Article – Anup N. Amatya & Associates, professional Financial, Business & Management Consultants
Any long-term strategic decision should base on the facts on the ground and its business and political implications considered beforehand to avoid any surprises down the road.
Strategic decision to invest in a Budget Branded Hotel
While planning to invest in a Budget Branded (3 or 4-star) hotel, Nepalese and foreign investors considering an investment in this sector, need to evaluate whether their strategy to move into this sector would have a favourable outcome in the long-term.
For example, Fab Hotels, an Indian Budget Hotel chain, operate in the $30 per night, value-for-money, Budget 3-Star hotel segment. The hotels are located conveniently near a business hub, airport or railway station. They work on a 100% exclusive franchise model with long-term contracts.
In my own experience, their service and amenities are adequate for a budget-conscious traveller, with central a/c, Satellite TV, attached bathroom with shower, mini-fridge etc. They have minimized their operating costs with online reservations for all of their 500+ hotels in major Indian cities. One can either pay by credit-debit card online or pay at the property while checking-in with some additional fee.
I have noticed the properties lacking some essentials such as proper maintenance of the rooms, not a wide choice for buffet breakfast, travel desk etc. I think with such additional facilities, one can charge more than US$30 per night.
For the investors not having previous experience of running any hotel, they could consider a tie-up with one of the above or similar branded budget hotel chains, or go for a franchise model while starting. It will give them experience as well as access to their online booking platform and the Indian market at large.
Porter’s Five Forces Model for analyzing Industry Competitiveness
To further evaluate the attractiveness of the investment, Porter’s five forces model is useful for analyzing industry competitiveness. At present, Rivalry among Competitors is quite low in Nepal in the Branded Budget, as well as Upscale hotel segments. There is, however, cut-throat competition in the unbranded hotels, which are their Substitutes.
The Barrier to Entry is also visible due to moderately large funding requirement and Nepal government’s policy of not allowing 100% FDI in the 3-Star and below category hotels, a favourable political implication.
Power of Customers could be high in the future if budget-branded hotels crop up rapidly, the Supply Side. Hence, it’s better to scale up gradually to stay ahead of the competition.
The Business and Political implications of the decision to invest in the Budget Branded Hotel segment
The business implication of the decision to invest in this segment looks quite favourable at present since both our immediate neighbours are growing fast. E.g., “The Indian tourism industry is projected to touch $157 billion by 2024 – up from $80 billion in 2013. Hotel players are recognizing this trend and coming up with newer offerings – particularly in the budget segment for the domestic traveller.” Source: Forbes Asia, Aug 30, 2016.
Nepal would directly benefit from this trend since most of our tourists are Indians arriving primarily via land route. Indians do not require either a VISA or Passport to enter Nepal. They need to show their Government-issued IDs, such as a Voter’s ID only.
Proof of this trend: Nepal welcomed over one million tourists in 2018 with China, India as leading markets. Source: Xinhua, 2019-01-08.
Available from: http://www.xinhuanet.com/english/2019-01/08/c_137729223.htm
Furthermore, there is a favourable Political climate since the Nepalese government has aimed to increase annual arrivals of foreign tourists to over 2.5 million in the next five years. Source: Travel News Nepal – Aug 03, 2018. Available from: https://travelnewsnepal.com/11184/
Therefore, due to favourable business as well as the political environment, a strategic plan to enter into the Budget Branded Hotel Segment at an early growth stage would have a profitable outcome.
Anup N. Amatya & Associates, professional Financial, Business & Management Consultants
Author: Anup Narsingh Amatya