Pakistan is undergoing a budget hotel revolution. Kind of.

The single most important factor in the tourism industry is accommodation. More than tourist destinations, food, and activities, where you stay matters. A good hotel can make or break a trip, and particularly when an entire family is travelling. Over the past few years, a lot of focus has been placed on Pakistan’s tourism industry and its potential. And while the point is to attract foreign tourists that bring in foreign exchange, most of the focus has been on local tourists willing to travel within Pakistan. 

The problem is that good hotels are far and few in between. Larger, luxury hotels like Pearl Continental or Avari are too expensive, especially if one is travelling with family. On the other hand, smaller, local, individual hotels that may not be as expensive have quality problems. Essentially, the hotels worth living in are too expensive, and the cheaper options are sometimes bad enough to make the skin crawl. 

With the average size of the Pakistani household being around 6 or 7 people according to the 2017 census, no one is going to want to book multiple rooms in a large chain hotel, or risk the safety and experience of their entire family on a smaller one. 

This is where a collaboration between large hotel chains and local investors looking to start hotels come in. The Hashoo Group – which owns the Pearl Continental brand as well as the Pakistan franchise of Marriott hotels – has launched a line of smaller, mid-sized hotels operating with the same standards as Pearl Continental. Branded under the ‘Hotel One by PC’ moniker, the Hashoo group is not the only large chain looking to tap into this market. Avari has also launched Avari Xpress, which follows the same context, and even Daewoo offers Daewoo Rooms.

While these hotels are naturally a step down from their larger parent hotels, they offer similar accommodation, food, and service. However, none of the hotels are actually owned by the group, which simply manages them for someone that has already put in the investment to build them. They are simply franchises with management contracts with the parent company.

The franchise business model

How exactly does this work, and how come the Hashoo Group does not own any of the many ‘Hotel One by PC’ buildings? The business model is actually quite simple. An investor decides to build a hotel, for example in the northern areas. Now, they have bought the land, built the building, arranged amenities, and are close to ready to begin operations.

However, there is a slight problem. What do they name the hotel? How do they convince people to stay there? How do they get the word out that they are trustworthy? A shiny, new hotel they may be, but they are not a brand. Which is why when they are under construction and close to completion, the investors will reach out to the management at the Hashoo Group’s Hotel One team. This does not affect their balance sheets, and it also does not make them grow in terms of assets because PC is not investing any money or material. The only thing they will be investing is human capital and experience, which they have in abundance, and the proud new owners of the small hotel do not. 

After coming to an agreement on profits and revenues, the Hotel One team then agrees to take over control of the hotel and manage it for the owner under the name “Hotel One by PC.” All the expenses, however, such as the furniture, fittings, equipment, toiletries, etc. are paid for by the owner. In return, he gets his return on investment and the PC logo on his hotel. Hotel One, on the other hand, is able to take its share for running the business. It is, perhaps roughly explained, an advanced franchise scheme. 

Currently, PC does not own any Hotel One, but they are running approximately 32 of them all over the country. Generally, these are hotels with maybe 30 rooms, and a small restaurant that serves breakfast, lunch, and dinner. They target middle managers that require a clean environment to lodge the night, or families looking for short stays on trips. They are lodging based by design. 

The investors are happy because they get someone to manage their hotel and they go up on the map under the PC banner. It also works more than well for PC, which simply has to stretch its already existing infrastructure. It is an efficient use of resources for PC because they already have dedicated teams for tasks. Say, for example, there is a need for a technician at a Hotel One, one of the PC hotel technicians will cater to the situation.

For instance, PC already has a dedicated team that works on marketing. Standalone hotels cannot afford such a team, which makes it difficult for them to attract sales from all over Pakistan. PC, however, already has the human resource required. Marketing for Hotel One comes at virtually no extra cost other than any promotional material such as fliers or banners that they may be needed.

The edge?

There are naturally many advantages that this arrangement offers. PC does not have to get their hands dirty with building and owning these hotels, while their vast network offers opportunities that cut through previously tiresome problems. One of these is the seasonal nature of many hotels that cater to tourists.  

Hotels in Naran can only operate for five months a year, because for the rest of the year the area is closed off because all the roads are blocked by snowfall. In any case, most people visit in the summer holidays when there is an influx of people, with the days quiet for most other times of the year. This means that most local hotels can only offer seasonal unemployment, which is definitely bad for the employees, but also for the owners considering how they may or may not be able to rehire the staff. 

However, Hotel One in Naran does not have this problem. During the months the hotel is shut, the Hotel One management team relocates the staff into other hotels around the country where they are short-staffed. This is a luxury individual hotels cannot afford.

Murtaza Hashwani of the Hashoo Group has been as early to realize that the future of hospitality in Pakistan lies in the mid range. Five-star hotels are fragile considering how expensive they are, and a dying luxury that not everyone wants to spend on anymore. The grandeur of it has lost its charm, and it is for hotel chains to step up and adapt. Especially with current circumstances.

“One little flicker and your business is hit hard. Smaller hotels incur low costs thus allowing them to absorb shocks,” says Azam Jamil, a leading light in Pakistan’s hospitality business, whose last held position was Chief Operating Officer at PC by the Hashoo Group. “COVID is not a flicker, it is a sledgehammer.” And he is right, the hotel industry did suffer from major cash flow issues during the initial days of lockdown, prior to travel opening up, with both PC and Avari offering discounted rates. 

And there are problems with running these larger operations. For example, in these mid-sized hotels, if there is no one in a room, you simply turn off the air conditioning. But in the larger hotels, which have central heating and cooling systems,  the air conditioning for all the rooms and restaurants are on all the time, even if only five rooms are occupied or in the hotel.

Similarly, a number of large hotels base their earnings on events. WIth weddings and conventions not being held on hotel premises, revenues have been slipping across the board for these bigger hotels. While some hotels base their earnings off the banquets, some base them off their rooms. It depends on whether the hotel is big or small, their public spaces, and their design. The bigger ones are usually more public and dependent on events that need their size and magnitude to make an impact. In the case of Hotel One, it’s all about the rooms and the accommodation. 

These hotels base their earnings on rooms entirely. One needs to understand that while revenues are important, profit margins outweigh them. Banquet occupancy tends to bring in larger amounts of revenue, however, their margins are lower considering the high amount of revenue costs associated with them.

Room occupancy, however, has a higher profit margin considering the lower cost. Essentially the guest is not charged the cost of the room, it is a capital expense. Instead, they’re charged for the toothbrush, toothpaste, clean sheets, and service, which are revenue expenses and are inherently smaller costs.

The potential

As road travel has improved between cities, the motel culture in Pakistan is likely to grow. Back in the day, we did not have reliable roads. Families that could afford to, did not prefer to travel by car. Nobody of wealth travelled by road, it was always air. Now you’ll find the rich and middle class on the roads too.

Naturally, if one is travelling by road, they will need places to stay on the way. But when one makes a rest stop, they do not care about the 5-star amenities. All they need is maybe a shower, a good night’s sleep, and breakfast to get back on the road. They don’t care if there’s an event area. Clean sheets, clean towels, nice coffee, the ability to order nice warm food and a breakfast before heading out is what matters to that traveller.

Hotel One plans to grow alongside the CPEC route for this very reason.  The unique edge that Hotel One has is that it has virtually no competition from major competitors in this regard. Avari Xpress is a close competitor, but you can only find their marketing in large urban centers and their hotels limited to Islamabad, Multan, and Lahore. On the other hand, you will find a Hotel One nearly everywhere.

Dinshaw Avari of Avari Hotels agrees with the Hotel One business plan of developing alongside the CPEC route. “While I understand the business model of Hotel One, and how they are trying to grow along the CPEC route, I think I will stick to the cities for now,” he says. “The Avari Xpress hotels are purpose built and provide a 5 star experience in a 4 star hotel. Quality is what matters most to us.”

Soft brands and the future 

“The potential for Hotel Ones are much greater, especially considering the profile of the general population,” explains Azam Jamil. “The proportion of the population that can afford to stay at a fancy hotel is significantly low.” He feels that considering the size and proportion of the middle class in our demographics, the segment can no longer be ignored.

On the other hand is Andre Privateer, CEO of Ascendant, who says that the middle income group is “the sweet spot” one should target in the hospitality industry agreeing to the notion that mid-sized hotels have potential.

Ascendant is a hotel advisory company that has launched its soft brand, Roomph, in Pakistan. This is essentially a hotel booking website that only takes on hotels of a certain standard. This means, if you’re travelling anywhere across the country and see a Roomph logo on a hotel, you can rest assured that it is of a particular standard.  

“While Hotel One and Avari Xpress are hard brands, Roomph is a soft brand,” explains Privateer. Considering the local sensitivity towards budgetary constraints and lack of consistency amongst smaller hotels, Ascendant has partnered with Hotel One and other budget hotels around Pakistan. They have set up a reservation platform named, Roomph where travelers can “book now, pay later.”

The platform has been soft launched so far. As Pakistan is past the Covid-19 hurdle, and Ascendant plans on a dedicated launch event soon. “These hotels guarantee a nice, clean, safe, environment; good air conditioning, clean washrooms, reliable Wi-Fi and uniform standards.” It is a soft brand because being on the Roomph platform means that standards are adhered to and there are no bad surprises. Privateer adds that the integration of Hotel One on the platform adds credibility to the platform and the other listed hotels and that their motto is “only happy surprises”.

To do this, Privateer gathered 30 regional account managers and gave each of them a team. They were then told to scout the country for small hotels and guest houses that follow standards and were likely to continue doing so. These hotels were signed up to the website that serves as a channel manager and booking website. They are then given a sign board with the Roomph name which helps guests know that this hotel will adhere to standards.

Ascendant finished 2019 with 800+ in Pakistan hotels, using their channel management software, and by September 30, 2020, they expect that they will be able to provide real-time rates and reservation confirmation for 1,500 hotels in 70+ destinations throughout the country.

Privateer feels that this industry has been slow to pick up on technology however Roomph will be able to establish better guest-host relations and will eventually be able to pick up on brand loyalty towards the platform. In order to improve the usage of technology in this industry, Ascendant has designed the websites for PC hotels and Hotel Ones.

Moreover, considering the pattern of usage, Roomph can be accessed by their website and its dedicated app. Like early mentioned, smaller independent hotels lack marketing teams that are able to reach out to a bigger audience. That is here Roomph helps them get guests in return for a commission.

Out of the box solutions

A completely different approach to hospitality is taken by Seema Al Karimi, the founder of Lets Home, a local form of Bed & Breakfast. LetsHome provides travelers the chance to stay in bed and breakfasts set up by the locals. “This gives them the chance to experience the genuine culture of living up north. Travelers can live as the people do.”

She explains that even though the lodging is divided into economy, premium, etc. this type of tourism is developing in Pakistan, albeit slow. “Pakistani travelers usually prefer luxury while traveling instead of absorbing the local culture. However, this niche is developing.” She feels that as security has improved and areas are now accessible by roads, younger tourists and foreign tourists find such lodging an enjoyable and affordable experience.

Roomph feels that there is potential in this and is planning on adding nearly 10,000 options of staying at a home onto their platform. While LetsHome primarily focuses on the Northern areas, Roomph will take on properties all across the country.

But like any industry, any approach will have problems. The same is the case for the hospitality industry. Players in the industry often ask how one can expect them to run their business in 2020 while the rules were set in a different era? However, with the PM’s focus on tourism to the extent that he doesn’t want COVID to get in the way, hoteliers are confident that the regulations will be revisited. One concern remains the unification of bed tax across all provinces in order to create a level playing field.

In the past smaller hotels have found it difficult to survive, such as the PTDC. They also face challenges with establishing footing, however, the ability to sign management deals with Hotel One or partner with platforms like Roomph will enable smaller fish to rise and earn. This is essential if Pakistan is serious about its tourism industry.