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All about the low-cost Ginger hotels
Shobhana Subramanian
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July 24, 2007

It is considered auspicious to tag on a "1" to a number ending in zero. All the hotels in the Ginger chain have 101 or 201 rooms, but the decision hasn't been guided by any religious sentiment. There's a more practical reason: the last room is specially designed for physically challenged guests.

The other 100 or 200 rooms are strictly no-frills and that's exactly how Ginger likes it. The chain -- run by Roots Corporation, a subsidiary of Indian Hotels Limited, which also runs the Taj group of hotels -- is now four years and eight properties old. It's a slow start, but Ginger is, dare we say it, all gingered up for the future.

Another eight hotels will be up and running by March 2008, says Roots CEO Prabhat Pani, and the total count will go up to 50 by 2010. The Strategist took a peek at Ginger's spicy recipe for expansion and growth. Here's what we found.

The price proposition

Ginger's expansion couldn't have been better timed. Research firm KPMG estimates the demand-supply mismatch to be far more acute in the budget segment than in the luxury segment. Just about 40,000 rooms are available currently in the economy and budget categories; compare that with the 430 million domestic tourists that criss-crossed the country in 2006.

Says Nandita daCunha, manager, KPMG, "The opportunity in the space is huge, which is why international players like Accor or Choice Hotels are also looking to scale up operations in India."

Ginger, which operates in the three-star category, prices its rooms competitively -- single rooms cost Rs 999, while a double room won't set you back by more than Rs 1,799, inclusive of taxes. And the tariffs are the same whether you're in Bangalore or Bhubaneswar, and whether it's January or June.

That's different from how another newcomer in the budget hotel category, the Red Fox chain run by Krizm Hotels, operates. Single rooms at the Hyderabad, Jaipur and Delhi properties of the chain will cost about Rs 1,500. "But we will be flexible about the pricing," adds Chairman Patu Keswani.

Keswani reasons that since labour in India is relatively cheap, it makes sense to offer some limited services and charge a little extra. Ginger's Pani, on the other hand, believes that the young traveller doesn't mind doing things on his own and so he'd rather have price as a USP. Which is why even food is affordable(there's no room service): Rs 80-150 for the buffet.

Full house

course, a cheap meal isn't going to be enough to tempt guests to stay longer. And given its value-for-money pricing proposition, it is critical for Ginger to constantly push up occupancies.

Explains Mona Chhabra, vice-president, Ernst & Young, "Since it is a fixed price model and tariffs cannot be increased even if there is a sudden surge in demand, occupancies need to be high throughout the year."

There's another reason why Ginger needs to be able to display the "no vacancy" sign frequently: budget hotels can't depend too much on the food and beverages (F&B) segment to bring in revenues.

Margins on F&B are about a third of those for rooms because while the operating cost for rooms is low, the raw material cost for food is high. So while F&B would typically fetch over 20 per cent of revenues for a five-star chain and, in many cases, as much as 35 per cent, a budget hotel earns less than 15 per cent of its topline from F&B.

KPMG's daCunha believes that given the current shortage of rooms, Ginger can succeed with a fixed priced model. "However, in a downturn, they may want to work with a variable price model much like low-cost airlines do," she observes.

Pani reckons that occupanies need to average 70 per cent around the year for the hotels to make money and is pencilling in a 50 per cent gross margin a couple of years down the line, once costs are absorbed over a larger base.

In the right places

And that's why Ginger is targeting either smaller business centres like Tirupur or Durgapur or tourist destinations that attract visitors round the year. That is also why it has a property at Nashik, Maharashtra -- given its proximity to popular pilgrimage Shirdi -- but not Manali, which is deserted in the winter.

"We cannot afford to look at places where we don't clock 70 per cent occupancies through the year," agrees Pani. In fact, the Haridwar property, set up earlier this year as an experiment, hasn't been doing too well because the flow of tourists has been unexpectedly seasonal. On the other hand, Goa may bring in good returns since the state is beginning to see some serious business traffic.

Compare that strategy with Red Fox's. The chain plans to be in locations where it sees any kind of demand, even bigger cities like New Delhi. "We're simply looking at high-demand areas and if the real estate is too expensive, we don't mind being situated in the suburbs," explains Keswani.

If Red Fox is looking at location from a macro point of view, Ginger is taking the micro approach -- properties need to be close to the business district; metros and large cities are, therefore, out for the most part.

Even the choice of small town is determined by the level of potential demand -- Ginger hopes to tap demand in very small towns where a big corporate project may be planned. "Instead of the company having to build and run a guest house for its executives, executives can camp at the Ginger hotel," says Pani.

Getting real

The idea really is to try and minimise real estate costs, which as Krizm's Keswani points out, account for 50 per cent of the cost of a room in India compared with as little as 15 per cent overseas. Pani estimates that for the model to be viable, monthly lease rents need to be well within Rs 50 a square foot.

So Ginger is looking at ways to get around buying or leasing expensive property. For instance, it has decided to set up a hotel on the fourth and fifth floors of a mall in Ludhiana. While Ginger saves on real estate costs, the owners of the mall are able to use the space more efficiently.

Also, being located in a mall, Ginger needs to focus even less on food since the mall would most certainly have a food court. "We do make arrangements for food even when we're located in a mall, but mainly we will need to focus on breakfast," explains Pani.

The mall idea seems to be catching on -- Red Fox, too, has opted to build hotels on malls. But it is going a step further by first constructing a couple of malls and then selling them off, retaining just the top floors for the hotels.

Ginger is also working with public sector organisations such as Indian Railways (IR) to convert some of their properties into hotels -- the Rail Yatri Niwas in the capital will soon be turned into one. Ginger will run the hotel in return for a fee.

In addition, Pani plans on entering into management contracts with existing hoteliers who will use the Ginger brand and marketing network in return for a fixed fee or a revenue-sharing agreement.

Netting in customers

Real estate costs are just one worry. Given that room rates are extremely competitive so as to be within reach of the target audience, Ginger needs to rein in other costs, too. Since the chain caters to a tech-savvy crowd, Ginger believes it can increasingly sell a larger number of rooms online, thereby saving on commissions to travel agents.

Website sales are as high as 15 per cent in some places like Bangalore, and Pani believes that a higher share of website sales would not only bring down costs but would mean greater control over the inventory. Ginger is also getting into deals with corporates for block bookings and in some cities like Bhubhaneshwar, the bulk of the business has come via this route. Travel portals are next on the agenda.

Meanwhile, it's ensuring costs stay at the minimum at the properties, too. As the firm's television commercial (released in last month by creative agency Lowe) so humorously captured, there is no valet parking and no bell boys. That's no tips to fork out for the guest, and no salaries to pay for the hotel.

Since the spend on aesthetics need to be contained, all properties look more or less the same with standard rooms, corridors and lobbies. But that doesn't mean Ginger is cutting down on essentials. In fact, it is taking care to see that it provides everything that younger, tech-savvy travellers today need most -- what the hotel terms "smart basics".

That means a flat TV and Internet and Wifi connections in all rooms, an ATM on premises and a gym (swimming pools are too expensive). There's no room service but basic tea and coffee making apart, there's also a dial-a-meal facility: guests can order meals from local restaurants and collect them from the front desk. "Our brand stands for informality, simplicity and modernity," explains Pani.

The target guest is young, so Ginger needs to ensure it stays young and trendy, too. There's a Caf� Coffee Day on the premises at the Thiruvananthapuram property: a coffee shop that can theoretically stay open 24 hours helps improve visibility and draws in outsiders.

The Pune property has a lounge of sorts, with video games, but there are no bars yet. Since nearly 15-20 per cent of Ginger's clientele comprises foreigners, that's probably next on the to-do list.

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