Hotel industry: challenges in India

 The hotel industry in India having a tremendous opportunity in the future because of increasing trends in the tourism industry, government promoting the “Incredible India” campaign and other tourism promotion measures. The hotel industry in India is mix of many brand internationally established hotels having the scope to attract shares in the brand hotels which will help to expand the industry and the innovations in the industry is helping the hotels to retain the customers with them. Though the industry is having opportunities in future it is suffering with the cost of land which is costing 50% of the total cost and the taxes are main drawbacks for the industry. Industry is opening gates for the foreign investment which is a good sign for the industry and industry is working toward the fulfillment of the demand and supply gap.

The performance of the hotel industry is directly connected with global and local economic growth and investor confidence. A strong underlying economy is a pre-requisite for sustained recovery. Unfortunately, the year 2011 has not been a year of economic recovery either in India or globally. After two exceptionally bad years, the global hospitality industry was expected to recover in 2011. Despite encouraging signs in the first half of 2011, there was growing uncertainty during the latter part of the year. As a result, recovery has been fragile during 2011. The situation in India mirrors this overall global trend. 

According to a report, Hotel Industry in India currently has supply of 110,000 rooms and there is a shortage of 150,000 rooms fuelling hotel room rates across India. According to estimates demand is going to exceed supply by at least 100% over the next 2 years. Five-star hotels in metro cities allot same room, more than once a day to different guests, receiving almost 24-hour rates from both guests against 6-8 hours usage. With demand-supply disparity, hotel rates in India are likely to rise by 25% annually and occupancy by 80%, over the next two years. This will affect the competitiveness of India as a cost-effective tourist destination. In 2003-04 the hospitality industry contributed only 2% of the GDP. However, it is projected to grow at a rate of 8.8% between 2007-16, which would place India as the second-fastest growing tourism market in the world. This year the number of tourists visiting India is estimated to have touched the figure of 4.4 million. With this huge figure, India is becoming the hottest tourist destination. The arrival of foreign tourists has shown a compounded annual growth of 6 per cent over the past 10 years.

Besides, travel and tourism is the second highest foreign exchange earner for India. Moreover, it is also estimated that the tourism sector will account for nearly 5.3 per cent of GDP and 5.4 per cent of total employment.

There are certain challenges for this industry that need instant redressal:

Bargaining power of suppliers

  • The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services.
  • The high class hotels are operating by few hotel chains like-TAJ,EIH,ITC&THE  LEELA PALACE so they have a control over the industry.
  • There are no substitutes for spas and five star hotels.
  • The hotels customers are fragmented, so they have to reduce their bargaining power to attract the customers.
  • The Taj, ITC& Oberoi are having various rates and tariffs. Because they are having their own brand image.
  • The hotel chains are operating different services like Spas, Boatels, Resorts, City Centers, Heritage HOTELS, etc.

Bargaining power of customers

  • The bargaining power of customers determines how much customers can impose pressure on margins and volumes.
  • The hotel industry is one of the most invested in its fixed assets. So they are trying to recover their amount quickly. 
  • The suppliers are providing better information about them to attract the customers’ .Here the buyers are highly informed.
  • If the hotel price changes are moderate, the Customers have low margins and are price-sensitive.
  • Some unseasoned timings the hotels are offering discounts and incentives to reduce the bargaining power of buyers.

THREAT of New Entrants

 The competition in an industry will be the higher; the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.

  • The foreign hotel chains are tied up with Indian hotels to reduce the initial cost and using the latter’s brand name.
  • Brand loyalty of customers like TAJ, ITC, and LEELA PALACE affects the new entrants.
  • Access to raw materials and Distribution channels are controlled by Existing players like TAJ, ITC, and LEELA PALACE.
  • The cost of land in India is high at 50% of total project cost as against 15% abroad. This acts   as a major deterrent to the Indian hotel industry.
  • In India the expenditure tax, luxury tax and sales tax inflate the hotel bill by over 30%. Effective tax in the South East Asian countries works out to only 4-5%.



Threat of Substitutes

 A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.

  • Brand loyalty of customers (TAJ, ITC, LEELA PALACE, etc,) is dominating the substitutes.
  • The hotel relationship with customer and costs also the reasons to switching to substitutes.
  • The price variation of same class hotel services from various brands is one of the reasons to choose a substitute.
  • The present demand and supply of hotel rooms is one of the reasons to choose a substitute.
  • More fixed cost and switching costs affects the business.
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Last modified: July 1, 2014