Price Wars Have No Winners
Foreseeing the financial crisis that might become a reality due to the price wars, Anil Bhandari, Chairman, AB Smart Concepts shares his opinion on how to deal with the current situation.
A price war is triggered off when the supply far exceeds the demand for a certain category of goods or services and there is cut- throat competition among producers and sellers. In this scenario, the customer is the king. However, the spiral of retaliatory price slashing by rival competitors invariably leads to a precipitous decline in the industry and the economy. Eventually, the customer, too, has to put up with a less gratifying guest experience and fall in service standards. The customer may also lose the choice of hotels which close down due to financial unviability.
Currently, the Travel and Tourism sector in India continues to be beleaguered by the COVID-19 crisis. 2020 was a disastrous year for this industry. A few months back it appeared that the situation was improving as most of the hotels had commenced their operations after realigning their operational procedures and introducing necessary safety measures for their guests. However, unfortunately, the second and third waves of COVID- 19 surfaced leading to cancellations of air travel and hotel bookings across the globe. Several countries are again in the Lockdown mode.
International Tourist traffic has collapsed majorly due to the pandemic as most countries have banned international tourists from entering their borders. Domestic traffic is the only hope for the Industry at this time. However, here too, the number of people travelling is very small. The hotel occupancies are good only at few popular tourist resorts and some hotels in the metros. Business travel is very less as people are largely conducting business meetings through Zoom and Google Meet.
What lies ahead is a lot of uncertainty. The new normal seems to shift every other day. An estimated 2 to 5.5 crore people, employed (directly or indirectly) in Tourism sector lost their jobs over the last year due to retrenchment and suspension of businesses. The revenue losses were to the tune of Rs.1.58 lakh crore. Financial institutions are pressurising hotel owners to cough up EMIs, loans and other dues. The Industry was looking forward to getting some financial assistance from the Central & State Governments but, regrettably, the last budget was a huge let down for the Industry and no relief of any kind has been given till date. Several components of the industry are under threat of permanent closure with no possibility of resuscitation. This is highly unfortunate as, inarguably, the Travel and Tourism Industry has the maximum potential of generating employment as well as revenues.
In FY 2020-21 the hotel occupancy declined drastically due to the impact of travel restrictions and lockdowns to contain the spread of the virus. Only one-third of the hotels were open in April and May 2020, with demand coming mainly from medical or frontline workers and stranded travellers. According to an ICRA report, the average pan- India occupancy rate is expected to be 35-40 per cent only in FY. 2021-22 as against a 69 per cent occupancy rate in FY 2019-20. Consequently, there will be a sharp decline in RevPAR in FY2021-22. There will also be an adverse impact on other key industry parameters.
The decline in business due to COVID- 19 has led to hotel rooms lying vacant at most locations. Every saleable room- night is a perishable product with an extremely limited shelf life. There is, thus, pressure on the hotels to sell at a lower price and make at least some money rather than none at all. The hotels which have large inventories and substantial overheads are, particularly, willing to reduce their tariffs to attract guests at predatory prices. When a higher positioned hotel reduces its tariffs the lower positioned hotels are forced to reduce their rates too.
In a bid to attract clients the hoteliers are slashing their tariffs indiscriminately. The difference in rates pre COVID to post COVID period is as high as 50 per cent. Consequently, the average room rates (ARR) are declining. Presently, a 3-4 star hotel room is being sold at Rs. 2000/- and at times at Rs. 1500/- only. Pre- COVID they were selling the same room at Rs3500 -4500. Similarly, 5-star hotel rooms which were selling at Rs. 5000/- to Rs. 7000/- pre- COVID are now being sold at Rs. 3000-4500/- The tariff of 5-star deluxe hotel rooms have been brought down from 7500 -12000 to Rs. 4500- 6500. The desperation on the part to hotels to make whatever money they can, has triggered off a price war in the hotel industry.
Competition in any field is inevitable and keeps complacency at bay. Competition also prompts the producers and sellers to improve their standards and upgrade their services. Healthy competition can induce more demand also as consumer’s flock to avail of attractive deals. However, room tariffs should be lowered only up to a point where it does not hurt a hotels’ brand positioning and profitability. Beyond that the reduction in prices is bound to prove destructive.
However, despite incurring losses, the hotels are continuing to provide freebies like free transportation from airport, complimentary breakfast, a complimentary bottle of wine, welcome drinks, fruit platters etc. The Hotels Sector should learn from the Aviation Industry where the airlines charge for every service and provide no facility for free. Hotels also continue to pay 15 per cent commission to OTA’s whereas they should pay10 per cent only as is in the case of other Travel agents.
There are no winners in a price war as all the players end up worse off than before such engagement. For instance, when American Airlines, Northwest Airlines and other US carriers went into retaliatory price war in 1992, the result was record volumes of air travel - and record losses. Some estimates suggest that the overall losses suffered by the industry that year exceeded the combined profits for the industry from its inception.
Closer home, fare slashing by Air India pressured the private airlines to keep their fares down even though they were running to full capacity. Air India was bailed out by the government but private airlines ran into red. Jet Airways and Kingfisher Airlines were the victims of the continuing price war.
It is high time that association like HAI and FHRAI intervene and urge their members to stop the price war. Just like in the case of airlines, a minimum tariff should be fixed for hotel rooms to make the hotels viable. The minimum price should be fixed in respect of all categories of rooms and for all destinations across the country. Hotel/ resorts should be advised not sell at a lower price than what is fixed.
Unless the step to fix the minimum tariff is taken promptly many hotels and resorts will get closed permanently on account of a financial crisis. It will be a big calamity for the Travel and Tourism Industry and all its stakeholders if several hotel properties wind up due to price war.
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