So, how much of that has happened? The duo argues that these numbers have gone through a sea change since the last documents were filed. But neither is willing to comment on the split between OTAs or traffic generated from their own portals. The argument is that once the tipping point comes and customers start to discover and book hotels from the website, the negative take rate becomes positive, and with more demand, the revenue share with certain hotels increase.
And like every Indian internet company, there is a comparison with China to rely on.
How were the bookings done?
One of China’s biggest hotel chains, China Lodging Group, shows the way. It claims that almost 90% of its bookings came directly and just 10% came through OTAs. In the US, 2015 was the big tipping point when almost all bookings came through online travel agents. Things began to change soon after. The hotel brands and their owners have started spending heavily on brand building and driving traffic directly to the app and the website.
India is somewhere in the middle. Rajesh Magow, CEO, MMT says that about 10-15% of the country’s budget hotel market is organized. And of that, MMT and goibibo have a share of 54%.
“In India, about 75% of the bookings of budget hotels come through OTAs. It changes to 50% when it comes to starred hotel chains,” says Magow.
But directing traffic is not the only problem budget hotel chains face.
One of the sources of inspiration for most of the founders in this space was the perceived success of Lemon Tree and Ginger, the first wave of budget hotels in India. Lemon Tree is on its way to listing on the bourses. While the motivation is more or less right, there are two marked differences.
Knowing the business model
First, the business model is different. Lemon Tree signs a lease for up to 15 years and takes over everything in the hotel. The contracts signed by Treebo and Fab Hotels are much shorter. “These hotel chains will have to bring significant value-add to retain these hotels,” says Anil Madhok, founder, Sarovar Hotels and Resorts. If the chains lose these hotels, getting them back takes a significant amount of effort.
Because, essentially, these budget hotels now know exactly what is needed to list, sell, and demand a slight premium on their rooms on OTAs. “And as much as they [internet hotel chains] try, they can’t wish the OTAs away,” Madhok adds.
And the likes of MMT have started to see the results. “Smaller budget hotels have started to get rid of the chalta hai (yeah, whatever) attitude,” says Magow of MMT. He explains that hotels have realized they need to put in a little more effort into hygiene and upkeep.
Another key difference is the price point. Lemon Tree, for instance, has an average ticket price, according to hospitality analysts, of Rs 4,000 ($61). While Treebo and Fab Hotels are at Rs 2,000 ($31). The duo target totally different types of customers.
For Lemon Tree, there is scope to increase the price point if needed. “The budget hotel chains cannot. They are married to this price,” says Manav Thadani, chairman-APAC, HVS, a hospitality consulting firm headquartered in New York. These companies have gotten into this marriage for a single reason: to target customers who can’t afford to pay extra. There is very little scope to change the price point.
Another way hotels make money is by upselling. “For e-commerce companies, phones don’t bring in big margins but accessories do, so they try to sell those bundled with the phone,” says Sreedhar Prasad, partner, KPMG India. In this business model, there is nothing to upsell or bundle. Breakfast is usually tied in. If there is a laundry service, the money is made by the hotel owner.
But can this be overcome? Yes, and the answer is scale. “The bigger these chains become, the easier it will be to bargain down the commissions with OTAs. For some chains, these OTAs charge almost 30%. Those charges will have to be rationalized,” explains Madhok.