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Raymond Bickson's Revival Plan For Taj Hotels
By Cuckoo Paul
Raymond Bickson is trying to change the Taj hotels' operating model, but first the chain will have to learn to get out of its comfort zone
In 2008, when INSEAD's Gabriel Szulanski wrote his case study around the Taj hotels' acquisition of The Pierre, a marquee property in the heart of Manhattan, little did he realise just how prescient he would turn out to be. The case study delved into the group's dilemma on whether to expand in the US market.
So here's the moot point: Was attack really the best form of defense?
Enemy at the Gates
The picture started to change radically after 2009. The financial meltdown, followed by the terror-attack in Mumbai, took the wind out of the Taj sails. Revenues began dropping and debt (taken on in the good times) began rising. In February this year, at his first board meeting as chairman of IHCL, Cyrus Mistry had to deal with a grim set of numbers. Auditors highlighted exposures in long-term investments in and advances to wholly-owned subsidiaries aggregating Rs 1,563.67 crore. The carrying costs of these investments significantly exceeded the book and market value as of December 31. The oldest company in the Tata fold is faced with falling room rates and increased competition.
It is no different from other Indian chains like Hotel Leela Venture and East India Hotels (Oberois) that ruled over the domestic market for years. All three are weighed down by debt, taken on during the construction of high-cost luxury properties. The slowdown in the Indian economy and the sudden increase in capacity have not helped matters. The bourses have given the stocks the thumbs down. They have trailed the market, tanking 15 to 30 percent on the Bombay Stock Exchange in the past one year. Growth in revenues have been tepid in 2012, despite a low base in December 2011 (see table on pg 46). All the domestic chains have posted a loss at the net level. The only consolation: Since it's been fully backed by the Tata group, IHCL has been able to weather the storm better than the others, while Leela and East India Hotels have had to look for white knights to support them through the crisis.
That's exactly why Anil Goel spends much of his time figuring ways to de-leverage the company. The canny executive director, finance, at Indian Hotels is fully aware that with consolidated debt at Rs 3,700 crore, the balance sheet is under pressure. In the past two years, he has been able to reduce some of the pressure through financial re-engineering. This includes changing the currency-mix for the borrowings and tweaking debt tenures, he says. IHCL raised Rs 600 crore through a rights issue in 2008-9 and was followed up with a preferential allotment in 2011-12, that brought in Rs 385 crore from Tata Sons.
Meanwhile, Bickson is busy capping new investments. Construction costs for a five star hotel range between Rs 1 crore to Rs 1.5 crore per room, depending on the city. IHCL has gradually moved out of funding projects itself and the balance sheet now has only two projects (Vivanta hotels at Guwahati and Dwarka). "All the rest are through management contracts or on the books of joint venture companies like the Chennai-based OHL [Oriental Hotels] that is funding a hotel at Begumpet in Hyderabad or Taj-GVK for the airport hotel in Mumbai," says Bickson.
Jaguar or Nano?
For almost five years, almost all its luxury hotels have faced severe headwinds. For instance, Bickson found that in cities like Chandigarh, rates had to be corrected because customers were simply reluctant to pay top dollar to stay at the Taj or any other luxury hotel for that matter. Foreign hotels continue to be bullish about India, but many, including the world's largest hotel chain the Intercontinental Hotels Group (IHG), have eschewed luxury to focus on the mid-market. "The days of a foreigner being the main customer for hotels in India, are over. The real growth is from domestic travellers," says Douglas Martell, IHG vice president operations. Thirty-five of IHG's 48 hotels in the pipeline in India will be Holiday Inn and Holiday Inn Express, both mid-scale brands.
When IHCL launched Ginger in 2004, for the Indian consumer, the idea was revolutionary. Based on a plan outlined by CK Prahalad, the idea was to build a low price brand, with room tariffs less than Rs 1,000 a night. The hotels would cater to a huge, under-served domestic market for smart, cheap and clean accommodation. As the first organised player in this segment, Ginger together with Air Deccan and the Nano, captured the imagination of every marketing guru. India could take hundreds of these, they said. Nine years later, there are only 27 of the hotels. Room rates are now upwards of Rs 2,000 for most properties.
Revival by Taj
Bickson says the revival plan could substantially improve its financial situation in the next year. Once Ginger reaches a minimum size of about 40 hotels, he plans to take Roots public. The big priority now is to find ways to sweat the existing assets-so cash-generation improves. He has set up a cross-functional task-force to find ways to improve revenues for every hotel. Room rates, income from F&B and retail-the three traditional revenue sources are being examined, he says.
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