23-26 February 2009, BIEC, Bengaluru Organized by Knowledge Partner Indian Hospitality Industry Outlook

Acknowledgement We are thankful to Confederation of Indian Industries (CII) for giving us the opportunity to be the Knowledge Partner for the International Hospitality Fair 2009 being organized at BIEC, Bengaluru from 2326 February 2009. We thank Mr. Gurpal Singh, Deputy Director General, CII and his team for making this effort successful. We would also like to express gratitude to the members of the Hospitality Industry for sharing their ideas and knowledge and making their important contribution in preparation of this report.

Contents Executive Summary 01 Chapter 1 Indian Hospitality Industry - Overview 02 Chapter 2 Indian Hotel Sector - Overview 03 Chapter 3 Indian Restaurant Sector - Overview 04 Chapter 4 Phases of the Indian Hospitality Industry 05 Chapter 5 Comparisons with Retail & Healthcare 07 Chapter 6 The Key Growth Drivers Regulatory External 08 Internal Chapter 7 The Key Emerging Trends Hotels Restaurant Technology 11 Chapter 8 The Key Challenges Regulatory External Internal 14 Chapter 9 The Key Opportunities 16 Chapter 10 Technopak Recommendations

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Indian Hospitality Industry Outlook Executive Summary Although many of us have been tourists at some point in our lives, defining what tourism actually is can be difficult. Tourism is the activities of persons traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business or other purposes. Tourism is a dynamic and competitive industry that requires the ability to constantly adapt to customers changing needs and desires, as the customer s satisfaction, safety and enjoyment are particularly the focus of tourism businesses. It is motivated by the natural urge of every human being for new experience, adventure, education and entertainment. The motivations for tourism also include social, religious and business interests. The spread of education has fostered a desire to know more about different parts of the globe. The basic human thirst for new experience and knowledge has become stronger, as technological advances are overcoming communication barriers. Progress in air transport and development of tourist facilities has encouraged people to venture out to the foreign lands. Tourism has the potential to stimulate other economic sectors through its backward and forward linkages and cross-sectoral synergies with sectors like agriculture, horticulture, poultry, handicrafts, transport, construction, etc. Expenditure on tourism induces a chain of transactions requiring supply of goods and services from these related sectors. The consumption demand, emanating from tourist expenditure, also induces more employment and generates a multiplier effect on the economy. As a result, additional income and employment opportunities are generated through such linkages. Thus, the expansion of the tourism sector can lead to large-scale employment generation and poverty alleviation. The economic benefits that flow into the economy through growth of tourism in the shape of increased national and State revenues, business receipts, employment, wages and salary, buoyancy in central, state and local tax receipts can contribute towards overall socio-economic improvement and accelerated growth in the economy. As the world economy slips into recession hitting the demand hard and the banking sector takes conservative approach towards lending to corporate sector, the GDP growth forecast for India has been downgraded to 7.1 per cent for 2008-09 and predicted to be 6.5 per cent for FY 2009-10 Global financial crisis has started to take its toll on the service sector. According to 81 per cent of the surveyed CEOs in a study, the sector which recorded an average growth rate of 10.7 per cent in last three years is expected to deteriorate down to below the 9 per cent growth rate mark. Paring under the current crisis; the service sector - real estate, aviation, financial services, hotels and tourism are expected to go in a slowdown further while telecommunication and railway transportation are expected to grow at decent pace. Ministry of Tourism compiles monthly estimates of Foreign Tourist Arrivals (FTAs) and Foreign Exchange Earnings (FEE) on the basis of data

received from major airports. Following are the important highlights as regards these two important indicators of tourism sector. Foreign Tourist Arrivals (FTAs) to India: FTAs during the year 2008 were 5.37 million as compared to FTAs of 5.08 million during the year 2007. Therefore, in spite of global financial meltdown and terrorist activities, number of FTAs has increased in 2008 as compared to 2007. UNWTO has predicted a growth rate of 2-3% for international tourist arrivals in the world during 2008. Therefore, the Indian Scenario (growth rate of 5.6%) is much better than the world scenario. The number of FTAs in December 2008 has risen to 5.22 lakhs as compared to 5.21 lakhs in November 2008. Foreign Exchange Earnings (FEE) from Tourism in Indian rupee terms and US $ terms FEE during the year 2008 were Rs. 50730 crore as compared to Rs. 44360 crore in 2007. FEE in US $ terms during for the year 2008 were US $ 11747 million as compared to FEE of US $ 10729 during 2007. The lower growth rate in 2008 as compared to 2007 may be mainly due to lower growth rate of FTAs in 2008 as compared to 2007 and exchange rate variation. FEE from tourism in December 2008 were Rs. 5083 crore as compared to Rs. 4935 crore in November 2008 and Rs. 5079 crore in December 2007. FEE in US $ terms during the year 2008 were US $ 1046 million as compared to US $ 1005 million in November 2008 and US $ 1287 million in December 2007. The decline in the FEE in US $ term during December 2008 vis--vis December 2007 is mainly due to the foreign exchange variations in these months. The Hospitality Outlook report by Technopak aims to look at the Indian Hospitality industry with a different viewpoint. It identifies the growth drivers & the challenges the industry faces and at the same time highlights the opportunities that exist. A significant contribution has been made towards identifying key trends that will drive the industry in near future. Technopak uses its vast experience in this sector to put on board the key recommendations that the industry professionals and key policy decision makers might consider over a period of time. 1

Indian Hospitality Industry Outlook Indian Hospitality Industry Overview Chapter 1 For the purpose of this report, the Indian hospitality market refers to hotels & eating out demand by Indians, which consists of the domestic travel market (Indians travelling in India) and the inbound travel market (foreigners travelling in India). The size of the Indian hospitality industry is estimated as a sum of revenues of the two segments. The revenues generated from travelers for all purposes such as business, leisure, Visiting Friends and Relatives (VFR), religious, meetings and conferences make up the market considering they are using hotels during their stay and similarly the revenue generated by the consumers while they are eating out at any form of outlet Restaurants, fine dining, Quick Service Restaurants (QSRs), Takeaways, Dhabas or any other form of unorganized sector. Furthermore, we have based our valuations on the spending of Indian travel consumers on accommodation, food & beverage, expenses towards minor operating departments like Telephones, Laundry & Car Rental. We have estimated the overall market size using a mix of demand-supply approaches. To estimate the overall market size in India, we have calculated the value of the different star category hotels in the country and to validate the estimations, the demand side approach has been used at an overall level. We have also adopted expense side approaches to estimate the market size for Eating Outs. The Indian Hospitality Industry is one of the fastest growing sectors of the Indian economy. Riding on the economic growth and rising income levels that India has been experiencing in the past few years, it has emerged as one of the key sectors driving the country s economy. Currently its market size is USD 23 billion, accounting for 2.2% of the GDP. Key Market Facts: For the purpose of this report, we have considered the consumption of Hotel services by Indian & Foreign consumers. However, for the spending on food & beverage at eating outlets only the Indian Consumer has been considered. The disposable income of Indians is on the rise. An average increase in household income, with more and more double income households in the urban areas, is also contributing to this phenomenon. According to National Council for Applied Economic Research (NCAER) estimates, there are 56 million people in households earning USD$4,400- US$21,800 a year, which is defined as the middle class. The upper middle and high-income urban households were estimated to have grown to 38.2 million in 2007 from 14.6 million in 2000. India topped the 2006 AT Kearney Global Retail Development Index. This is indicative of a rise in spending on consumer durables, electronics, clothes, entertainment, vacations and lifestyle products. Vacations have emerged as the top priority for disposing of extra money. Compared to 2002, Indians are now spending 30-35% more on their holidays. We have used a bottom-up approach to arrive at the total market size. The hotel market is segmented into star categories. We have

used a two-pronged approach comprising of primary and secondary research. The primary research involved extensive in-depth interviews with over 35,000 consumers in India to understand their spending pattern on food & beverage and discussions with other relevant industry experts and panel members across the different sectors to understand the market size of Hotels in India and the growth factors. Within the hospitality industry, there are a number of key industries; prominent amongst them are hotels and restaurants, each of which has witnessed a surge in their growth over the past few years. This paper is an attempt to present key facts and figures pertaining to these industries. Gross Domestic Product USD 1050 Billion Hospitality Market Size USD 23 BillionContributes 2.2% to GDP Source: Technopak Analysis and Economic Survey of India 2

Indian Hospitality Industry Outlook Chapter 2 Indian Hotel Sector - Overview As per an analysis by the Economy Survey of India and Technopak (2008), the Hotel industry is a USD 17 Billion industry. Of this, 70% (USD 11.85 Billion) contribution comes from the unorganized sector and the remaining 30% (USD 5.08 Billion) comes from the organized Organisedmarket, 30% Unorganisedmarket, 70% Source: Technopak Analysis Market Size & Projections* 0 5 10 15 20 25 30 35 40 USD Bn 2008 2009 2013 2018 16.7 14.7 30.7 35.7 * Overall market size (organised & unorganised) 1-2 Star 3 Star 4 Star 5 Star Unorganised sector. A break up of the organized hotel industry indicates that the foremost contribution is coming from 5 star rated hotels. Despite a dip in the year 2009, an upward trend in growth of overall Hotel Industry is further expected, whereby it is expected to grow to USD 36 Billion by 2018. On the demand side, over the past few years there has been a consistent increase in the number of hotel rooms which is close to 5 % in the last 3-4 years. However the rate of increase is still not enough to meet the rising demand, and requires further investment in this sector to meet the increased demand. The investment scenario however looks positive. The Hospitality sector is expected to see an estimated investment of USD 12.17 billion in the next 2 years, and an addition of

over 20 new international hotel brands by 2011. Breakup of Organised Market (2008) 3 Star (USD Bn) 0.6 12% 5 Star (USD Bn) 2&1 Star (USD Bn) 2.9 1.1 58% 22% 4 Star (USD Bn) 0.4 8% Source: Technopak Analysis, Industry Reports 3

Indian Hospitality Industry Outlook Chapter 3 Indian Restaurant Sector - Overview The Indian Restaurant sector is a USD 6 billion industry and is expected to be a USD 10 billion market by 2018. As high as 90% of the industry is unorganized and the remaining 10% is organized and is more of a metro urban p henomenon. Despite slow down, the unorganized sector is expected to grow at 5% plus through until 2011. The organized sector is in fact expected to grow faster, at 20% - 25%. Market Size & Projections* 2008 2009 2013 2018 * Overall market size (organised & unorganised) Within restaurant category, quick service restaurants (QSRs) will flourish furth er. Along with the entry of new international brands transactional QSRs are expanding their presence in the country. Caf Coffee Day, Domino s Pizza, K FC are some examples, with each having further expansion plan. USD BnOrganisedUnorganised5.86.88.19.6024681012 QSRs No. of Outlets Expansion Plans Caf Coffee Day 718 20-25 cafes every month Domino s Pizza 220 300 outlets by 2010-11 Barista 189 300 outlets by 2009 McDonalds 155 205 outlets by Dec-09 Pizza Hut 137 175 outlets by 2010 US Pizza 60 500 outlets by 2011 Nirula's 60 140 outlets by 2010 KFC 59 1000 outlets by 2014 Costa Coffee 43 75 outlets by 2009 Yo-China 30 200 outlets by 2009 Total 1671 * As of January 2009 4

Indian Hospitality Industry Outlook Chapter 4 Phases of the Indian Hospitality Industry A look at the hospitality industry over a period of time will indicate a shift in focus. Looking at the past one will indeed realize that the hospitality industry is the first one to enter recession and the last to come out of it. What it indicates is that Hospitality Economics is kind of an indicator of the overall economy of the country. Any recession or downturn first affects the travel and hotel budgets of companies & the vacation plans of the leisure traveler. Overall the growth story started in the 80 s when the development of various hotels kicked off for the Asiad Games in New Delhi. But it s not just the development that has happened over a period of 3 decades. Hotel industry in the past used to be polarized into two extremes Luxury hotels on one end and unclassified hotels on the other. But now there has been an emergence of mid segment chains of hotels, which has kind of revolutionized the industry. This is especially keeping in mind the budget travelers. Geographically, while initially the focus was very metro centric, the shift is now towards Tier 2 and 3 towns and cities. In future there will be more multi tourism in the offing, spanning different geographies. In terms of operational aspects, there has been a shift from ownership and franchise model to handing out management contracts. Technopak does an attempt to look at various aspects of this lifecycle and has classified the same as follows: OPERATING MODEL Phase III 2010 - 2020 Phase II 2002 - 2010 Management models to continue Phase I 1991 - 2001 Ownership & franchise model Emergence of management contracts Sarovar Hotels was master franchisee for Carlson Hospitality Shift towards management contracts Carlson Hospitality now has management tie-ups. IHG is also moving to only management contracts GEOGRAPHIC PENETRATION Phase III 2010 - 2020 Phase II 2002 - 2010 Phase I 1991 - 2001 Tier I cities & famous tourist destinations

Focus only on markets in Delhi, Mumbai, Hyderabad, Bangalore & Chennai Tier II & III cities Promotion of Gateway Cities Only ~27% hotels approved in Tier 1 cities Tier II & III cities Promotion of Gateway Cities Only ~27% hotels approved in Tier 1 cities PROPOSITION Phase III 2010 - 2020 Phase II 2002 - 2010 Phase I 1991 - 2001 Luxury hotels on one end and unclassified hotels on the other Emergence & growth of individual profit centers* Entry of mid-segment chains Taj Group has entered into mid-segment hotels with its Ginger brand Growth of established budget brands for a long term Hilton International plans to introduce mid-segment business brands like Hilton Garden Inns, Hampton Inns and Scandic 5

Indian Hospitality Industry Outlook Chapter 4 Phases of the Indian Hospitality Industry Strategic focus and investment requirements There have also been changes in their strategic focus as well as investment requirements. Some of the key highlights are as below. STRATEGIC FOCUS Phase III 2010 - 2020 Phase II 2002 - 2010 Phase I 1991 - 2001 Revenue growth & maximization Customer acquisition Identifying untapped customer segments Focus on CRM Business diversification Addition of new capacity Reliance Industries, UB Group ventures into hospitality Customer retention Business diversification Loyalty Factor The Tier II and III cities started attracting the eye of a business traveler. While the aggressive and rapid expansion started pushing the real estate costs up, it affected infrastructure development, new businesses and at the same time new hotel projects. The growing economy did bring into limelight the advantages that a Tier II & III city had to offer in-terms of lower costs and the more friendly nature the state boards acquired to boost this much wanted development. This saw expansion of existing brands to have a budget segment / mid-market hotel brand to offer and at the same time various new entrants into the business that realized the potential. The investment needs for this cycle were achieved by both conventional means and at the same time by forms of Joint Ventures and Private Equity investments. Existing players in diverse fields ventured into hospitality to take advantage of their brand equity. INVESTMENT NEEDS Phase III 2010 - 2020 Phase II 2002 - 2010 Phase I 1991 - 2001 Funded by conventional methods JVs and tie-ups with international brands JVs with engineering, construction, real estate companies, PE firms Acquisitions Emaar MGF & Accor group, HCC group (lavasa)

Refurbishments & Expansions under Brands While the first phase of business in 90s saw an aggressive expansion in the 5 star hotel segment, it also saw various franchise and hotel management companies (HMC) that came into the business. The metros were the most sought after destinations as this is where the development and growth was happening in terms of infrastructure and business. This also lead to a creation of a big gap in the mid market segment as the organized sector had nothing to offer in this league. The hotel companies moved towards revenue growths on year on year basis and took advantage of the imbalance. The value of land towards a hotel project stood at 5-10% of the overall project cost in metros till such times and the debt was primarily raised through conventional methods of approaching banks or Tourism Finance Corporation of India Ltd (TFCI) that was set up on the recommendations of Planning Commission in 1989. While the next decade saw a shift of ownership model towards HMC, considering that the new brand entrants into the business had by then made some ground in the country and were on an expansion spree, the development was also sought after in the gap that was created in the first half of the cycle. The following year s post 2010 however, will see a rebound of the first phase. While the growth of budget brands will continue, as that has been regarded as the long term area of growth potential, the industry will see a lot of consolidation. The over 65% unorganized sector is bound to go through a phase of identification evaluation selection wherein the franchisee partner is bound to have its flag hoisted once the evaluation criteria is passed. The industry is also expected to be matured by this time. 6

Indian Hospitality Industry Outlook Chapter 5 Comparisons with Retail & Healthcare Hospitality sector which is currently contributing 2.2% of the GDP is expected to grow at 6.6%, as compared to retail industry, which despite its high contribution of 35.3% to the GDP, is expected to witness a growth, which is marginally higher than hospitality sector, at 8%. This makes the hospitality sector as lucrative from investment point of view, as the retail industry. Hospitality Retail 50 CAGR 6% 1000 42.07 38.98 40 800 Y2008 Y2013 368 552 Y2018 772 CAGR 8% 10 Y2008 23 Y2018 Y2013 USD Bn 200 0 0 Healthcare 150 CAGR 15% 136 30 600 20 400

100 room rate (ADR) growth of 40% reported in Delhi/NCR and Mumbai, and almost 20% growth in Bangalore. However, such growth levels are not sustainable over the short term & long term as room rates are expected to adjust to more realistic levels as new supply come online and the terror attacks and the global meltdown impacts the industry as a whole. By virtue of first hand feedback from industry experts and its inhouse experience, Technopak is projecting an immediate correction of approximately 10% in the occupancy figures and that will be accompanied by 12-14% correction in the ADR. With these de-growth figures for the coming year, the RevPAR is expected to be down by USD Bn USD Bn 21% for the next financial year. Technopak however looks at the correction in average rates as much required. The great Indian imbalance between Demand & Supply had pushed the ADRs to great heights. This along with the extremely high tax structure did position the country to be as one of the most expensive tourist destinations. While the business travel was limited to key metro cities and did happen because of the great & promising growth potential the country has to offer, the leisure destinations and Meetings-Incentives-Conference-Exhibitions (MICE) business was getting effected to a large extent. The flip side of the story was the fact that the same hotels went down by over 40-45% in ADRs during the off seasons (primarily the summers) This correction hence is looked at as a silver lining to the long term growth vision of the country. It will certainly make the destination much more viable to travel and will put in a fresh lease of life even in the current times of global meltdown. Overall the long term view is positive and the occupancies and ADR is expected to make a positive Sector GDP Contribution CAGR Retail ~35.3% 7.6% Healthcare ~3.2% 15.0% Hospitality ~2.2% 6.1% 34 68 Y2018 Y2013 Y2008 50 0 leap from FY 2010-2011.

Source: Technopak Analysis (Healthcare Excludes Pharma Sector) The medium to long term view of fundamentals are very promising. In a global context, given the size of the economy, the population and the future potential of India as a tourist destination, the demand fundamentals are very good. Technopak expects that continued economic growth, increased interest in the Indian markets and improved international access, combined with the modernization of major airports, will boost inbound travel in India. The long-term demand for India will mean that the country requires a lot more hotels to service that future demand. With a current supply of just under 100,000 rooms, stifled stock growth over the last five years is leading to a demand-supply crunch. Based on the government target for 2010, India will need to add at least 150,000 new rooms in the next four years. The total known supply in the pipeline for major Indian cities (as of March 2008) through to 2011 currently stands at just over 29,000 A comparison of EBITDA of top three performers within hospitality, retail and healthcare industry indicate that the hotel industry is infact well placed. This only goes to corroborate the fact that investment in the hospitality sector, might well bring in higher returns, in comparison to the other two sectors. Hospitality Retail 0.17 USD BnUSD Bn0.070.040.030.030.11 IHCL EIH LEELA Shoppers Pantaloon Vishal Stop Retail Retail USD Bn rooms and some of this supply will be delayed given the turmoil in Healthcare the global financial markets. 0.04 The hotel investment market in India will see an increase in volume going forward. Historically, very few operating assets have transacted

in the market, and currently most investment opportunities are in assets being developed, however, the future will be different as the 0.01 0.01 market matures During FY2006-2007 and FY 2007-2008, the five-star deluxe and five-Apollo Wockhardt Fortis star hotel segment in key Indian cities recorded strong growth in Source: Annual Reports, Wockhardt figures for FY 2007 revenue per available room (RevPAR) with year-on-year average daily 7

The hospitality sector requires over USD 10 Billion next two to three years for which the government is well, in-line with the past investment trends. Source: RBI, Industry Reports, JLL Report 2008 Non Hospitality Hospitality 1.56 98.44 The hospitality sector requires over USD 10 Billion next two to three years for which the government is well, in-line with the past investment trends. Source: RBI, Industry Reports, JLL Report 2008 Non Hospitality Hospitality 1.56 98.44 Indian Hospitality Industry Outlook

investment in the relying on FDI as

investment in the relying on FDI as

Chapter 6 Key Growth Drivers The burgeoning growth of India s hospitality industry can be attributed New Product Development to a number of factors which may be broadly classified as below. A concept which is popular abroad and is fast catching up in India is the bed and breakfast concept. In adherence to this, the Government of India is recognizing spare rooms available with various house Internal Growth Drivers External Growth Drivers Regulatory Growth Drivers Policy incentives and amendments Tax incentives New product development Rising GDP FDI Inow Increasing domestic and international arrivals Changing consumer dynamics Demand supply imbalance New entrants in the sector owners by classifying these facilities as the Incredible India Bed and Breakfast Establishments , under Gold or Silver category In context to the development of tourism in the country, rural areas hold great potential and the Ministry of Tourism has tied up with the United Nations Development Program (UNDP) to promote rural tourism. The Ministry has also sanctioned 102 rural tourism infrastructure projects to spread tourism and socio economic benefits to identified rural sites with tourism potential. Further the Tourism Ministry is planning to permit the issuance of visaon-arrival by 2009 (from specific countries under pilot project) in an effort to foster tourism in the country. hotels and resorts, recreational facilities and city and regional level 2500 infrastructure. Further, there has been a reduction of expenditure tax

2000 for upscale hotels. A new form of tourism fast catching up is medical tourism, and the 783105014872135 USD Bn 1500 1000 Government of India has introduced a new category of visa 500 Visa (M -Visa), which can be given for specific purpose to foreign 0 tourists coming into India. Source: RBI, Industry Reports, JLL Report 2008 To give a boost to the hospitality industry at the central and the state level, several number of incentives have been announced at the 2. FDI Inflow Central as well as the State level. Of the total FDI inflow between 2000 and 200 8, the hospitality sector Incentives at Central Level Incentives at State Level has contributed 1.56% of the total inflow, amounting to USD 1.07 Y2003 Y2008 Y2013 Y2018 Billion. Elimination of Customs Duty for Import of raw materials, equipment, liquor etc Capital subsidy program for budget hotels Fringe Benefit Tax exempted on crche, employee sports, guest house facilities Five year income tax holiday granted to 2-4star hotels established in specified districts having UNESCO-declared 'World Heritage Sites' Exemption of Luxury Tax and Sales Tax for 5-7 Years for new Projects Small capital subsidy for the development of budget hotels Below market rate allotment of land controlled by State for development projects Five year income tax holiday for 2-4 star hotels and convention centers (minimum seating 3,000 people) in NCR Medical

In order to increase Built-up area in Delhi, zonal auction rate has been brought down 8 Regulatory Growth Drivers Policy & Tax Incentives and Amendments The Department of Tourism, Government of India has initiated a number of steps to ensure full utilization of the potential which tourism holds in India. As of date the Government is allowing foreign direct investment (FDI) in all construction development projects including construction of External Growth Drivers 1. Rising GDP Overall there has been a positive growth of the India economy with a growth rate of 9.6% and 9% in 2006-07 and 2007-08 respectively. Despite slowdown, the GDP growth for 2008-09 is projected at 7.1%. The hospitality sector is expected to contribute up to 2.2% to the GDP.

Indian Hospitality Industry Outlook Chapter 6 Key Growth Drivers 3. Changing Consumer Dynamics & Ease of Finance Nominal per capita income growth averaged around 7.3%, which was higher than the average inflation rate of 5.1% during 2004-08 Household Income Number of Households Aggregate disposable Income Bracket INR 000 Figs in Mn INR, Trillion Globals (>1,000) 2 Strivers (500-1,000) 1.6 Seekers (200-500) Aspirers (90-200) Deprived (1,000) 3.3 6.3 Strivers (500-1,000) 5.5 3.8 Seekers (200-500) Aspirers (90-200) Deprived (1,000) 9.5 21.7 Strivers (500-1,000) 33.1 20.9 Seekers (200-500) Aspirers (90-200) Deprived (