MICROECONOMICS PROJECT REPORT

ON

“A Room For The Hotel Industry In Indian Economy”

Introduction

According to world travel and tourism council, India ranks 18th in business travel and in due course
of time , it will take one among the top 5 positions in the world. A rise of almost 80-85% in
occupancy rate is expected in the coming two years in comparison to the previous rate of 25%
growth. Revolution in Information technology, retail,real estate and telecom has contributed
significantly to the development of this industry.

Industry size 150000 room supply approx.

Geographical Distribution All across India

Output Almost 15% per year

Revenue growth 9-11%

There is a concrete classification of the different hotel types that exist in our country:
1)Heritage Hotels- These hotels are old mansions or buildings which primarily have a connection
with the royal families of India or have been established ages ago.
2)Luxury Hotels-These hotels focus on providing comfort and convenience to upper middle class
by way of investing in technology and other raw materials
3)Budget Hotels-These hotels focus on delivering shelter with comfort and these fall under the
affordable category.This sub sector is increasing in terms of growth in the recent times.
4)Resorts-These hotels act as tourist destinations since they incorporate a lot of infrastructural
amenities.

Industry leader of this segment have primarily been ,J.W. Marriott, Radisson Hotels, Taj Hotels,
Park Hotels and ITC. The hotel industry has a potential to generate employment opportunities. But
it also faces a threat of saturation since, it suffers from a lot of competition intrinsically. Even
though the chain of hotels covers whole India, there have been variations in growth in terms of
occupancy and rooms added. The NCR region did experience slow growth equivalent to
stagnation(1-2%) , whereas, in Mumbai, the growth was an astonishing 15% .

Objective

In the service sector, Hospitality industry has emerged as one of the key players.The growth of the
hospitality industry is mainly dependent upon tourism. In the recent times there has been a lot of
exciting development in the hospitality sector due to new emerging players, new consumer base, huge
inflow of foreign tourists and a few government policies.

The objective of our study is to analyse the Indian hospitality industry. Our focus area of studies are :

Emergence and growth of hospitality industry

1. Identifying the various factors which are driving the growth and those which are critical to the
industry.
2. To analyse the characteristics of the hospitality industry and determine the kind of market
based on level of competition.
3. To study pricing model of major key players in the segment.
4. To highlight the future challenges and possible solution with respect to hotel business in India
5. To understand the practical application of theoretical concepts learned in valuable sessions of
microeconomics

Evolution in the Industry

Booming tourism industry and a strong commitment from the Central and different State
governments in promoting tourism has resulted in huge growth of the hospitality industry. The
hospitality industry is expected to grow at 16% CAGR to reach 2,769 thousand crore by 2022. The
major drivers for the hospitality sectors are foreign tourist arrivals, domestic tourism, Business
travels and airline passengers. Between January - May 2018 the total foreign tourist arrivals have
already reached 4.48 million in comparison to a total of 10.77 million in 2017 reflecting a growth of
8.8% YOY. Due to the rising domestic income the number of domestic travellers increased by 13%.
Also, niche tourism like spiritual, medical and eco tourism are expected to create more demand in
the market.
In 2011 the government had allowed 100% FDI (51% direct) in this sector. This resulted in huge
investments from organisations like Hyatt, Marriott, Starwood, Accor etc. in building their
properties across India. Prior to this there was a shortage of supply in the sector. Hence, due to the
prices were higher.

But a huge paradigm shift happened with the advent of online hotel booking (makemytrip, yatra),
Technological startups (oyo room, airbnb) in the sector and 100% FDI through direct route (2015)
Though there was an increase in demand but the increase in supply was far greater this caused the
prices to drop. Both international and national players of the industry grew there inventory by
building more hotels. But the earlier unorganised sector of hotels i.e. budget hotels and premium
mid-market segment became organised with the advent of online booking websites and
technological startups. As a result of which consumers now had more options to choose from at the
same price hence the demand become elastic.
Some of the key government initiatives in this industry are National Tourist Policy & Swadesh
Bhaava which aims at developing tourist sites and encouraging domestic tourism. Campaign such
as Incredible India and Athithi Devo Bhava are present to harness the industry potential. These
initiatives mostly affected the demand side of the equation causing it to rise.

Structure

In the case of hotels, there are many firms each one offers something different and possesses an
element of uniqueness, but all are essentially competing for the same customers.
On the basis of following features and level of competition we will conclude the nature of market:

1. As we have seen that each hotel makes independent decisions about price and output, based
on its product and service and its costs of production.
2. Though the knowledge is widely spread and easily available, consumer does not usually
look at all the specifications before using the services of a hotel which makes knowledge
about the products/services unlikely to be perfect.
3. Also, we have seen that there is no particular barrier to entry or exit i.e. the participants
have freedom to enter or exit according to their preferability.
4. Lets notice the products and services that the hotel industry offers. Upon better
understanding we can conclude that hotels use features like bed-size, comfort, amenities,
gyms,spas, other features to make their product different.
5. Since, hospitality is a service industry the service offered differs from hotel to hotel and
thus they provide differentiated product not only by feature but also in the eyes of
consumer.

Because each hotel provide a unique product-service, it can charge a higher or lower price than
its rivals depending on its objective. The firm is a price ‘maker’ and not a price ‘taker’, though
the industry price may be a guideline, or become a constraint. This also means that the demand
curve will slope downwards. Hence, hotels are often in fierce competition with other
competitors, and may need to advertise on a regular basis, to let customers know their
differences.

Based on the above mentioned characteristics of a market , we can conclude that, as an economic
model of competition the more appropriate one which shows above mentioned features is
monopolistic competition.

 Monopolistically competitive firms are assumed to be profit maximisers because firms tend to
be small with entrepreneurs actively involved in managing the business.
 There are usually a large numbers of independent firms competing in the market.

Monopolistic competition
At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above
ATC at Q, supernormal profits are possible (area PABC). (fig. 1)
In the short run supernormal profits are possible, but in the long run new firms are attracted into the
industry, because of low barriers to entry, good knowledge and an opportunity to differentiate. As
new firms enter the market, demand for the existing firm’s products becomes more elastic and the
demand curve shifts to the left, driving down price. Eventually, all super-normal profits are eroded
away. New entrants continue until only normal profit is available (Fig. 2). At this point, firms have
reached their long run equilibrium.

From the above two graphs of short-term and Long-term cost curve,we can clearly state that the
firm benefits most when it is in its short run and will try to stay in the short run by innovating, and
further product differentiation.
Evaluation

The advantages of monopolistic competition

There are no significant barriers to entry; therefore markets are relatively

contestable.Differentiation creates diversity, choice and utility. For example, a typical high street in
any town will have a number of different restaurants from which to choose. The market is more
efficient than monopoly but less efficient than perfect competition - less allocatively and less
productively efficient. However, they may be dynamically efficient, innovative in terms of new
production processes or new products. For example, retailers often constantly have to develop new
ways to attract and retain local custom.

The disadvantages of monopolistic competition

Some differentiation does not create utility but generates unnecessary waste, such as excess
packaging. Advertising may also be considered wasteful, though most is informative rather than
persuasive. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency
in both the long and short run. This is because price is above marginal cost in both cases. In the
long run the firm is less allocatively inefficient, but it is still inefficient.

Inefficiency

The firm is allocatively and productively inefficient in both the long and short run.
There is a tendency for excess capacity because firms can never fully exploit their fixed factors
because mass production is difficult. This means they are productively inefficient in both the long
and short run. However, this is may be outweighed by the advantages of diversity and choice.

Performance of key players

In the luxury sector The Taj Group is the current market leader. It holds a strong market share
and has 84 Hotels spread across India. The Taj Group has three sub brands under it i.e. Taj,
Vivanta and Gateway. Last year, The Taj group has decided to consolidate Vivanta and Gateway
in one brand, using the brand proliferation strategy. The Taj Group revenues stood at Rs. 4,065
crores but suffered a loss of Rs. 63 crores. This loss is mainly attributed to low average pricing
due to high competition and high operating costs in comparison to it. The demand in the luxury
segment has also become elastic due to the competition.
The mid market refers to the two star and three star branded hotel chains. They target at upper
midscale segment catering to business and leisure guests accounts for 43% of all the branded
rooms available. The number of hotels has risen from a mere 6,000 hotels to 53,200 in the past 15
years. Also, the number of rooms available increased from 26,000 to 125,000 in the same time.
This has reflected in the performance of the key players in this segment. As per the BSE filling,
share of profit of Indian Hotels’ associates rose 53% amounting to Rs. 22.37 as compared to Rs.
14.58 crore recorded in the year ago period. The company is aiming high to achieve a revenue of
USD 100 million in the next two years driven by its mid-market and upscale properties and not
by the luxury hotel chain. One key move being scaling up the hotel Ginger brand from a mere 40
hotels to somewhere around 300 or 400 hotels. The Lemon Tree Hotels operates under three
brands: Lemon Tree premier - targeted primarily at upper midscale segment catering to business
and leisure guests, Lemon Tree Hotels - also targets to business and leisure guests who seek
convenient and cost effective experience and lastly, Red Fox by Lemon Tree Hotels - targeted
primarily at the economy hotels. As per the company, supply has grown comparatively lower
than demand in the recent years. As per the Horwath HTL report, supply grew at 8.4% between
FY14 and FY17, the demand has grown at 13.7%. During the same time period, the average
industry occupancy has moved from 58 % up to 65%.

Conclusion

Future Roadmap:
The positioning of hotels in India is currently hazy, where many hotels are witnessing clear
overlaps between the Tier 2 and Tier 3 hotels and then again between Tier 2 and Tier 1 hotels.
We anticipate the positioning to become sharper in the coming years, with each segment creating
a clear differentiation for itself in terms of the product as well as service. With many new entrants
in the market, the Hotel Industry is likely to become more susceptible to technology and
innovative disruptions to maintain the differentiation across segments.

Challenges:
As we analyse the hospitality industry, AirBnb and backpacker hostels have become a
substitutionary threat to hotels as all three are ultimately catering to the same consumer which
makes them at competition. Between September 2014 and August 2015, 4,80,000 hotel rooms
were booked whereas 2.8 million AirBnb rooms were booked. Around 450 million USD are lost
by hotels to AirBnb per year. This has enabled luxury and boutique hotels to increase their prices
due to increasing demands. Also, hostel accommodations are also gaining popularity over hotels
among younger generations interested in solo travel. Couchsurfing is preferred by foreign
travellers looking for a comfortable yet affordable stay for a few months. All these alternatives to
the hotel industry has led to a decrease in demand.
 References

1. Hotel development cost-trends in-India. Retrieved from

http:/www.hvs.com/article/4912/hoteldevelopment-cost-trends-in-india.

2. Market Structure analysis. Retrieved from

http://www.economicsonline.co.uk/Business_economics/Efficiency.html

3. Growth drivers and challenges in Indian hotel industry. Retrieved from

https://wwjmrd.com/upload/growth-drivers-and-challenges-in-indian-hotel-industry-
.pdf

4. Tourism & Hospitality Industry in India. Retrieved from

https://www.ibef.org/industry/tourism-hospitality-india.aspx

5. Business model innovation: Hotels' roadmap to 2020. Retrieved from

https://www.grantthornton.co.uk/globalassets/1.-member-firms/united-
kingdom/pdf/publication/2016/business-model-innovation-hotels-roadmap-to-
2020.pdf

6. Hotels Sector Analysis Report. Retrieved from

https://www.equitymaster.com/research-it/sector-info/hotels/Hotels-Sector-Analysis-
Report.asp
7. Key player analysis. Retrieved from
https://www.business-standard.com/article/companies/what-makes-mid-market-
hotels-the-star-of-india-s-hospitality-sector-118012500349_1.html

8. Pindyck, R.S. & Rubinfeld L.D. (1988). Microeconomics. Chennai: Pearson India.