Raymond Bickson is trying to change the Taj hotels’ operating model, but first the chain will have to learn to get out of its comfort zone
In 2008, when INSEAD’s Gabriel Szulanski wrote his case study around the Taj hotels’ acquisition of The Pierre, a marquee property in the heart of Manhattan, little did he realise just how prescient he would turn out to be. The case study delved into the group’s dilemma on whether to expand in the US market.
Since 2004, the Taj had been on a roll. In its home market, rooms were in short supply. Its rack rates were at an all-time high. Indian Hotels Company (IHCL), the firm which owns the Taj brand, had chalked out an ambitious plan to buy assets at peak valuations in India and around the world. IHCL had ended the financial year 2008 with an operating profit of around Rs 1,000 crore. In fact, 2008 was the best in 41 years for the global hotel industry. Hubris was high, markets were at their peak.
The Pierre had seemed like a perfect fit. Overlooking Central Park, it had hosted Elizabeth Taylor, Yves Saint-Laurent and Mohamed Al-Fayed as permanent residents in the upper floors that house the suites and grand-suites. It moved from being under the Four Seasons management to IHCL in 2005. Not satisfied with the condition of the property, the Tatas plonked down $100 million (Rs 500 crore) to restore it. But by the time it re-opened in ’09, the world had changed.
About 60 percent of The Pierre’s business came from the Wall Street. As the financial markets tanked, so did its earnings. Despite a modest recovery, the hotel still burns a $20 million (Rs 100 crore) hole in the Taj balance sheet every year. Room rates (measured by RevPAR—revenue per available room) are still about $200 a night less than competition. And things are unlikely to change soon.
IHCL CEO Raymond Bickson has been at the helm through the acquisition and its aftermath. He says the choice is a Catch-22 situation. Getting The Pierre and other US hotels (in Boston and Los Angles) into the Taj fold demonstrated the group’s capability to hotel property owners elsewhere—and opened doors for other management contracts, notably in important markets like China. “It was the only way to go,” says Bickson.
Yet, not everyone inside the Tata group was convinced of the hotel chain’s strategy to pursue costly buyouts abroad, especially at a time when all the major international hotels were pounding at India’s door. Exactly a decade ago, in 2003, the IHCL board, headed by then chairman Ratan Tata, had done a strategic review to decide the way ahead for the Taj. It was clear that market share would decline. So, how to stay relevant over the next 20 years? “The big boys of the hotel industry were here—and here to stay,” says Bickson. “We had to figure out how to draw up a plan so we were able to grow and have at least 10 percent share even in the distant future when India went up to 500,000 rooms,” he says. For perspective, India had 62,000 hotel rooms when the review was on. That has now zoomed to 175,000.
Two key decisions taken there have shaped the group’s path since. The first call was to plant the Taj flag in about 25 key markets internationally. The second move, aimed at the domestic market, was to launch new brands catering to the more value-conscious customers. In 2003, Taj had 62 hotels in its portfolio. It now has 117 and operates with four different brands—Taj Resorts and Palaces (luxury), Vivanta by Taj (upscale), Gateway (midscale) and Ginger (budget).
So here’s the moot point: Was attack really the best form of defense?
Enemy at the Gates
The picture started to change radically after 2009. The financial meltdown, followed by the terror-attack in Mumbai, took the wind out of the Taj sails. Revenues began dropping and debt (taken on in the good times) began rising. In February this year, at his first board meeting as chairman of IHCL, Cyrus Mistry had to deal with a grim set of numbers. Auditors highlighted exposures in long-term investments in and advances to wholly-owned subsidiaries aggregating Rs 1,563.67 crore. The carrying costs of these investments significantly exceeded the book and market value as of December 31. The oldest company in the Tata fold is faced with falling room rates and increased competition.
(This story appears in the 03 May, 2013 issue of Forbes India. To visit our Archives, click here.)