Hotel chains struggle to raise average room rates despite occupancy growth

Average room rates have continued to decline since the global financial crisis in 2008 due to oversupply of hotel rooms in many Indian metros


ARR across hotel companies in the country grew marginally higher to Rs5,300 while nationwide occupancy has crossed 60% till the first quarter of this financial year. Photo: Pradeep Gaur/Mint
ARR across hotel companies in the country grew marginally higher to Rs5,300 while nationwide occupancy has crossed 60% till the first quarter of this financial year. Photo: Pradeep Gaur/Mint

Mumbai: Despite improvement in hotel occupancy for the last three consecutive years, hoteliers are faced with a tough challenge to increase the average room rates.

Average room rates (ARR) have continued to decline since the global financial crisis in 2008 due to oversupply of hotel rooms in many Indian metros. This has been a cause of concern for many hotel companies, which have been struggling to improve their revenue growth and profit margins.

Several hotel owners across the country said the growth in occupancy has not translated to improvement in room rates as many are still focused on immediate cash generation and fear that raising the price will lead to losing out their existing customer base.

“There is still apprehension in the market around the ability to push through a rate increase while retaining customers. Hotels have to figure out that inflation adjusted rate hikes are required to stem bleeding profits,” said Pavithra Ponniah, vice president, ICRA, a credit rating agency.

ARR across hotel companies in the country grew marginally higher to Rs5,300 while nationwide occupancy has crossed 60% till the first quarter of this financial year. Overall revenue grew by just about 3% during the same period, as per estimates by ICRA.

According to hotel consulting firm HVS Global Hospitality Services, existing room supply grew by 5.5% in 2015-2016 to 1,13,622 rooms (as of 31 March 2016).

“The challenge now is how much can we optimise the good occupancy in terms of growing the room rates. We have been able to increase marginally by 5% but it’s not enough. Demand is improving and supply is also settling down but we believe hotels are not confident that the occupancy that has increased will continue to increase in the coming year,” said Jean-Michel Cassé, senior vice president, operations, AccorHotels, India.

The French hotel chain operates 45 hotels under 10 brands, including Novotel and Ibis in cities like Delhi, Mumbai and Bengaluru.

Cassé said that average room rates in most premium hotels in India are hovering less than $100 though most of them match up to global standards in terms of quality and service.

Sanjay Sethi, managing director and chief executive, Chalet Hotels, a part of K. Raheja Corp, also agreed that despite clocking more than 70% occupancy the growth in room rates has been in low single digit. “The ideal situation should be at this given occupancy growth, ARR should also grow rapidly but it has been disappointing,” he said.

Chalet runs eight hotels under brands like JW Mariott, Renaissance and Four Points by Sheraton. The company has seen a room rate growth of around 2.5-3% in the last one year. Average price of rooms across its portfolio stands at around Rs8,000.

“Most hotels are fighting for the same business and the only way they are doing is by undercutting each other (in terms of room rates) to address their immediate cash flow needs and are hurting themselves in the long run,” Sethi said. For a city like Mumbai where most hotels are clocking 70%, there is no reason why growth should not be about 7-8%,” he added.

Vineet Verma, executive director, Brigade Hospitality Services Ltd, which operates three hotels under brands like Sheraton Bangalore Hotel and Grand Mercure in Bengaluru, said that there has been a pressure on the rates even as there has been signs of improvement on the demand side.

“Bengaluru market has also seen a lot of supply in the last few years. This has also affected the room rates to an extent. However, we are hopeful that rates will increase in the next couple years because we expect tourist inflow to grow significantly into the city. And overall tourism has been growing by 2-3%,” Verma said.

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