: We anticipate expectations and delight our patrons

with convenient and modern facilities at an unsurpassed value

Entrepreneurship: We strive to take ownership of the tasks we perform and to

create an environment that encourages and supports initiative and appropriate

risk-taking

Innovation: We believe that making meaningful changes to improve products,

services and processes to create value for all stakeholders is an integral part of the

daily work of the organisation

Valuing employees, partners and communities: We believe in nurturing and

developing internal and external partnerships, balancing the growth of the core

business while preserving natural resources and contributing to society

Speed and agility: We deliver on promises with a sense of urgency and short

response time

Fun, joy and zing: We believe that a happy employee leads to a delighted guest

IDENTIFYING & CLASSIFYING THE FIRM’S RESOURCES - RESOURCE

BASED VIEW

The RBV framework sees firms as a unique combination of valuable tangible assets,

intangible assets and organizational capabilities that lead it toward a competitive

advantage among rivals. The resource heterogeneity between various players provides

for the construction, accumulation and achievement of competitive advantages.2 The

relative strengths and opportunities possessed by the ownership of certain resources

ensure the barriers to duplication by competitors. The tangible assets/intangible

assets/capabilities typology gives an implicit hierarchy of resources that provides the

basis to formulate a strategy of sustainable development. Broadly speaking intangible

resources and capabilities are more difficult to duplicate and form the basis for

strategy development.

Masstige Service – Differentiation Strategy

Differentiation strategy hotels always have higher room costs than those using a cost

leadership strategy, and also have competitive advantage that is not easily imitated.

Ginger differentiates itself from other budget hotels by its SMART BASICS feature.

Smart Basics concept was co-created by Ginger with the help of the Management

Guru CK Prahlad. Smart Basics provide a value proposition that signifies simplicity,

2 Innovation in Hospitality and Tourism By Mike Peters, Birgit Pikkemaat

convenience, informality, style, modernity and affordability. The hotel’s offering is

high end, reliable and standardized facilities at an affordable price tag. Ginger offers a

customer A/C, electronic lock, comfortable beds, work area, 17" Flat TV, Direct Dial

with STD, Gym, cyber cafe etc. at a rate of Rs 999 for single and 1790 for double

room. The hotels operate with skeletal staff but is highly process oriented so that most

of the necessities of the customers are taken care. Some of the services are outsourced

but available to the customer on call. As the tagline says " Please Help Yourself",

most of the services are self service ( to reduce cost) including check in. Ginger thus

effectively fills the gap for a budget hotel that delivers reasonable/assured service.

Ginger is an example of a Masstige service, in marketing terminology.

The price proposition

Ginger’s competitive prices ranging from Rs.999 to Rs.1799, inclusive of taxes,

follow a standardized rate format. Flexible pricing according to city, season, location,

would add to consumer confusion. The cost-saving on labour comes into the picture

with Ginger believing that the young traveller doesn't mind doing things on his own

and so he would rather have price as a USP and compromise on the frills of full

service. This has even made Ginger price conscious on the food (there is no room

service). Not only are meals at the in-house restaurant priced affordably but tie-ups

with branded food outlets like Cafe Coffee Day, Harbour Market Restaurants, etc.

afford them the value of additional brands along with increased service availability,

without compromising on investment and thus lower prices.

Keeping Occupancy Levels

Given its value-for-money pricing proposition, it is critical for Ginger to constantly

push up occupancies. 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 maintained at a

high throughout the year3. There is a need to meet revenue parameters without inflow

from high-priced F&B segment, usually an area that brings in up to 35% of hotel

revenues. The operating cost per room is low, estimated by industry experts to stand

3 Mona Chhabra, vice-president, Ernst & Young

at about 50 % gross margins with an estimated 70 % occupancy year round to cover

costs. Currently, Ginger Hotels is operating at an 85 % occupancy rate.

Locational Advantages

Ginger’s targets are mainly either smaller business centres like Tirupur or Durgapur

or tourist destinations that attract visitors round the year. That is why it has a property

at Nashik, given its proximity to Shirdi, but not Manali, which is empty during the

winter months. The 70 % occupancy target makes the choice of location an all-

important one. This strategy is different to some others like Red Fox who are willing

to undergo expensive real estate and high competition to be located in bigger cities

and metros in order to benefit from the higher demand. Potential demand is the real

factor Ginger Hotels is considering. Minimizing on real estate costs of setting up

properties is another factor. 50 % of the cost of a room in India is due to real estate

prices, compared with as little as 15 % overseas.

Segmentation/Positioning

The resource-based view of the firm focuses attention on the ability of the firm to

deliver on its desired positioning strategy. These may involve positions based on

price, premium quality, superior service and innovativeness (Hooley 1998). For

example, in the luxury hotel business, Marriott Hotel's renowned positioning as a

customer service leader is related to the resources of customer-focused organisational

culture and an obsession with detail (Stalk, Evans and Schulman 1992). The pursuit of

a low price strategy like that of Ginger Hotels necessitates resources such as cost

control systems, TQM processes, skills in procurement, revenue optimization models

and extensive use of information systems. Its positioning caters to the middle class

and the urban working youth, offering no frills ‘Smart Basics’.

Brand Association with Taj Group of Hotels and TATA Enterprises

The brand imagery of Ginger Hotels is contemporary, progressive and customer-

oriented. Its greatest strength is the promise of a sophisticated and elegant hotel stay

at an affordable price. The Tata Enterprise name tag drives brand identity and brand

recognition. Association with the Tata brand not adds to its brand equity and assures

consumers of the quality of its services. The Tata promise has come to be a symbol of

quality, reliability, and real value for Ginger Hotels.

Financials – Light Asset Policy

The budget segment generated revenues of Rs. 33 m in FY06, however, the company

made an operating loss of Rs. 21 m.4 This is because of the fact that the venture is in

an early stage where the company is making significant high investments, which lead

to margin dilution and a drain on financial resources. With time, margins will rise and

the budget segment is projected to turn very profitable.

In a bid to establish a an asset-light policy, Ginger Hotels is looking at management

contracts, partnerships including public-private partnerships, franchise options, joint

developments, as well as conversions, as it aims for over 70 hotels by 2011. To beat

high real estate costs, the company operates by leasing land and investing in building

and interiors, opting for hotels in malls, searching for opportunities available in

existing hotels, modifying them to meet the brand's set standards and is in talks with

tourism development corporations for conversion of tourist bungalows into hotels. To

yield long term advantage, technology is being used to introduce 'smart' rates with a

price advantage of Rs 200 to Rs 400 for a confirmed advance booking online. Tie-ups

with Landmark Bookstores, The Harbour Market restaurant chain, Café Coffee Day

and spa facility 'Smart Wellness' are expected to bring down investment levels.

Competition

The absence of national level competition from organised chains in the low budget

hotel segment has allowed Ginger hotels to capture a new market in the industry. The

major sources of competition are from standalone properties, company guest houses

and from service apartments. So they have tapped the market of people, like women

executives and corporates, who hitherto did not visit a town because there was no safe

4 Company Financial Statements 2007-2008

hotel available. This has meant high occupancy levels for the Hotel’s 1500 rooms

across 15 properties. 5

IDENTIFYING THE FIRM’S CAPABILITIES – RESOURCES AND

COMPETITIVE ADVANTAGE

To enable companies to achieve a competitive advantage and ultimately, a superior

business performance, its strategic resources must be valuable, rare, imperfectly

imitable and non-substitutable. Valuable and rare resources create a competitive

advantage. Resources that are difficult to imitate and non-substitutable create a

sustained competitive advantage. Seen in this light, intangibles are much more likely

to facilitate superior business results than physical and financial assets.

Tangible Resources

Tangible resources of a firm are seen in the form of physical capital and assets. In the

case of Ginger Hotels, tangible resources are

Intangible Resources

Some of the know-how, such as creativity of offering, teamwork abilities and learning

capacity, is generally applicable. Other know-how is job-specific, to expertly operate

particular applications, like the ‘Smart Basics’ concept. Another set of intangible

resources consists of resources that provide an efficient structure for day-to-day

operations and facilitate achievement of goals and objectives. In this category lies

data within the company’s files and databases : codified knowledge on the company’s

organizational structure and on its operational and management systems.

Organizational culture, largely implicit and almost metaphysical is decidedly vital. At

Ginger Hotels this culture banks on the belief that a customer is intelligent, capable of

self-help, does not require special assistance, requires a standardized, simplified

service at the best cost and the company and its employees are set to provide that. The

company’s reputation as perceived by customers, shareholders and the public in 5 Company Website

general and the company’s brand name under the Tata umbrella are particularly

valuable resources. All the resources that come into the company from the parent

becomes important here, as the knowledge and extensive experience of the Taj Group

is a non-imitable source of competitive advantage.

Organizational Capabilities

The tacit and explicit knowledge systems that exist within the company become

capabilities that develop, accumulate and evolve over time to become competitive

advantage drivers. Examined closely, at Ginger Hotels, capabilities constitute a

collective know-how and are special resources themselves. Operational capabilities

are set down in company guidelines to meet the requirement to deliver affordable,

quality services according to the ‘Smart Basics’ concept. Dynamic capabilities to

expand and adapt to environmental change can be seen in Ginger Hotels. Its constant

improvisations to cut down costs and boost revenues, for example locating inside

malls, outsourcing/franchising F&B services, enable it to improve and extend its

existing resource base and continually create competitive advantage.

These intangible resources and capabilities become sources of competitive advantage

when they meet the various criteria of sustainability.

The Test of Value

Ginger Hotel’s strategic relevance in generating advantages has a value-creating

characteristic in the low budget hotel industry. Its distinct ‘Smart Basics’ offering to

customers is perceived by guests to have a unique utility to them that is bound in the

firm intrinsically (attributed to brand value to a certain extent). This utility-

maximizing capacity in a differentiated manner meets the test of Value for the hotel.

The Test of Rarity

The array of options in the low budget segment in the Indian Hotel Industry shows the

absolute lack of standardized, clean, safe and reliable hotel rooms for the small budget

traveller. Most offerings are not what they are pitched to be and expectations are

rarely met. The resource capabilities of Ginger Hotels in making such a satisfactory

offering to the market prove its rarity. Although every player in the industry operates

on the same service principle, the dynamism of adaptation to environments and needs

of Ginger keeps it at the front of the race. The durable nature of these processes meets

the requirement of rarity.

The Test of Imitability

1. Physical uniqueness of the product can be seen in the décor and physical

infrastructure of the hotel. Since the décor can be copied almost precisely, the

physical uniqueness here cannot be highlighted.

2. Path dependency resources need to be built over time in ways that are difficult

to accelerate6 by design. For Ginger Hotels, this translates to the high brand

value attached with its name (Tata Enterprise) that cannot be replicated over a

very long period of time. Similarly, its work processes that ensure successful

operations cannot be repeated anywhere.

3. Causal ambiguity arising from organizational capabilities cannot be

disentangled and broken down into components to identify the individual

factors contributing to success. The causal ambiguity of Ginger Hotels

prevents easy duplication. The parts of offerings may be individually offered

in the open market, but the entire experience may not be reproducible by any

competitor.

4. Economic deterrence or social complexity is not relevant for Ginger Hotels as

seen in the high number of entrants into the industry.

The Test of Substitutability

Innovative concepts and ideas exploding onto the market often threaten the possibility

of maintaining a non-substitutable product. The competition in this case has to create

the very same basic offerings with the available resources. What Ginger Hotels has

done using low labour-high technology may be trumped with a new conceptual use of

resources like changing the fixed price model to variable pricing like in the airline

industry to erode cost leadership.

6 “Asset Stock Accumulation and Sustainability of Competitive Advantage” Ingemar Dierickx and Karel Cool; Management Science, p.1504, December 1989

The Test of Durability

Ginger Hotels competitive advantage cannot remain a durable aspect due to the

dynamic trends in the industry. The only guarantee of maintaining the competitive

advantage will lie in its ability to continuously innovate in the face of competition.

Resources depreciate once they become popular and mass adoption makes them

standard instead of unique.

The Test of Competitive Superiority

Core competence? External Environment?

LOW COST STRATEGY OR BEST COST STRATEGY?

The low cost model of operations are driven by the following sources of advantage ;

- relatively low investment in hotel building

- standard hotel design with no extra/luxury features

- simple furnishings and decorations

- few or no complementary services

- located in tier-II cities and suburbs

But the Ginger Hotels offering is not just low cost leadership driven. It provides

differentiation too :

- business facilities and restaurant, gym, swimming pool where possible

- high level of investment in technology, embedded in design

- intense marketing activity, especially among corporates/professionals

- high quality inputs at all stages

- comfortable and posh interiors to suit discerning business traveller

Therefore, Ginger Hotels may be classified as more of a Best Cost Offering,

combining low cost and limited differentiation. Customers get what they perceive

as valuable, at the same time the company offers it at a cost efficient level.

Resource dedication to build centres of competence around specific components of

the service takes place at all levels of operation. With the increasing volumes, this

becomes all the more necessary to focus on continuous refinement of quality and

service-delivery productivity. With dedicated service delivery a more self-contained

business line emerges and capabilities and competencies get shaped into relatively

large components that can be configured to support the specific needs of customers.

Strategic design processes are replaced by innovative resource utilization in the long

run.