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A potential gold mine – Chinese investments into India’s mid-range hotels

April 27, 2011

In the spring of India-China trade relations, when more than 50 businessmen from China’s Sichuan Province (located in south-west China, known for their hot and spicy foods) are in India to consummate business relations, Inchin Closer looks at a nascent industry in India that has a massive investment potential for Chinese investors – the mid-range hotel.

“In India, you have two distinct classes of hotels – deluxe properties, which compare very well internationally, or bottom of the pyramid, where the basics of the business – security and hygiene – are not guaranteed,” Rahul Pandit, Lemon Tree’s chief operating officer, told the Financial Times. “There is a wide space in the middle – we occupy this space,” he added.

China on the other hand over the past decade of boom, has mastered the art of catering to all pockets of travelers and businessmen. A bevy of domestic chains such as Home Inn, 7 Days Inn, and Motel 168 – some backed by western private equity groups – have created a highly competitive market for budget accommodation, that offers clean, decent stay’s at every price point.

India which has a huge tourism industry and whose budget airline industry is burgeoning, however hasn’t been able to cater to the huge mid-income bracket that swarms its sights. High end hotel rooms such as the Taj and Oberoi cater to the uber rich, while unkept, dingy motels cater to everybody else. It is only of late, realizing this pot of gold in the middle, that global hotel groups such as Accor’s Ibis, Marriott’s Fairfeild,  Taj’s Ginger and InterContinental Hotel’s Holiday Inn Express have all rolled out new mid-price hotels to cater to India’s fast-growing domestic business and travel market.

Having experience on their side, analysts expect several Chinese mid-tier hotel chains to spring up all over India soon. The potential is there, India’s growing, aspirational middle class is looking for more value for their money, they are willing to pay that little bit extra for a better hotel room for their families, but are still unable to afford five-star luxuries, herein lies the enormous potential for Western backed mid-range Chinese hotel chains.

Although not known for their high level of service, an aspect that the Chinese can definitely learn from the Indians, this sino-indian collaboration could be a gold mine for investors.  Indian consumers think very similarly to Chinese consumers, locked in value, they appreciate service, comfort and need family and business friendly spaces. The Chinese understand this. Lastly, it is only the Chinese that will be able to provide these exceptional facilities at rock-bottom prices that are considered affordable by Indians.

Investments into this sector have just begun – The Marriott has just unveiled a joint venture with Sahmi Hotels, an India-focused investment fund, to introduce its mid-range Fairfield brand in India. Sahmi is raising around US$150 million for the venture, of which Marriott will invest 30 percent. InterContinental Hotels is investing US$30million for a 24 percent stake in a joint venture with Duet India Hotels Group to establish 19 of its Holiday Inn Express hotels in the country by 2016. Of foreign hotel groups, Accor has made the biggest financial commitment to India, with an investment of US$250 million, mostly for developing moderate-price and budget properties.  It has a 50-50 joint venture with InterGlobe, the parent of popular Indian low-fare carrier IndiGo, to expand the Ibis brand in India. Accor is also building 10 of its budget Formule 1 hotels, which the French company will wholly own.

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