The Oberoi without Oberoi

One milk jug’s story typifies what Oberoi hotels have always stood for. Ravi Bhoothalingam, former president of East India Hotels (EIH), the listed company that owns the chain, recalls the time he got an agitated call from chairman Prithvi Raj Singh (Biki) Oberoi. A second-generation hotelier, Oberoi had given him free rein to run the business during his tenure from 1995 to 2001. “Oh, you know, you do what you want. If there’s something important, let me know,” Oberoi had said when Bhoothalingam asked what financial amounts he could sanction. With 26 years of experience at top-notch companies, including ITC (where he’d been director), and later with British American Tobacco, Bhoothalingam was considered a prize catch.

Bhoothalingam signed off on what are considered some of the world’s best hotel properties—including the Rajvilas in Jaipur. All seemed to be working to plan until that urgent call. No sooner had Bhoothalingam walked into the chairman’s office than Oberoi cried out: “What have you done!” He proceeded to sit Bhoothalingam down and pour him a cup of tea from the latest addition to the hotel’s china. Bhoothalingam had sanctioned its purchase. As Oberoi poured out the milk, it spilled on the spotless linen—and Oberoi’s point was made. “There’s a problem with the lip [of the jug],” he said triumphantly. “It is not shaped right. The milk shouldn’t spill, not a drop.” The china was never used again.

Such stories of Oberoi’s attention to detail abound. Managers across his properties talk of his ability to spot bathroom tiles that are minutely misaligned or table linen that’s barely askew, while guests swear by Oberoi hospitality. One of them says he only had to mention, once, his favourite brand of tea, and it has since been served to him every time he stays at any Oberoi hotel. This passion, which some would argue borders on the obsessive compulsive, helped Oberoi build India’s finest chain of hotels, one that married larger-than-life hoteliering with great processes. Indeed, it’s universally acknowledged that he is the greatest hotelier India has produced. His father, Mohan Singh Oberoi, is perhaps a close second.

Yet, being Biki Oberoi is also Biki Oberoi’s biggest weakness. His hotels, say those who know him well, are his alter ego. Says one: “It’s a one-man show—everything is him, his opinion, and decision. And when the man is 82, the show cannot go on forever.” Moreover, his successor hasn’t been identified yet, and others are eyeing his hotels.

Since 2000, ITC, for example, has built up a 14.98% stake in EIH. (The promoters and promoter groups, which include the Oberoi family, owns 34.6%.) Though Oberoi told Fortune India over e-mail that he “never considered the ITC shareholding as hostile”, the fact is that EIH did get very busy to prevent ITC from gaining control. Oberoi spoke to various friendly parties, who could, along with the Oberois control an overwhelming majority in the company. There were talks of a merger between EIH and EIH Associated Hotels, a joint venture between the Oberois and the Rajan Raheja Group. EIH Associated Hotels owns Trident and is engaged in the business of hotel operations, among other things. The merger would have increased the combined promoter holding in EIH. Then, in 2009-10, Max India founder Analjit Singh picked up 9% of EIH and for a short while was seen as a white knight. He was interested in an additional stake through an open offer, which would lift his shareholding to a rumoured 26%.

However, in August 2010, the Mukesh Ambani-owned Reliance Industries (RIL) acquired 14.2% of EIH, for Rs 7,200 crore (It hiked the stake to 14.8% in September 2010). Sensing Oberoi’s marked preference for Ambani, Singh reduced his stake to around 4%. By November 2011, Ambani’s wife Nita, and his right-hand man Manoj Modi were inducted into the board as non-executive directors.

All this at a time when the Indian hospitality industry is evolving into a highly competitive arena with over 20 premium brands launching projects in the next three years. According to HVS, a U.S.-based global hospitality consultancy, around 15% of the 102,438 hotel rooms proposed for India by 2015-16 will be in the luxury bracket. Foreign brands such as Starwood Hotels have announced plans to open 20 hotels in India by 2015, including their marquee brand, the St. Regis. There is also MGM Grand, Mandarin Oriental, Dubai’s super luxury hotel Jumeirah, and Thailand’s Lebua making India plans. “With the number of players coming in and major expansion plans, the market is readying for a bloodbath,” says Arjun Sharma of Le Passage to India, a luxury travel company.

So far, neither Four Seasons in Mumbai nor Aman in Delhi has dented the Oberoi market; they have been slow to take off as Indians get accustomed to a new level of understated luxury hoteliering. When the Shangri-La opened in Delhi within 10 kilometres of his flagship Delhi hotel, Oberoi confessed to friends that it could be a big threat. But the service at Shangri-La, a smaller property than The Oberoi, turned out to be indifferent, and really never threatened the latter. But, with more competition, that could change dramatically.

Also, as the Leela Palace Hotel in Bangalore and The Imperial in Delhi have shown, even in the best of times, there are chinks in the Oberoi armour that can be exploited. With considerably less resources than EIH, The Leela was, and continues to be, the hotel of choice of top business travellers to Bangalore. The Imperial, a single property, was clearly the best luxury hotel in Delhi between 2002 and 2008 under its Swiss general manager Pierre Joachim who, incidentally, was general manager at The Oberoi, Delhi, between 1998 and 2000. Things have not been the same for The Imperial since Joachim left to join The Raffles chain, and problems within the promoter family have surfaced.

Between 2000 and 2003, Oberoi and Isadore Sharp, the man who built the Four Seasons brand, discussed combining forces in India. In his book on the Four Seasons journey, Sharp recalls that one issue was “the name of our hotels. Each of us felt strongly that his own brand should be on top.” In the end, Sharp says, “we concluded that there wasn’t a basis for partnership”.

Getting an international partnership to access international clientele has been one of Oberoi’s big failings. He also tried and failed with the Sheraton (Starwood group) and Hilton hotels, but it’s clear he understands that competition from domestic and international players can only get worse. (A confidant says he once said, “There were barbarians at the gate.”) So what are his options?

The Ambanis and the Oberois have always been close. Dhirubhai Ambani preferred the Oberoi to the Taj hotels, and even got EIH to maintain Sea Wind, the 14-storeyed family home. Mukesh Ambani continues that tradition in his 27-floor house Antilla, in Mumbai.

For Ambani, the EIH stake is the first step into the hospitality sector. It is widely seen as a move to create a rival that can compare with the Taj Group in size: Currently, Oberoi has the brand but not the scale of the Taj. Though Reliance would not comment, people close to the deal say nothing to refute such possibilities either.

Nita Ambani’s seat on the board is also in line with the micro empire being built within RIL, which includes an Indian Premier League team; Reliance Brands, the group’s foray into the luxury space; and an international school. Sources say that the Oberoi stake also possibly fulfils an old Ambani dream of owning a marquee brand, dreamt of since the time Dhirubhai gazed upon the Taj built by his key rival, the Tatas. Mukesh Ambani is rumoured to have talked about buying the Mandarin Oriental hotel, which inspired his wife to get the Oriental’s designers, Perkins+Will and Hirsch Bedner Associates, to design Antilla.

It’s another matter that those closely involved in EIH operations feel that there may be a clash of style and culture if the Ambanis take over. No one will say it on record, but everyone—whether an old Oberoi hand or an industry expert—feels the Oberoi will not remain the same under the Ambanis. “They do not have the kind of finesse and eye for detail that Biki Oberoi has,” said a top EIH executive.

Indeed, there are many who believe that in a decade’s time, the Oberoi hotels may not be owned by an Oberoi. Reliance is, after all, not seen as the type that plays second-fiddle in a business it has staked money in. EIH insiders hint that the Ambanis and the Oberois have an agreement that after Biki Oberoi, the family will continue to own the Oberoi name and brand, while the company and its real estate will go to the Ambanis. “The asset ownership will be divorced from brand ownership in the next decade,” says a close associate of the family. This reflects a global trend in hospitality: Properties are owned by a company with the capital to make real estate investments and run by an upmarket hotel label identified with excellence in service, housekeeping, and management.

Oberoi declined to respond to this scenario, which he called “hypothetical”. “We consider RIL to be a good long-term shareholder,” he says. He adds, without going into specifics, that there was no agreement to sell more stake to the Ambanis: “We own strategic and valuable sites in several locations which shall be developed by the group. In others, we shall develop properties either as joint ventures or operate hotels under management contracts.”

There’s already evidence of the symbiotic relationship between the Ambanis and Oberoi. In Goa and Bangalore, they have jointly launched a mixed-use land development project. EIH owns 8.2 acres in Bangalore and 55 acres in Goa; it plans to build a 250-room hotel and 60 luxury apartments in Bangalore, and a 100-room hotel and villas in Goa. “This development could well be a sign of things to come,” says Sharma of Le Passage to India.

The overwhelming opinion is that Oberoi is, in a sense, ensuring that his true legacy, his hotels, is secure. Since the next generation of Oberois may not have the guile of M.S. Oberoi and Biki Oberoi, the old warhorse has ensured that it will be safe with Ambani rather than fall to ITC or someone else. He knows this may happen after him and, therefore, he wants to control who finally owns EIH. This way, the shadow of Oberoi will loom ever large over his hotels.

The Ambani handshake has certainly helped Biki Oberoi dispel speculation of an ITC takeover, which he swore never to allow. “Call it an entrepreneur’s pride,” says Habib Rehman, the hotelier credited with having given the ITC brand of hotels their new luxurious identity before he retired in 2009. “No matter what [I did], I was a mere employee of ITC, as is [ITC chairman] Yogi Deveshwar. How can a malik [owner] sell out to a mere employee? No matter what, ITC had to be stopped from taking over. So even though there are enormous synergies, the preference will always be for anyone but ITC.”

The mention of ITC is anathema in Oberoi territory, as is the mention of Analjit Singh. Singh refused to talk about the fallout, but he is known to be bitter about the almost last-minute spurning. Oberoi was worried that Singh did not have long-haul capital, which is what EIH desperately needs and which is critical in a business where the gestation period is as long as a decade for a single property. There were also worries that Singh, with his track record of buying and selling, might have sold out to ITC.

While the takeover threat may have been lessened for the time being, there’s still the succession issue. Son Vikram has turned 47, and nephew Arjun, 45. “It is no secret,” says an old Oberoi family friend, “that both Arjun and Vikram want Biki’s throne. And who does Biki want? His son, of course. But again, there is the lurking feeling that the throne would have gone to Arjun had Tikki [Tilak Raj Oberoi, Arjun’s father and Biki’s brother] lived. Biki is basically a fair man, so it’s a difficult situation.” However, Biki Oberoi says: “No decision has been taken as to who is next in line”.

All he says is that the two “are actively involved in the business and will continue to run the business; the rest is mere speculation”. Vikram handles day-to-day affairs and Arjun looks after the expansion plans. Both are joint managing directors. Arjun owns 1.13% in EIH, just a little more than Vikram’s 0.90%. “If you were to read Biki Oberoi’s mind,” says one of his closest confidants for many years, “he knows right now that neither has the capability, more important, the money muscle, to take the group forward. Yet, he wants the legacy to remain intact. Enter Ambani.”

Having had a late entry himself, Oberoi perhaps doesn’t think there’s anything unusual in his son and nephew to be waiting their turn. Tikki Oberoi, seven years older, was heir to the Oberoi business, and, when he took over, he seemed well-prepared. As the global man about town, he did business with even more panache than his father, who started the business from scratch. But Tikki Oberoi died 15 years into his career.

Biki Oberoi joined the business when he was about 40. Till then he’d lived in the best hotels in New York, London, and Paris, attending parties with the rich and famous. He would be at The Carlyle in New York or Rome, the Astor, the Ritz, or the Plaza Athénée in Paris, and the Richemont in Geneva—a stark contrast to his father, who only attended to business. M.S. Oberoi indulgently explained: “He is a rich man’s son, I’m a poor man’s son”. Perhaps it was for the best, for when he joined the business Biki Oberoi was well-versed in the best service standards in the world.

The point Oberoi clients make is that Biki Oberoi was the trendsetter. Even the not-so-good ideas he brought in, such as shopping corridors in luxury hotels, copied from the Peninsula in Hong Kong, and the idea of creating twin hotels, one slightly cheaper, within the same premises, were copied by other chains and delivered revenue. The low quality of competition, and some luck, helped.

Of course, the standard in-house response to the succession issue is that M.S. Oberoi was in control till he was 100 (he died at 103). By those standards, Biki Oberoi will still be around at least another 18 years before he retires.

At the last count, the Oberoi chain included 18 business and leisure destinations in India, besides hotels and heritage properties in Egypt and Saudi Arabia. In comparison the Taj has 76 hotels, seven palaces, six private islands, and 12 resorts and spas, spanning 52 destinations. While it has managed to scale up, the Oberois haven’t.

For years, the two Oberoi hotels at Nariman Point—around 1,000 rooms in total—accounted for over 50% of the group’s revenue. “The Oberoi was the ultimate business hotel in Mumbai. For leisure it was the Taj. Most of the business was based in south Mumbai,” says Vikram Madhok, managing director, Abercrombie & Kent, a luxury travel company. Madhok was corporate director for sales and marketing at the Oberoi for eight years before joining the travel company.

Skyrocketing rentals in south Mumbai forced businesses to migrate north to what was known as the ‘suburbs’ even a decade ago, and the custom of south Mumbai hotels fell. Today, the average rate of return (ARR), a benchmark statistic used by hotels, is Rs 13,000 for five stars in south Mumbai, lower than in north or central Mumbai hotels.

After the 26/11 terror attacks, The Oberoi, Mumbai, was almost destroyed. Restoration took 18 months and cost Rs 232 crore. There were fewer rooms (287 compared with the previous 330), but they were bigger. The number of suites was also increased from 26 to 81. It was all more opulent than before. But perhaps it was already too late.

Sure, EIH has a new Trident at the Bandra Kurla Complex, a new business hub in the suburbs. “It is an excellent hotel, but just one of many,” says Madhok.

Meanwhile, The Oberoi, Delhi, looks dated, while the ITC chain has repositioned itself with bigger, more luxurious rooms, and high-end gizmos. Newer chains—such as The Leela—have followed suit. There’s talk of refurbishing The Oberoi in Delhi and enlarging the rooms. “Business conditions will dictate the date,” says Oberoi.

By his admission, the numbers do not look good. “There has been relatively little revenue growth since 2008. Growth has been affected by 26/11 and subsequent terrorist activities in other Indian cities. Revenue has also been adversely affected by the global financial crisis,” he says. He declined to give future projections, saying “it is difficult to predict the future as the financial uncertainties in the U.S. and Europe are unresolved”.

To reclaim its past glory, the company needs to expand, say insiders. Currently, 80% of its revenue comes from domestic hotels. A person who once did deals for EIH explains how it tried to buy the Carlyle and Barbizon in New York, the Gresham Place in Budapest, and other hotels across Europe. But often, it had not the cash. The Ambani money can help at a time when hallmark properties are selling for a song in recession-hit Europe and the U.S. and everyone’s shopping for them. Subroto Roy, chairman, Sahara India, picked up the iconic Grosvenor House in London for £470 million (Rs 2,418 crore).

Sharma of Le Passage says, “The key ingredient of Mukesh Ambani’s magic has been creating and efficiently handling gigantic scale. The Oberoi [chain] needs massive scale—and fast.”

Oberoi's fightback is led by new hotels such as The Oberoi and The Trident, neighbouring hotels in Gurgaon, which resemble Dubai properties with expanses of Mediterranean white, water bodies, and light filtering in. While that may be inappropriate for the highest category of understated business travellers, there’s still a market for such hotels.

EIH also plans to sell some of its real estate, using the land for a mix of apartments, offices, or villas adjoining the hotel, as in Goa and Bangalore. One of Oberoi’s friends says the redevelopment of the Delhi hotel may also see mixed land use. “A score of high-class apartments in that location would sell for anywhere between Rs 20 crore and Rs 30 crore each. And what does that do to the balance sheet?”

For those preparing to watch the end of the Oberois as owners of the hotel chain, insiders say it’s never a good idea to write them off. They tell the story of how M.S. Oberoi’s dream hotel—then called the Oberoi Sheraton—at Mumbai’s Nariman Point, was built. Oberoi paid Rs 2,650 per square metre for the land alone. By the time it was ready in 1973, around Rs 18 crore had been spent. As Margaret Herdeck and Gita Piramal write in India’s Industrialists, “The high rate of interest on the loans to build the Oberoi wiped out profits in the early years.”

It was the first time Oberoi had defaulted. But in 1976, a West Asian crisis brought flocks of Arab pleasure-seekers to Mumbai’s shores away from Beirut, and M.S. Oberoi was all set to welcome them and make his money.

Biki Oberoi insists that as long as he is around, the Oberois will be in control. He says he’s “in good health and active in the business” with no retirement plan. Those close to him say he wants to be around till he’s 100, like his father.

Whatever happens to the Oberoi hotels now will be a metaphor for the future of the Indian hospitality industry—which was, after all, virtually invented by the Oberois.