For an entire generation of Indians that grew up in the 1970s and 1980s, hotels tend to be synonymous with old local brands like the Taj, Maurya or the Oberoi. Mention the Oberoi or Maurya to trueblue Delhiites or the Taj Mahal Palace to old-time Mumbai residents, and they’ll probably tear up with nostalgia. Chances are you might even see the images flashing through their minds: afternoon lunches at the Taj’s Machan in Delhi, dancing at Maurya’s onceiconic discotheque Ghungroo, or romantic dates at the Mumbai Taj’s Sea Lounge overlooking the Gateway of India.
But times have changed. And so has the hospitality industry. People have many more hotels to make memories in, including a string of modern new global brands that are posing a challenge to traditional home-grown hotels. And top of the mind is the Marriott, a U.S. chain that set up shop in India with a resort in Goa in 1999 and has now become the second largest hotel chain in India after Indian Hotels with 105 properties in the bag. You can see the change as soon you come down the escalator at Delhi airport’s Terminal 3 to head to the baggage hall: The first thing that greets you is a large video wall set up by the Maryland-headquartered Marriott International. Drive out of the airport and a once barren wilderness is now a 45-acre complex dotted with 11 hotels—two of them are Marriott properties and none belong to the old and established Taj or Oberoi. “We are the fourth country in the world to have a 100-plus hotels in the Marriott International universe. The U.S. is the largest, followed by China, Canada, and then India,” Neeraj Govil, area vice president for South Asia at Marriott International, tells Fortune India.
The story of how Marriott shot into the big league of India’s hospitality industry is no secret. It quite literally happened overnight in 2016 following Marriott International’s over $13.6 billion acquisition of rival Starwood Hotels and Resorts, which already had a significant presence in India. The buyout made Marriott the world’s largest hotel chain straddling the entire range from luxury brands such as Ritz-Carlton and St. Regis to mid-level brands such as Courtyard and Four Points. And it gave the hotel chain once associated with cookie-cutter hotel rooms something for everybody from hipster millennials to fussy 60-somethings. The acquisition also had a domino effect on India: Soon, the number of Marriott hotels in the country more than doubled from 35 to 79, briefly propelling it beyond Tata group’s Indian Hotels, which owns Taj Hotels. Since then, the Taj has clawed its way back to the top with 126 properties.
But if you think this contest for the top spot is over, you have another think coming. Marriott International is showing no signs of slowing down. Govil says the company opened anywhere between six and eight hotels a year before the acquisition, then opened close to 15 in 2017, and plans to open a similar number in 2018. The rate of new openings seems rather high at first glance; it is nearly twice as much as what Indian Hotels added last year. How on earth did they do it? Look closely and it becomes clear how: Marriott International doesn’t own any hotels in India; instead it operates hotels owned by others through management contracts and franchisee agreements. In other words, it uses an asset-light business model, a global template created by the global chain in the mid-1970s. “The assetlight model allows us to grow exponentially and increases the speed to market. If you look at our growth numbers, it wouldn’t have happened if we went about building our own hotels,” says Govil.
Both management contracts and franchisee agreements are a well-entrenched concept in the world of hospitality. Under management contracts, hotel chains tie up with real estate developers. The hotel chain comes in and does the branding, makes sure the interiors are up to the mark, trains the staff, and manages day-to-day operations for a pre-determined fee, which could be a share of profits, a share of revenues or simply a standalone fee. Typically, even employees are contracted with the real estate developer. The franchisee model is more asset light for hotel chains. Here, even the day-to-day management is carried out by the third party and the brand ensures the hotel maintains its standards.
It’s a model that’s worked well for Marriott globally, and seems to be working well in India, too. Essentially, Marriott’s operations in India are quite lean. It has just 75 people working at its offices in the country, and has instead built long-standing partnerships with top real estate developers such as K. Raheja Corp’s Chalet Hotels, the Salgaocar family in Goa, Panchshil Realty, and SAMHI. Marriott plans hotels in two ways: In most cases, it engages with real estate developers who approach it with a property under construction. Sometimes, it engages with them right from the conception stage, especially when building resorts. “Here we do engage with the developer at a very early stage. Resorts are not a prototype hotel. At most of our resorts, we have got in at a very early stage where we have influenced the design,” says Govil. “For example, when we opened Mussoorie, we realised that a lot of people are going to drive to the location. So we made it a point to have well-equipped accommodation for drivers and maids.”
Marriott International also has a franchisee arrangement with ITC Hotels. Most of the large ITC hotels now form a part of The Luxury Collection hotels of Marriott International under the deal. ITC was perhaps a natural fit for Marriott International’s post-acquisition portfolio as one of Starwood’s oldest brands, Sheraton, had a long-term partnership with many landmark ITC hotels. Marriott doesn’t share financial numbers, but Govil says topline growth in India is expected to be in nearly double digits: “Ebitda is improving significantly as we have seen a double-digit cost decline in procurement costs after the merger.”
Marriott International has 15 brands in India broadly across three categories. The luxury segment has St. Regis, RitzCarlton, JW Marriott, and The W, while the premium segment includes The Westin and Le Meridien; and the moderate segment has the Courtyard, Fairfield, Aloft, and Four Points. Marriott is focussing on tier II and tier III markets with hotels in smaller towns and cities such as Pune, Visakhapatnam, and Ahmedabad. But big cities still generate maximum revenues for the chain. “The moderate tier segment is the fastest growing in India and the good thing is we have four brands in this segment. The advantage these hotels have is that when recession comes along, they are least impacted but when the economy is booming, these hotels can surge maximum in terms of pricing. They have high margins and are best equipped to deal with the cyclicality of the business,” says Govil.
Hoteliers agree the asset-light model’s popularity has grown in India due to the influx of international brands looking to grow quickly. Building a hotel from scratch isn’t easy as you need anywhere from 35 to 80 permits, which inevitably delays projects. Moreover, the cost of acquiring land and building a hotel is another deterrent. It’s hardly surprising that even local groups such as Indian Hotels—which has brands like the Taj, Vivanta, and Ginger—and EIH, with brands like the Oberoi and Trident, are adopting the asset-light model. To be clear, Indian Hotels isn’t selling all its properties and shifting to only management contracts and franchisees, but it is leaning towards an asset-light model. Today, 67% of its assets are either owned or on a long-term lease and only about 33% are based on management contracts/franchisees. However, of its 30 hotels in the pipeline, less than 10 are owned properties and over the long term it sees half of its properties run as a fee-based business. “There’s nothing like a right or wrong model. Value creation in owning an asset like Taj Lands End [in Mumbai] is so significant that you need a 100 management contracts at a lower level, 50 at a mid-level and 20 at an upper upscale or luxury level to compensate for the income we have from Taj Lands End alone,” Puneet Chhatwal, managing director and CEO of Indian Hotels, tells Fortune India.
Even EIH is looking at an asset-light future. On August 1, after the company’s annual general meeting, executive chairman P.R.S. Oberoi said the company owned too much real estate and the aim was to reverse the ratio of owned properties versus managed ones, which currently stands at 70:30. Such a strategy may finally allow it to ramp up its presence significantly. Today it stands at barely 24 hotels in India despite being one of the oldest hotel chains in the country. “Management contracts are a natural progression for hotel companies that have invested significantly in the real estate business to establish their brands. Management contracts allow you to extend your brand and operational expertise to other real estate assets,” says Vikram Oberoi, CEO and managing director of The Oberoi Group.
Obviously, hotels in India are banking on the boom in the hospitality sector. A 2017 Boston Consulting Group and Google India report expects the hotel industry to grow at 13% annually to $13 billion by 2020. The industry is also optimistic as the number of hotel rooms at 115,000 is still short of demand. A report by ratings agency ICRA says average occupancy has improved to 66% from 62.5% in 2015-16, and average room revenues have grown 2-3% over the past one year to `5,800 and above. “Hotel occupancies have improved across most markets in the country, supported by slow supply addition and improving demand-supply dynamics,” Pavethra Ponniah, sector head and vice president, corporate sector ratings, ICRA, said at the report’s release in June. “The muted supply pipeline will continue to support increase in occupancies until they peak in 2021-22 at 69-70%.”
In many ways, the asset-light model holds the key to growth for the Indian hotels industry. That’s where Marriott has an edge. It has perfected the business of managing hotels without owning them. Its 30 brands have more than 6,000 properties across over 120 countries. No wonder it doesn’t plan to stop at just 100 in India. Arne Sorenson, president of Marriott International, told Fortune India earlier this year that the chain planned to go to 200 “in a handful of years”. He said one of the challenges was the high GST rate for hotels: “Hotels that trade about $110 a night are taxed at 28% and there is no other market in the world at 28% taxation. Hotels under $110 are taxed at 18%. There is no other market in the Asia Pacific region with this kind of taxation... Even though the business is doing well, the business would do that much better with the lowering of GST.” The question now is: Is the Taj group of hotels in danger of being knocked off the top slot? The rate at which Marriott is going, maybe. But, going by the Taj group’s plans of setting up 500 entry-level Ginger hotels over the next few years, maybe not.
(This article was originally published in the September 2018 issue of the magazine.)