Lemon Tree eyes shared loyalty alliances with international hotel chains

The hospitality company with a market capitalization of more than ₹10,000 crore currently operates 112 hotels, consisting of 41 owned properties with about 5,800 rooms and 71 managed hotels with around 4,500 rooms. The company is also developing 86 new hotels, which will add approximately 5,900 rooms to its portfolio. Since April, it has signed over 30 new hotels. In September, Fleur Hotels Private Ltd was converted from a private limited company into an unlisted public company.

For the second quarter ended 30 September, Lemon Tree reported a consolidated revenue of ₹284 crore, a 24% increase compared to the same period last year. Net profit grew 34% year-on-year to ₹35 crore. Its occupancy rate for the quarter stood at 68.4%, a decline of 3.28% compared to the previous year. However, the revenue per available room (RevPAR) increased by 7% to ₹4,035.

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As the Indian middle-class travels more, is there a strong need for Lemon Tree to have a loyalty programme tie-up with an international chain?

Currently, about 26 million Indians travel internationally. Earlier, when Indians travelled abroad, to locations in Asia, they rarely found Indian breakfasts. Today, that has changed because of a new demand dynamic. At the same time, earlier there were 100 million Chinese travelling abroad—the largest travelling population in the world—which currently has seen a collapse. My expectation is that in the next 4-5 years, 100 million Indians too will start travelling abroad. Successful Indian hotel chains with strong loyalty programmes will benefit as Indian travellers will end up using those Indian hotel brands when they travel abroad. There are about 10-12 cities in the world like Dubai, Singapore, Hong Kong, London, New York etc where 80% of these Indians will go. This is where a good loyalty programme will help Indian hotel companies expand successfully.

In September you announced your plans to list your subsidiary Fleur Hotels. What is the intent behind that?

Yes, we intend to list the subsidiary within two years. About 70% of our hotel rooms are in this subsidiary. This includes our Delhi Lemon Tree Premier, Aerocity and Aurika Mumbai Skycity hotels. Fleur will become a very large income generator with an Ebitda (earnings before interest, taxes, depreciation, and amortization) over ₹700 crore per annum. Once listed, within six months, Fleur will become debt free and have about ₹2,000 crore of growth capital available. When this happens, Lemon Tree’s management fee from Fleur becomes visible, which is about ₹150-180 crore per annum. In the last 15 years, we have built 5,000 rooms, so with this growth capital and the cash flow that Fleur already generates we should be able to scale the asset-development side of the business too in that company.

What sort of locations will you look at building or acquiring these new assets?

We’d like to build or acquire big-box hotels in Bengaluru, Mumbai and Delhi. We’d also like to be near every airport of every city with a population in excess of 10 lakh.

Are the economic indicators in favour of India in terms of increased domestic hotel consumption in the coming years?

As India moves towards a $5 trillion economy, the number of Indian households travelling domestically and staying in branded hotels will cross 30 million. India has a $3.8 trillion economy today, and about 5 million households currently stay in branded hotel rooms out of the 320 million households in India. This will be the biggest opportunity for branded hotels going forward – capturing this demand. A branded hotel room is part of a chain or collection unified by a brand’s standards, amenities, and design.

So where is Lemon Tree going to be in the next five years?

The next opportunity is to ‘soft brand’ the unorganised hotel room supply of under-40 room hotels, spread across tier 1-4 cities. There are 12-14 lakh such rooms in the country. A soft brand is a partnership between an independent hotel and a hotel group, providing lower costs and more flexibility to both companies than traditional franchises. When these rooms get formalized, and hotel companies start to brand them, there will be exponential growth in the hotel business.

So the company could have hotels with fewer than 40 rooms in the future?

The opportunity lies in sub-40 room hotels, being run by individual and independent owners. Since it doesn’t make sense for bigger companies to manage them, they will be franchised only. This is what we do with our ‘Keys’ brand and focus mainly on safety, cleanliness and hygiene. There is money to be made if we use technology and our distribution platform. Lemon Tree’s future is here and if we capture this opportunity well, we can become a very large hotel business in India in the next 3-5 years. Most international hotel management chains don’t have the cost structure or the brands to get into this category.

Could that mean India will see fewer 5-star hotels in the future?

New hotels will keep getting built, but the bandwidth to manage more 5-star hotels is very limited because 90% of all the five-star hotels in India are already branded by some company or the other. So the unbranded opportunity is actually in 2-3 star hotel equivalents. If we look at the entire gamut of hotel rooms in the country, only 8% are branded, the remaining are unbranded or unorganized. In the next 5 years, if even half of these 12 -14 lakhs unbranded rooms are franchised by chains, it would be an enormous growth opportunity.