The Hindu Business Line : Leveraging the Sarovar brand

It has been a landmark year for Sarovar hotels as it has moved from managing establishments to acquiring its own. Kickstarting a branding exercise for itself, the hotel management company is today gearing up to take its brand overseas and re-branding its existing and future properties.

Beginning as a master franchise to the Carlson Group brands of Park Plaza and Park Inn, Sarovar has now added three new brands to its portfolio: Sarovar Premier (domestic 5-star brand), Sarovar Portico (domestic 3-4-star brand) and Hometel (a 3-star no-frills budget brand). Continuing with its management contracts, Sarovar will now bring in its own brands at the existing properties and at the same time acquire new ones to unveil its branding exercise.

But it will mainly be its budget brand, Hometel, which will be used for its acquired properties while the rest of the managed properties would continue to get converted to the rest of the brands.

“We intend investing Rs 20 crore in each property. We intend doing 6-7 hotels of our own. Most of them are likely to be under the Hometel brand and some under Portico,” states Anil Madhok, Managing Director, Sarovar Hotels.

With enough cash reserves, the company does not intend borrowing from the market immediately. “We don’t need to go to the market as we already have reserves to own these properties,” adds Madhok, keeping in mind the vagaries of real estate prices. But in 2005 Sarovar Hotels had raised Rs 38 crore ($8.5 million) from two global private equity firms - Bessemer Venture Partners Trust (an affiliate of Bessemer Venture Partners) and New Vernon Private Equity Ltd.

Sarovar, which currently manages 35 hotels and resorts, will use the financing to fund Hometel, its new budget hotel concept. Along with internal reserves and debt, Sarovar plans to invest Rs 200 crore ($44 million) to develop the Hometel concept across India and acquire properties.

Says Homi Aibara, Partner, Mahajan & Aibara (specialists in hospitality, retail and real estate), who were the sole advisors to the transaction), “The company has been cautious about spending the money it has raised. It’s easy to talk about these projects but buying and implementing them will be the main challenge.”

While Sarovar’s first owned property at Indore is ready, three more are coming up in Chennai and a single one has been planned at Chandigarh. Other properties are likely to get acquired in smaller towns such as Vadodara, Ahmedabad and Raipur where its budget brand, Hometel, is expected to come up. Explaining his decision to own the hotels, Madhok says, “In a management contract somebody else owns the assets and most of the revenues go to the owner while we earn a percentage of the fee. Typically we charge 7-8 per cent of the gross revenue of such hotels whose turnover may be over Rs 500 crore. In that sense, our turnover is not that huge.” Branding its hotels and resorts will be a new business proposition as Sarovar will now be able to charge a value for its brand in the case of the existing hotels which are being managed by the company.

In fact, all this while, it was Sarovar hotels which has been paying a fair amount of money for using the Carlson brands in the country. “Now the Sarovar brand belongs to us and will apply to all the new hotels that we would be launching. All this time we were paying a fair amount of money for the use of the Carlson brands but now we will also be able to charge a fee for the brands created by us since the Sarovar brand belongs to us,” says Madhok, for whom the majority of the properties will continue to be managed with a mere ten per cent of the properties being owned by the hotel chain.

In the domestic market, Sarovar will continue to be the master franchisee for the Carlson brands of Park Inn and Park Plaza. Not fearing any immediate direct competition for its budget and premium brands, Sarovar expects to stay away from the luxury segment already dominated by the big chains. As Madhok claims, “We are not in the super luxury segment while in the budget segment there are still not may organised players.” Operating at a slight premium to Indian Hotels’ Ginger brand (Rs 2,000 per night) for its Hometel hotels, the company does not believe in being competitively priced to have an edge in the business.

“There are costs involved and I have to maintain a certain level of service. We have to pump in substantial money every year to maintain these hotels and I don’t believe in selling our rooms at less than Rs 1,000.”

At the same time, Sarovar does not want to go on an overdrive across the country to launch its hotels. Saturated markets with little potential for more hotels have to be kept in mind. Warns Madhok,

“I would be careful in cities such as Bangalore, Hyderabad and Pune where there may be price corrections as there is an oversupply of hotels.”

Sarovar has a couple of management contracts in these cities but is wary of launching its own hotels in such markets. As it extends its properties across India with almost 30 hotels planned with the new Sarovar brands, scaling its operations beyond the country is also being explored.

Targeting new markets such as West Asia, Africa and the Far East, Sarovar Hotels expects to enter into management contracts rather than set up its own hotels. “Ownership will only happen in the domestic market while in the overseas markets we are looking at management contracts. But first I have to build my brands,” says Madhok.

Meanwhile, there is competition creeping up in the budget segment where Sarovar is expected to have a major presence. Big chains such as Accor Group, Marriott and Hilton have already lined up their budget hotel brands. But Madhok is not perturbed, given his years of experience with the Oberoi Group.

“There are going to be enough budget brands in the country. But competition only helps,” says Madhok, who already has the experience of implementing several projects. In fact, his implementation strategies and skills are being held in high regard from consultants who have helped him raise money for his projects.

“Madhok has enough implementation capabilities and that will see him through,” says Homia Aibara. Expecting each of his newly-owned properties to break even within their first year, Madhok is targeting a turnover between Rs 120 crore and Rs 150 crore by 2009-10.