Tuesday, Jul 05, 2022

Why Hilton Lacks The Ambition To Dominate India's Hotel Industry

Sixteen years after checking into India and a failed partnership later, Hilton Hotels & Resorts' footprint is limited to 24 operating hotels. It is now going back to the drawing board to cover lost ground and keep pace with its galloping peers

Source- Hilton.com
Source- Hilton.com

In 2005, French hospitality company Accor reentered India a decade after it exited the country. A year later, an American multinational hospitality company, Hilton Hotels & Resorts, checked into the country.

Both companies chose to work with a local partner for their respective forays. Accor set up twin joint ventures with InterGlobe Enterprises to develop and manage the Ibis range of economy hotels in India and South Asia. Hilton forged a 26:74 joint venture with a property developer, DLF, to own and manage 50 properties under its flagship Hilton and midscale Hilton Garden Inn brands.

Currently, Accor has 55 operating hotels across 10 brands, including Raffles, Fairmont, Novotel, Pullman, Sofitel, Mercure and Ibis in India, covering the entire spectrum of the hospitality sector. Hilton has 24 across Hilton, Hilton Garden Inn, DoubleTree by Hilton and Conrad brands which concentrate on the midscale and upscale segment.

During his recent visit to the country, Marc Descrozaille, COO of India, the Middle East and Africa at Accor, said that the company has 20 hotels in the pipeline right now which will be operational over the next three to five years. 

Last week, Alan Watts, president-APAC, Hilton, revealed that the company has 14 hotels in the pipeline. "I would like to double this number in the next five years, which would mean 50 trading hotels. Of course, it is difficult to predict with elements like dynamic construction time, supply and cost challenges, but this is the short-term outlook," he stated. 

Lost The Head Start?

To an onlooker, it might appear that Hilton has ceded ground to its peers in India and this does not mean Accor alone. For almost two decades after it entered India in 1982, Hyatt Hotels Corporation had around six hotels. It recently executed 24 deals for hotels in the country which are slated to open in the next three years, helping it achieve the milestone of 50 properties in its portfolio by 2023. 

"We plan to expand our brand footprint in India by more than 70 per cent by 2023," says Peter Fulton, group president – EAME for Hyatt Hotels Corporation. "A third of these openings will be focused on leisure and cultural destinations, adding an additional dimension to our distribution in the country."

Hilton's cautious approach is even more surprising given that the Indian market is undersupplied for hotel rooms. An HVS Research & STR report pointed out that India continues to have the lowest proportion of branded hotel rooms as compared to major Asian hotel markets. Shanghai and Beijing are nearly 10 times the size of our major hotel markets.

According to Hotelivate, in FY21, the existing room supply in India grew by 3.3 per cent over the previous fiscal year, increasing the total number of branded rooms to 1,44,047. By 2025-26, it anticipated the addition of approximately 36,599 branded rooms (under active development), taking the total supply to 1,80,646 and growing the existing supply base by 25 per cent. This inventory pipeline is inadequate considering that hotel rooms or convention centres are often unavailable in peak periods or at atrociously high rates if obtainable. Surely, this indicates that the country offers a lot of potential for leading hotel companies like Hilton to plant their brand flag at more locations and augment their overall inventory.

Watts agrees. He says that India holds some of the largest hotel, travel, and tourism opportunities in the macro Asia Pacific region. "Therefore, it has become the second most important revenue stream globally for global hotel companies. Where it is today is a fraction of the percentage of where it will sit tomorrow. If you contrast India with China, India has only 2.6 million keys or rooms for 1.4 billion people versus China’s about 3.2 million guest rooms for 1.4 billion people," he emphasises. 

At the same time, he appears unfazed by the rapid strides his competition takes. "We do not need to be the largest hotel company in a particular market, but we do need to sufficiently scale to where our brands, our customers want to be. We missed a cycle because we did a big ambitious deal before the global financial crisis (GFC—2007-08). If that crisis had not happened and the pre-GFC deal had come off, we would have had 100 hotels with one partner," he clarifies.

He is referring to the 26:74 joint venture with DLF in 2006 where it planned to build 75 hotels in India over the next five to seven years. The real estate major ended up with a Rs 23,000-crore debt around 2012 following which it decided to exit or divest its non-core assets to cut this debt. This left Hilton adrift and unable to cash in on the growth in India’s hospitality sector.

HVS Anarock’s India Hotels Outlook-Impact of COVID-19 report said that immediately post the 2001 and 2008 crises, demand grew at strong rates following short-term impacts. Demand in the 2010 decade grew at 5.3 per cent CAGR as against 10.8 per cent CAGR in the 2000 decade.

When the sun shone, Hilton could not make hay and was forced to retreat into the stable to redraw its business plans. It also decided to proceed cautiously and only with partners who share its long-term vision. “We are mindful of opening new properties in India but will continue to grow with the right partner. In January and March, India recovered to the 2019 level in terms of occupancy,” he adds. Bullish about India's recovery going into 2022, he states that the lodging major currently has 2,800 rooms in the pipeline, including Tier II towns like Varanasi and Jabalpur.

Confident But Cautious

Watts' conviction stems from the confidence some of Hilton's owners have reposed in the company. It includes real estate magnate and CMD of Embassy Group, Jitu Virwani. In 2018, the property developer signed up with the American hospitality chain to develop a 500-room dual-branded hotel within the 100-acre Embassy TechVillage Business Park in Bengaluru. These would be developed and owned by the Embassy Group and managed by Hilton. This followed the success of Hilton Bangalore Embassy Golf Links. 

Earlier this month, Embassy REIT and Hilton launched the Hilton Bengaluru Embassy Manyata Business Park and the Hilton Convention Centre at Embassy Manyata Business Park in Bengaluru. The 266-key property with a massive convention centre is part of the 619-key dual-branded hotel complex, including the 353-key Hilton Garden Inn launched earlier this year. With 619 rooms, Hilton claimed that its flagship brand hotel at Embassy Manyata Business Park is one of the largest hotel complexes in south India and is amongst the biggest in the country. The dual-branded hotel offers access to approximately 60,000 square feet of convention space. Embassy Office Parks REIT and Hilton have entered into a partnership to develop another 518-room dual-branded hotel – a Hilton Hotels & Resorts hotel and a Hilton Garden Inn – in Embassy TechVillage. Developed at an investment of Rs 850 crore, it will be owned by Embassy REIT.

Delighted with the success that this inventory adds to Hilton's overall portfolio in the country, Watts is biding the time to get back on the fast track. "Our time will come again," he states. "In business, you take calculated risks, you make partnerships, and they do not always work out. But then again, from Hilton's perspective, we have been at this for over a hundred years." 

He recalled that he felt the same way about China when he joined the business and he is proud that today, with 400 hotels, Hilton is the fastest-growing hotel company in China. While mindful of the need to grow in India, too, Watts is unwilling to get into a mad race to sprint ahead. 

Virwani lauds this approach. "Sometimes you need to have hotels in a good location with good owners who have proper financial management. Often, you find a lot of strain in the city with hotels that are over-leveraged and are going through tough times. That is another reason why Hilton is growing slowly, but a steady pace will always pay in the long run," he justifies.

Watts feels Virwani made an excellent point. "We are a humble management company and are in the partnership business. It has been a long time since we owned physical assets. The Indian market does not necessarily clean assets (when an asset is owned completely without debt or liens against it) the way a country like the UK would. So, people get in trouble in India when their assets are overleveraged with high debt costs." He pointed out that these do not transact or turn around as quickly as in other markets. "Hence, you need to be careful about choosing your partners," he opines.

Hurdles In The Sprint 

This mutual loyalty notwithstanding, some observers in the market feel that Hilton needs to introspect closely to speed back into the fast lane. "Over the past couple of years, the management was not quick to spot and act upon opportunities, which were then picked up by others," says one analyst, under conditions of anonymity. "Secondly, given its limited presence and resultant marketing, it has a lower brand recall in the country than a Marriott or Radisson."

However, Virwani is quick to dismiss this conjecture. "When we considered Hilton the first time, it was because it was an American company and many commercial tenants in our business parks get American visitors. We identified a brand they could associate with and that came to their mind quickly," he emphasises.

While Hilton might have brand recall in the metros and Tier I cities, the analyst points out they lack it in the Tier II and Tier III markets—where the next growth wave will come from. Dimitris Manikis, president, of Europe, Middle East, Eurasia and Africa at Wyndham Hotels & Resorts, states that after hitting the 50-hotel mark recently, it is looking at 75-100 hotels by 2025. "We have six openings and a pipeline of 30 hotels. We are looking at Tier II and III cities with a great deal of attention," he states.

The InterContinental Hotels Group also plans to add 37 hotels to its current portfolio of 41 hotels over the next three years. After launching Six Senses Fort Barwara in Rajasthan last October, its first Six Senses property in India, it is now eyeing hotels in markets like Jaipur, Goa and Chandigarh.

The Radisson Hotel Group, too, has plans of more than doubling its India presence to touch 148 hotels and resorts by 2025 and the majority of these will be in non-metro cities. The newly introduced Radisson Individuals Retreats properties will come up in leisure locations like Coorg, Kabini and other offbeat places.

Another industry observer also points out that given its small footprint, Hilton has not been able to benefit from the business opportunities that a growing economy like India offers. "Almost 70 per cent of their profit comes from the US and the rest from Europe, the Middle East and Africa and Asia. While Asia contributes an increasingly higher percentage to the overall business, India's contribution is minuscule. If they had a stronger presence, this would have correspondingly increased," he says. 

Watts seems to be mindful of these challenges and is also inclined to overcome them. However, he is unwilling to scale the brand's presence merely for the sake of business growth. Instead, he would prefer to work with long-standing partners, post-best-in-class owner returns and keep profitability above all else. 

"Hilton was named the world's most valuable hotel brand in Brand Finance's 2022 Global 500 Report," he points out, while talking about expanding intelligently. This came after it led both the hotel and broader tourism sector with a brand value of $12 billion, now higher than its valuation before the Covid-19 pandemic. "We want to be cautious where our brand's flags are placed and how," he notes. 

While the 'move fast, break faster' mentality is a pitfall best avoided with scaling rapidly, an exceptionally cautious approach could also put a brand out of the reckoning. Is Hilton willing to take this gamble?