Shoring up the hospitality industry

Hotels resort to cost-cutting measures to become sustainable in the pandemic period

Hospitality industry traditionally accounts for 10 per cent of global GDP. According to estimates the Indian hotels sector (including organized, unorganized, and semi-organized segments) has incurred a total revenue loss of nearly Rs 90,000 crore in 2020. Hotel companies were also forced to resort to cost-cutting measures, including job cuts and furloughs, to become sustainable. As per estimates, 40-45 per cent of direct employees in the organized sector have lost their jobs and a similar number has been impacted by salary cuts during the year.

2021 will be a crucial year for the hospitality sector as it emerges from the disruptions and embarks on the path to recovery. It is expected that demand will improve considerably in 2021, as people make up for the lost time and give in to their pent-up desire to travel. However, hygiene, cleanliness and safety will continue to be their top priorities, as it has become a way of life in the post-Covid world.

Prior to Covid-19, over 11,500 rooms were expected to be added to the supply in 2021. However, it is unlikely that hotel projects will be back in full swing in the near term, resulting in subdued supply growth. Some stalled projects are likely to start gradually and we now expect only 20-25 per cent of the anticipated supply to come into the market, with the rest being postponed to 2022 and beyond.

Hotel companies have once again renewed their focus on increasing their network at leisure destinations. Besides, hotel rebranding or conversion has been a growing trend in the Indian hotels sector over the last few years. As a result, over the past five years more than 230 hotels have been converted either from a standalone property to a brand or migrated from one brand to another. However, the rate of conversions has not increased much during this period. Brand conversions still constitute only 20-25 per cent of the total signings in the country. It is expected that the hotel conversions, particularly standalone hotels joining larger brands, will gain considerable momentum in the next couple of years as both hotel owners and brands consider this proposition to tide over the current downturn.

The outlook will continue to be impacted by the lockdown, travel restrictions and safety-related concerns because of the virus spread. FY22 will see the industry witnessing over 120 per cent growth in revenues and operating margins clawing up to 13-15 per cent (FY2019: 22 per cent) supported by pick-up in revenues and some continued benefits of the large-scale cost rationalisation measures undertaken during the pandemic, particularly in staffing. However, to put these growth numbers in perspective, the optically high growth numbers for FY22 will only place the industry on a recovery path to pre-Covid levels in 2-3 years. ICRA expects recovery to pre-Covid levels in FY23-FY24.

On the standalone restaurant front, there will be many restaurants that will end up closing permanently due to how they handle the overwhelming challenges now facing them and the industry. However, there will also ultimately be survivors and some of those survivors will once again thrive as vibrant hospitality operations. They will find a ways to navigate these crippling conditions and make their way back to dry land where they can begin to securely build up their businesses again.

In the short term, one has to survive the crises. There is a need to minimize all expenses and try to find some way of bringing in some income. Owners have to be realistic about how long they will need to do this, realizing they are dealing with a moving, volatile target. Understand that in between the short term plan and the long term plan there will be a transition where customers will be hesitant to go back to restaurants and ramp up will be gradual over time. Create clear ramp up strategies based on consultation with trusted industry people and the volume of information available from different states and countries where restaurants have started to open up.

Always be asking, "What would it take for customers to be confident eating in a restaurant?" The long term plan should involve a rethinking of the concept in a possible new restaurant environment. Consider more diversification into take/out delivery and possibly retail. Perhaps putting on unique events will help differentiate the concept and give you another avenue of income. It is essential to look 5-10 years out and realize success will come if there is growth strategically and manage operations efficiently over time. Try not to let the present short term major challenges dampen the belief in long term success.