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Owner’s Roundtable at HICSA 2019 | Key Discussion Points

by and May 14, 2019Hotel Development

H otelivate hosted the 15th edition of Hotel Investment Conference – South Asia (HICSA) this year, commencing with an exclusive roundtable for owners, where they jointly and candidly expressed their views and concerns. The 90-minute session was co-moderated by Hotelivate and ELP, a leading full-service law firm in India, and had 80 owners in attendance.

While the topics discussed were wide-ranging, a significant amount of time was spent on the following points. We have summarised each, supplementing with Hotelivate’s take on these matters.

OTA Fees: Many owners held the opinion that although fees charged by OTAs are high and should be negotiated down further, this channel of room bookings is critical to the success of the business. In addition to enabling the creation of a more diversified customer base, OTAs offer a great marketing platform. Moreover, the owners agreed that in recent times, ceding to the demand from hotels, OTAs have rationalised distribution costs through relatively more reasonable commission rates (than charged in the past) and innovative offerings like “Zero Cost Rate” and “Pay at Hotel” schemes.

Hotelivate’s Take: In present times and the foreseeable future, hotels and OTAs are likely to continue their marriage of convenience, with the former relying on the latter for distribution and marketing, and OTAs relying on hotels for inventory. Commissions are essentially a “performance-based” model, and whether they hurt a business or give it the impetus it needs will depend on if the “right” balance has been struck. Instead of reclaiming customers booking through this one channel, hotels need to focus on yielding all channels of room bookings, employing revenue management strategies and technology.

High Employee Attrition and Talent Crunch: The 2019 India Hotel Manpower Study by Hotelivate reveals that the average annual employee attrition in Indian hotels stands at 24.5%. While this is comparable to the attrition in other industries (ranging between 20%-30%), combined with the inadequate stream of new talent graduating from various hospitality colleges in the country, it has largely contributed to the talent crunch faced by the sector today. Owners are concerned that the increase in rooms supply and numerous opportunities in parallel sectors that offer better work-life balance as well as compensation, are resulting in people jumping jobs.

Hotelivate’s Take: Without a doubt, the supply of hotel rooms is outpacing the supply of talent in India, and this is a serious issue that needs to be addressed without further delay. From investing in skills development to improving our HR practices that make working in the hotel industry better in terms of engagement, career advancement and work-life-balance, sincere efforts need to be made to bridge this gap.

Illogical Operator Performance Test: What’s the point of having a “test” that is nearly impossible to fail? The operator performance test is one of the most contentious clauses of a hotel management contract negotiation. Even with its several iterations – single-pronged (either budget- or RevPAR-based), double-pronged (both budget- and RevPAR-based), customised formats – this clause fails to be effective. Additionally, bundled with numerous operator-guarding caveats, instances of owners being able to exercise their termination right on account of a performance test failure are unheard of in India. And, if you ask the owners, not everyone is happy with the operators’ performance. Thus, it was recommended that the Return-on-Capital Employed (ROCE) be the new yardstick against which the performance of an operator is assessed.

Hotelivate’s Take: This owner grievance has been raised time and again, and rightly so. The clause needs to evolve from being just an eyewash to a more robust and effective gauge of the operator’s performance. We agree with the owners that ROCE is a more relevant as well as holistic metric (vis-à-vis GOP and RevPAR), which should find its way in the performance test clause of management contracts. Essentially, if the hotel fails to provide the required yield on investment (a minimum performance threshold that is mutually agreed upon by the two parties), the owner would have the right to terminate the operator for underperformance.  

Clarity on the Management of GST: The owners at the roundtable were unanimous in their view that the numerous GST slabs and the charging mechanism are ambiguous, resulting in confusion in day-to-day operations.

This topic was discussed in great detail and warrants an article to itself. We shall publish this separately for the reader’s benefit.

Outsourcing F&B: For highly capital-intensive real estate developments like hotels, the yield per square foot needs to be optimal. The owners, thus, opined that if the F&B outlet(s) recommended, branded and managed by the hotel operator/brand is not providing the return it should, they must have the right to look outside and get high-street brands and experts to manage the outlet(s). 

Hotelivate’s Take: Let’s face it, F&B is not the stronghold of every hotel brand operating in the country today. And owners should not be tied down to just one option (i.e. the hotel brand based on a management contract) when the performance of a key revenue department is suboptimal. In India, F&B occupies a sizeable portion of the hotel’s real estate and contributes anywhere between 30%-50% of the top line on an average. Hence, its yield per square foot needs regular monitoring. Should it be underperforming, the outsourcing option can be considered. That said, owners will be well advised to know the pros and cons of this alternative. Broadly, on one hand, outsourcing the hotel’s F&B can help increase non-residential footfall, offer a stable revenue stream and reduce direct staffing requirements. On the other, you lose considerable control over that aspect of the business. Moreover, the type of F&B outsourcing agreement one enters into is critical in determining the nuances of the relationship – whether it is a lease (fixed, variable, combination), a franchise, a management contract, a consulting agreement, etc.

General Data Protection Regulation (GDPR): Born in the European Union (enforced in 2018), the GDPR is a uniform data security law that regulates the processing by an individual, a company, or an organisation of personal data relating to individuals in the EU.[1] Following close on the heels, the USA is working on a consumer privacy protection policy of its own along a similar line. Now, given that a large number of hotel operators in India are headquartered in the USA and EU, together with the nature of the business that requires hotels to store, use and transfer huge amounts of customer and employee data, owners believe that it is only a matter of time, that management contracts with international operators will reflect consumer privacy policies and laws of their countries.

Hotelivate’s Take: Globalisation and new technology bring with them several benefits and many risks. Data privacy breach is a threat that the hotel sector has been hit with in the past and can face in the future as well. The new policies and laws may be cumbersome to understand and comply with, but they are designed to prevent the misuse of an individual’s personal information and to protect his/her right by limiting the way the information is used. For instance, under GDPR, individuals have the “Right to be Forgotten”, which allows them to request for their data to be erased by the hotel. Surely, it will change the way information from customers and employees is sought, stored, shared and processed. Also, the role of the IT head at a corporate or regional level will likely expand to assume responsibility relating to data protection compliance. Experts from the outside may be consulted as well.

Cross-rating of Reviews: With an aim to improve safety and efficiency, sharing-service companies like Uber and Airbnb have two-way ratings; i.e. their customers rate them, and they rate their customers. A poor score for the customer could mean that he/she will be unable to get a ride or an accommodation with these companies, respectively. Some owners at the HICSA roundtable felt that mainstream hotels should also consider such a rating system.   

Hotelivate’s Take: This is certainly a very interesting recommendation by the owner community, although we are not sure if our industry is ready for it just yet. The biggest challenge we see is the “bias” these ratings may have. The fear of reprisal with a poor review/rating could result in untrue feedback/assessment from both sides, defeating the very purpose of a rating system.

For more information, please contact achin@hotelivate.com or juie@hotelivate.com 

[1] 2018 Reform of EU Data Protection Rules. European Commission.

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