Indian Hotels takes online route to cut costs, drive growth

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Mumbai: Debt-laden Indian Hotels Co. Ltd, which runs the Taj chain of hotels, is planning to drive its sales through online platforms in a bid to reduce operational expenses and turn around its business.

Over the past one year, the Tata group firm has doubled investments to create its own digital platforms, aiming to earn half its revenue through online bookings in the next five years. The hotel chain has so far driven sales through traditional channels, direct marketing and through online travel agencies—a model it finds expensive. As of 31 March, the firm’s consolidated debt stood at Rs.4,386 crore.

“Last year, we got an approval from the board to make significant technology investment in building our own digital platforms. Earlier, the majority of the marketing and advertising budget was spent on offline and print, whereas we have changed that proportion quite a bit. Now, nearly 35-40% of the total marketing budget is spent online,” said Chinmai Sharma, chief revenue officer, Taj Hotels, Resorts and Palaces.

To be sure, prior to 2015, only about 15% of the total marketing budget was allocated to digital and online. In the past one year, the company has built a team of nine, including four managers, to oversee its digital initiatives. Last week, the company hired former Marriott Hotel director Prasad Iyer to head the digital team. It is now looking to add more specialists and experts in the digital space.

“In our current scenario, nearly 25% of our business is getting booked on the Internet. This includes (bookings) through our own websites and online travel agencies. Given the changing trend and especially in a market like India where technology and mobile phones are going through the roof, I would not be surprised if in the next five years, half of our business is booked online,” Sharma said, adding that acquiring customers is much cheaper online than through the traditional route and direct marketing.

Apart from revamping its own websites, the company is planning to launch a mobile app and relaunch most of its loyalty programmes to acquire more customers directly. “The other reason is because of the cost associated with the online travel agencies. The commissions charged by them are in the double digit. The more you build your digital platforms, the more people book directly; the cost of business continues to go down. So for every booking that I move from an online travel agent to my own channel, we save all the cost that we would have paid to the online travel agent,” he said.

According to analysts, online travel agents charge hotels around 10-35% in commission for every booking, which significantly impacts profit margins. “The cost of acquiring customers is just about 6% when hoteliers do it directly through their websites or apps. Plus having your own direct channels will help them study and understand the demand in a cost effective way. So your decision cost would be lesser,” said Sumant Kumar, equity research analyst, Elara Capital, a brokerage firm.

Indian Hotels’ focus on digital initiatives comes at a time when it is on a major debt-reduction drive. Over the last one year, the firm has exited from some of its properties. On 18 May, the firm informed stock exchanges that it plans to sell its US-based Taj Boston hotel for a base price of $125 million (about Rs.840 crore) as part of a plan to evaluate the “relevance of some of its existing assets in the portfolio to reduce leverage” and focus on growth in “high-margin markets”.

The restructuring plan along with a pickup in demand for hotel rooms in the past few months has helped it narrow its net loss to Rs.60.53 crore for the year ended 31 March fromRs.378.10 crore a year ago. Net sales rose 9.6% to Rs.4,590.92 crore.

“New hotels that are added have slowed down and demand is quite high. While supply is at about 4% and demand is growing by about 12%. This is a good sign because it will result in higher occupancy. The number of hotels that are being added in key markets has slowed down. Hopefully, this will translate into higher occupancy and pricing as well,” Sharma said.