The Tata-owned Indian Hotels Company (market capitalisation: Rs 18 bn) has decided to give a fillip to its catering business through a foray into marketing branded food and beverages at the retail level.
Indian Hotels (IHCL) runs the largest flight catering service in India. The company has units at Bombay, Delhi, Calcutta, Chennai and Goa, which service all domestic and international flights. This division contributed nearly 15% to the company's total operating income of Rs 5.9 bn in FY99.
As part of its new retail focus, Indian Hotels will utilise its airline-catering infrastructure to tap the retail market. IHCL will sell branded food items and beverages at shopping malls and retail outlets. It will also look at increasing sales at the institutional level. It has set itself a target of doubling revenues from the catering division (Rs 900 m currently) over the next three years. It has also forecasted that the non-airline catering revenues would contribute at least 50% to the total catering business over the same period.
Airline catering has traditionally been a low-margin, high volume business. Company sources have opined that the retail thrust will enable volume growth and consequently, improve returns to the bottom line. Industry circles however, perceive this move as part of the company's restructuring plans.
Managing director, Mr. R. K. Krishna Kumar had stated a few months back that Indian Hotels would get out of all businesses that yield less than 20% return on investments. The company opted out of the prestigious Bandra-Kurla project, as it did not fulfill the 20% return criteria. Recently, it sold The Lexington, New York for US$ 103 m and The Executive Plaza (Chicago) for US$ 48 m. All this was part of the company's drive to consolidate its core hotel business.
Industry forced to look at alternate income sources...
The last 3 years have not been kind to the hotel business. Low tourist arrivals and room demand resulted in declining Average Room Rentals (ARRs). The industry has therefore been forced to explore alternate avenues for revenue generation.
A glance at room rentals over the past three years reveals an interesting trend. Room rental contributions to the total revenues have declined 10-15% over this period, but contribution from associated services like food and beverage sales and telephone/fax services has improved by 20-25%.
In the case of Indian Hotels, food and beverage sales accounted for over 40% of FY99 operating income (38% in FY98). The Oberoi owned EIH (IHCL's nearest competitor) is witnessing a similar trend. With elections just a month away and given the recent tensions on the Indo-Pak border, the ARRs are likely to remain stagnant resulting in larger percentage contributions from the food and beverage segment in FY2000.
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