In the recent times, the hospitality industry in India has seen the emergence of a ‘middle space’ between deluxe hotel chains, and budget bed and breakfasts. And this is the space that Lemon Tree Hotels (Lemon Tree) wants to dominate. It does face stiff competition from several established international chains such as InterContinental Hotels, Mariott International and even Taj Hotels’ budget hotel chain, Ginger, but this does not faze Rahul Pandit, president and chief-operation officer, Lemon Tree. He draws a supply-demand comparison between the U.S. markets and the Indian markets to illustrate that there is a lot of room for everybody to compete. “In the U.S., for a population of 500 million, there are 5.5 million rooms. In India, for every 10,000 there is one room available,” he elaborates. And Lemon Tree’s approach to tapping this opportunity is simple – create high value for the customer’s money.

“In the U.S., for a population of 500 million, there are 5.5 million rooms. In India, for every 10,000 there is only one room available“

In 2002, founder-chief-executive officer, Patu Keswani, established the parent company, Krizm Hotels Pvt. Ltd. and chose ‘Lemon Tree’ as the brand name as he felt it would resonate with India’s young population. “Our first prototype in Gurgaon was built with the intention of tapping the bottom-quarter of the deluxe category and the top-quarter of the economy category,” says Pandit. The market response was positive and soon, Lemon Tree’s first five hotels were operating at over 80 per cent year-round occupancies, with over one quarter of the guests being repeat clientele. Today, Lemon Tree has established its presence pan-India and operates 14 properties at an annual occupancy rate of about 70 per cent (for hotels that are older than one year).

Even as it gained a foothold in the middle space, the company identified a gap in the economy market that it could address. “We saw that there was the need for a brand that would provide better amenities at a price point that was competitive to guest house services and that is how we created Red Fox Hotels,” explains Pandit. Today, there are three Red Fox properties in New Delhi, Hyderabad and Jaipur, and domestic, value-conscious travellers contribute predominantly to its top-line.

Satisfying the Indian customer

According to Pandit, Lemon Tree’s customer focus is primarily on the business traveller as typically eight out of 10 hotel stays of a working professional are business-related and the remaining two are leisure related. “This is reflected in our inventory spread across the country with the majority present in business cities and the balance at key leisure destinations. We will maintain this ratio going forward too,” he elaborates. As for how discerning the Indian customer has become, he says, “There was a time when the Indian customer paid attention to price and price alone. A great discount would be enough to capture his attention. Today, the customer wants quality due to global exposure, so he is price conscious yet aware of quality,” he says. Most importantly, Pandit says the Indian customer wants recognition. “We have found that it is easy to retain customers if you offer a bundle of services that recognise the customer while giving him great value for money.” And with the number of positive reviews on travel websites and other awards recognising its efforts, Lemon Tree seems to have devised a right formula to keep the Indian customer happy.

Working past challenges

Ask Pandit about the challenges that Lemon Tree faces in its operations and he says “real estate prices” before one can finish the question. “In India, real estate amounts to nearly 60 per cent of total costs whereas in the mature markets, this percentage is closer to 30 per cent,” says Pandit. He also rues the fact that India lacks a zoning system as this allows property developers to manipulate prices further. At present, Lemon Tree invests between Rs. 50 lakh and Rs. 55 lakh on building a property in a metropolitan city, while the investment for a non-metropolitan city is anywhere between Rs. 30 to Rs. 35 lakh. In the metropolitan cities, Lemon Tree follows a cookie-cutter model while with its resorts, it takes care to ensure that the ‘senses’ are pleased and the local charm is retained.

If real estate prices present a significant challenge, there is also the regulatory framework that needs to be taken care of. “Typically, we need to get anywhere between 70 to 100 clearances from the central and state governments and other local bodies,” he adds. As for finances, Pandit wishes that debt terms in India were more relaxed. He elaborates that in the west, hoteliers can avail single percentage interest rates and have return terms in excess of 20 years, which is quite different from the terms levied in India. “We are very conservative and our debt to equity ratio is 1:1,” says Pandit. In 2006, private equity firm, Warburg Pincus invested Rs. 210 crore in Lemon Tree for a 27 per cent stake and these funds were used to expand existing presence in addition to acquiring proprieties for Red Fox Hotels. Two years later, in April 2008, Lemon Tree received another joint investment of US $ 30 million from Japan’s Shinsei Bank and Kotak Realty Funds for an equity stake of 5.9 per cent. According to Pandit, Lemon Tree, which is sufficiently funded at present, is eyeing an initial public offering in the third or final quarter of fiscal 2013.

And finally, Lemon Tree also faces the people challenge – finding the right team with the right competencies. While Lemon Tree recruits from various hotel management colleges and vocational training centres, it also recruits people from different industries in its sales and revenue management functions in an endeavour to incorporate best practices.

Lemon Tree has also chosen to find an alternate solution to the people challenge – at the moment, four of its properties (Gurgaon, Chennai, Bengaluru and Hyderabad) employ 103 differently-abled people. “Even though we began this recruitment as a corporate social responsibility, we soon found that physically challenged people were very productive and had the lowest attrition rates,” says Pandit. He hopes that in the next two years, the number can touch 300.

Despite the threat of a global economic slowdown, Lemon Tree remains positive in its outlook. “We will be impacted by global changes, but the domestic market remains strong,” says Pandit. He is confident that the company will cross its revenue target of Rs. 600 crore by the next fiscal and shares that it plans to add 10 more properties (7 Lemon Tree Hotels and 3 Red Fox Hotels) to its portfolio.