Erawan confident of budget-hotel niche
By Suchat Sritama
Published on April 27, 2009
How did Erawan Group enter the budget-hotel business?
We wanted to diversify the hotel portfolio to offer international-standard hotels with room rates of between Bt800 and Bt1500. We worked with Accor for two and a half years to build Ibis in Thailand. We have already opened five Ibis outlets in Thailand. So far, results have confirmed that we are moving in the right direction, particularly amid the current economic and political situations.
What are the key success factors?
The investment requirement is low and the operating costs are kept low. With economy of scale, our average cost per room including land (freehold or leasehold) is only Bt1.6 million to Bt1.7 million per room, with very low monthly operating costs. We are well-positioned to compete in the Bt1,000 range market. This is thanks to Accor's strength, global network and brand recognition.
What are your next projects?
The sixth property is in Kata. The Bt400-million 260-room hotel is scheduled to open at the end of this year. We are also planning to resume the development of Ibis Bangkok by the Chao Phya River in the third quarter with 270 rooms and a Bt350-million investment. Three more are planned for Hua Hin, Sri Racha and Krabi. We have bought land and secured loans. We will decide later this year when to proceed with the projects.
Do you expect higher competition?
A threat in the hotel industry is that there is no mechanism to control supply. It is called "Me Too" - a flood of new supply. Anybody who has land and money can build hotels. When there are a few good stories, many follow and get into the business. The pitfall is that they don't know the real picture. Naturally, owners will always talk up good numbers for their hotels, but the numbers could be misleading. They could be for a period, rather than the whole year or even a month.
So, we have seen a lot of supply coming into the luxury segment over the past few years. Regrettably, some of these new hotels have lower yields than those in the lower tiers. Still, newcomers keep emerging. Over the last 12 months, many talked about the new supply from mid-scale properties by large-scale developers. Again, I don't know exactly how or when these plans will materialise. Some have talked about the over-Bt2,000-a-night range, which is not directly competing with Ibis.
How is Ibis performing amid the political turbulence?
At the height of the conflict, our average occupancy was around 50-60 per cent for a total of 1,200 rooms and we are satisfied with the result. The recent unrest was quite detrimental to visitors' confidence. The impact of the riots is similar to that of the airport closures, as it has led to a drastic drop in occupancy. The magnitude is, however, much less. The occupancy of our hotels didn't drop below 20 per cent, as it did last year. I think we will see light at the end of the tunnel before the high season arrives.
Over the past seven years, we have passed several major tests - Sars, bird flu, tsunami, the coup, the New-Year bombing, airport closures - and we'll pass this test, too. For Erawan, we are a long-term investor, with the right products and services. What we are doing now is to make sure that we survive through these difficult periods.
How is Erawan coping with this crisis?
By delaying some projects, rescheduling loan repayments and cost-cutting. However, lay-offs are not the cure for short-term turbulence. This month, occupancy is 50-60 per cent, 10-15 per cent off last year's level. Before the incident during Songkran, our hotels were on their way to full recovery from the airport closure. The recent political unrest will no doubt put pressure on occupancy rates. The question is how long until we see a full recovery. Many factors are still looming. If no other incident occurs, we expect things to normalise by the third quarter.
What do you expect from the government?
Restoring peace in the country is a must. Then, direct or indirect support on pricing would be very helpful. Directly, the government can cut tourist visa fees, airport landing fees, and even offer VAT refunds on expenses such as hotels and domestic flights. These will cut travelling expenses to Thailand by as much as 7 per cent. For hotel operators, the government should consider soft loans to help refinance existing loans. Lower funding costs will also enable us to offer packages that are even more attractive than they already are, compared to hotels in other regional destinations.