We plan to take Lemon Tree public by 2013 and become the largest hotel company in India

We plan to take Lemon Tree public by 2013 and become the largest hotel company in India

In an exclusive Interview with India Hospitality Review, Patu Keswani talks about his plans to become one of the dominant players in the mid-market segment in India.

What was the objective behind entering the mid-market segment?

In 2002 when we entered the mid-market segment, my view was that India, at that stage, had only national chains in the luxury space (the top segment) and guest houses at the bottom. There was a mid-market (segment) that nobody had really explored for which there were various reasons: the high cost of land, high cost of debt, and the fact that most chains were building only luxury hotels.

So, the first hotel I built was a two and a half star budget hotel wherein I was looking at current users of guest houses and five star hotels. However, we found that the five-star users wanted a better product and the guest house users (the mid-market) found it too expensive. Therefore, we had to change the brand standards and create Lemon Tree that became an upscale hotel and, to cater to the guest-house users, I had to create a new company, a new brand, called Red Fox.

How has the progress of Lemon Tree been so far?

We are the largest hotel company in the upscale space. We own 15 per cent of all rooms in the upscale space in India. Red Fox is also growing very rapidly. Currently, I am told, we are the fourth largest hotel company in India.  We operate about 2000 owned rooms while we are building a little less than 2000 by 2013 – all of which are under construction.

At the time when I take Lemon Tree and Red Fox public, they will be one company. I am merging the two. We will have close to 4000 rooms ready and maybe another 3000 in the pipeline. At that point, we'll be the second largest (hotel company) in India; and it would be the perfect time for us to go public. Most likely, we will also be one of the dominant players in the mid-space in India.

You planned to open around 20 hotels and five Red Fox by 2011. What is the status quo?

We have 18 hotels. We are planning to add 8 more - Three Red Foxes and five Lemon Trees by 2013 and they are all under construction.

How is the economical aspect so integral to your hotel projects?

We wished to be the best in cost. The two things we focused on were service levels and cost of setting up hotels per room and operating them. Since that was our entire focus, we were reasonably successful. That also gave us the ability to price ourselves at half of the competition, that is five star hotels and do much higher occupancies.

Typically, while a five star hotel goes for Rs 10,000 (average price per room) and 60 per cent occupancy, we would price ourselves at Rs 5000 and do 70 per cent occupancy. That's how we could do better on the occupancy front.

We design our hotels to make money on such a basis that when the market comes down, we were able to drop our prices and still do good business. Our model was proven in bad years and not only the good ones. In the good years, a five star hotel can take its price anywhere, I can't. In the bad and average years, we did very well and that's why we grew.  We are continuing to grow very rapidly.

What are the challenges of operating in the mid-scale segment?

One challenge is the high cost of land. The second is the lack of people which we are trying to sort out by getting into training and education, which is now on way. The third is that there is still irrational pricing in the market. While there is demand, the expectations of the customers for lower prices have heightened and therefore, realizations are down. Interest costs and inflation is taking our costs up and customers' expectations are driving our price down. It is not a comfortable place to be in.

What are the future plans of Lemon Tree?

I plan to take the company public by 2013 and hope in the next 6-7 years we become the largest hotel company in India.

Which geographies do you plan to expand in over the next 2 years?

All India. I am hungry for the rest of India. We are already in 14 cities. By 2013, we'll be in 16 cities i.e. when we open our next set of hotels. We have actually looked at 54 cities for Lemon Tree and 144 upto tier IV cities for Red Fox.

Are you planning to chalk out newer avenues or formats other than hotels?

We are looking at it. We might expand on our popular brand Republic of Noodles but it is not our main focus. Our main focus is to build our hotels. Second is to set up a separate company which is into affordable housing and third focus is expanding our education and employability skilling company.

Many hospitality players are venturing into the mid-scale market. How do you see the competition?

I feel supply will create demand. It is a good thing because Indian consumers need more choices.

Would it not be difficult to beat the competition in the long run?

If I am efficient, I will. If I am not, I will die. Simple!

How integral is employee satisfaction to the success of a company?

When a hotel company hits a certain size, especially when it is promoter-driven like mine is, you lose touch with people and nobody really wants to feel like a cog in a way. Therefore, our big focus was on the culture of caring for our employees. My employees are my guests and I try to reinforce that in every way I can. If our employees need any help, we are there. We are very focused on their learning, development and career progression.

Also, about 800 people in Lemon Tree are employees who also have shares in the company. We have come out as the top hundred best places to work and, according to Hewitt, we are a high performing company. Our caring approach has come out most beneficially in our customer-service. We have the highest percentage of repeat customers. Over 35 per cent of our customers are repeat customers to our chain.

How are you strategizing the recruitments for your hotels? Are there any retrenchments around this time?

We have never laid-off any employee. We are growing very fast and over the last five years have grown around 60 per cent. Thus, we constantly need more and more employees; and as far as possible, we recruit internally. We constantly recruit people at the entry level.

My problem therefore is not in giving opportunities to people; I have enough of them. My problem is getting the right people at the entry level which is a major issue for us.

How many differently-abled people are you planning to hire in the next few years?

We have around 140 as of now. We are planning to hire another 360 in the next three years.

What inclusive measures are you planning to undertake to further enhance your social goodwill?

We are hiring differently-abled people like the deaf and dumb; 6 per cent in our company are deaf and dumb and by 2013 they would be 10 per cent.

We are also the largest buyers and supporters of tribal art from Bastar in Madhya Pradesh. A few thousand people get their livelihood from what we buy. We buy hundreds of art pieces, sculptures, etc., every few months.

We also support various NGOs whether through providing material to them or through access to our facilities and so on. However, our major focus has been on the deaf and dumb and tribal art.

How according to you, has the hospitality sector in India evolved over the last few years?

The industry has become a lot more mature. When I started Lemon Tree there were only five-star chains and guest-rooms. Now there are lots of inter-mediate players. Several international brands have also come in. Also, a lot of Indian brands are trying to create a space for themselves. So the hospitality industry has become far more segmented. The hospitality industry has become far more segmented like the car market where you have a car for every segment of society.

What are your expectations from the government with respect to the hotel industry?

Today the government has become an active disabler. It is now finding ways not to help. Earlier they would neither help you nor hurt you but today, the way the approval process is moving, it is actually hurting the industry.