Surrounded by fine wines and elephant motifs in the Tusker bar of Accor's new luxury Sofitel hotel in Mumbai, chief executive Denis Hennequin is unsurprisingly betting on Asia to make up for uncertain prospects at home.
He is also convinced the real elephant-sized growth will come from looking downmarket at low-cost, high-return economy hotels -- piggybacking on the rise of budget airlines that have opened up domestic travel to Asia's emerging middle classes.
Facing economic malaise in Europe and the United States, as well as heavy local competition to build hotels in China, the world's fastest growing hospitality market, global hoteliers see a window of opportunity in India and Indonesia.
"We are a French-European company, but if you look at the pipeline for the next 3-5 years and beyond, more than 70 percent of the inventory of new rooms is from this part of world," said Hennequin.
Hoteliers such as Accor, Europe's largest hotel group, InterContinental Hotels Group, Marriott International and US investment group Starwood Capital's Louvre Hotels are hoping that early-mover advantage will help them build their budget brands on a profitable scale.
But it will not be plain sailing, given regulatory hurdles, a complex business environment, a lack of franchising experience and prospects that success will only increase competition.
In India, the concept of branded mid-scale hotels, where rooms cost between $40 and $80 a night, is in its infancy, whereas in Indonesia, other international hoteliers are waking up to a sector already pioneered by local firms and Accor.
"There is a real need for budget hotels in most parts of the world, notably in Asia," said Exane BNP Paribas analyst Matthias Desmarais, adding InterContinental was doing well in China but Accor was better positioned than its rivals elsewhere.
"Accor's strategy is therefore very relevant but it's not going to bear fruit right way, rather towards the 2015 horizon."
At the same time as it ramps up its presence in Asia, Accor is selling its US budget hotels. When Hennequin announced the $1.9 billion deal last month, he said the funds would help growth in Asia, Latin America and Europe.
STR Global, the industry's leading data provider, says China will account for 56 percent of the roughly 410,000 hotel rooms in the pipeline for Asia-Pacific.
Fellow G20 members India and Indonesia are expected to account for 18 percent and 6 percent, respectively, with about 40 percent of the latter being mid-scale or economy hotels.
And over the next decade, global hospitality consultant HVS estimates India, the world's second most populous country, will need more than $25 billion to build 180,000 new hotel rooms.
About two-thirds of these will be budget or mid-market rooms as chains target domestic travellers, who are seen doubling their spending to around $160 billion.
The focus is the same in Indonesia, the fourth most populous nation, where 122 million domestic tourists dwarfed the 7 million foreign visitors to the archipelago last year.
"In the long term, investment in mid-scale hotels is capable of returning more than 20 percent on equity," said Gary Garrabrant, CEO of Equity International, which manages $2 billion of global pension money and has invested $75 million in Indian developer Samhi to build mid-scale Marriott hotels.
These hotels are the McDonald's of the hospitality world- carbon copy chains with funky coloured interiors and basic bathrooms-but often little else. Still, they are a step up from the 'mom-and-pop' hotels common across Asia, and so are likely to find favour with the new breed of Asian travellers.
"These hotels give us more options," said Chatarina Maharani, a smartly dressed 27-year-old doing coal logistics for global trading giant Glencore in Jakarta, who is travelling more since her salary has been rising by up to 40 percent a year.
"I look for small new hotels with a budget rate. I just use them to sleep and shower so I don't need anything fancy."
Maharani wants more cleanliness than a backpacker hostel and the wireless internet that her $50 budget can buy, and always lines up a budget flight before booking her accommodation.
The rise of budget airlines is a crucial driver of the growth in economy hotel chains.
Low-cost carriers serving Indonesia, such as AirAsia and Lion Air, will add more than 1 million seats of capacity this year, while in India budget operators such as SpiceJet and Indigo Airlines have placed orders for 250 planes in recent months.
Budget hotels are especially appealing for investors because of the lower land costs needed for a simple block of rooms, compared to a luxury hotel that requires extra space for a grand lobby, swimming pools and conference rooms.
It costs $25,000 per room to build a budget hotel, with a return on investment within four to five years, versus $500,000 per room for a luxury hotel that takes 8-10 years to pay back, said Ruben Beda Kulle, business development director at Southeast Asian hotel operator Aston International, which plans to open 29 budget hotels in Indonesia under the "fave" brand.
However, buying land in both India and Indonesia can be difficult due to fragmented ownership or limits on foreign holdings, and complex licensing will delay some projects.
Both countries are known for policy changes as leaders vacillate between trying to encourage foreign firms and protect domestic interests, and for cumbersome bureaucracies-a combination that frustrates investors.
In India, hotels can need to get more than 100 license clearances before they can open.
"It takes longer here than other parts of the world to build a hotel because of a combination of reasons like a time-consuming licensing process, high cost of financing, and lack of project and construction management expertise," said Paul Logan, InterContinental's senior vice president for development in AMEA.
"Elsewhere the bulk of our portfolio is franchised, and while there is potential for it in India, the budget sector still needs more maturity and expertise."
That means most hoteliers are taking an asset-light approach, often acting as operators for a wealthy local partner who owns the land. Latecomers or those without local partners may struggle in countries known for red tape.
Global hoteliers will also have to compete against local players such as Tata Group's Indian Hotels that owns Ginger chain and private equity-backed Lemon Tree and Keys Hotels in India, and Indonesia-based brands such as Tauzia's "pop!".
Whitbread, which runs the UK's largest hotel chain Premier Inn, has already opened its first budget hotels in India and is now considering Indonesia.
"Given the immaturity of the market and dearth of supply there is space for all of us to grow.We just need to be wary of each other," said Aly Shariff, managing director in India for Premier Inn.
Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.
Updated Date: Dec 20, 2014 09:18:23 IST