Taj's Global Aspirations - Investment Outlook - September 2005

All eyes will be on New York's Pierre as the acid test of Taj Hotels, Resorts and Palaces' ability to position itself as a global player.

By Staff -- HOTELS Magazine, 9/1/2005

Taj Hotels, Resorts and Palaces executives raise the company flag at its new North American jewel in New York, The Pierre.

Mumbai-based Taj Hotels, Resorts and Palaces won the world’s attention with the July 5 announcement that it would succeed Four Seasons Hotels & Resorts as the lessee/operator of New York City landmark, The Pierre. Now, with the world watching, Taj has to deliver. How this 104-year-old, 73-hotel group handles the repositioning and subsequent operation of the 201-room/80-residence Fifth Avenue icon will play a major role in determining how fast Taj fulfills its goal of becoming a global player. Simply put, “Taj cannot afford to fail (with The Pierre),” says Georges Ugeux, chairman and CEO, Galileo Global Advisors, LLC, New York City, advisor to both Taj and its parent company, the Tata Group. “Taj cannot have ‘just a success’ (with The Pierre); it has to have a resounding success.”

The Pierre will test Taj’s readiness to make the leap from being a regional giant synonymous with sumptuous palaces and city center monoliths to becoming a truly global, sector-spanning hotel chain. It will measure Taj’s infrastructural strength, especially on the sales and marketing side, and it will weigh the group’s ability to outperform entrenched international competitors far away from its home market. This cannot be another excursion in the New York market like the company had with The Lexington. Taj needs to prove it can turn around what analysts called “an earnings drag” on Four Seasons and carve out a high-profile niche at the top of the market.

It will be the job of Raymond Bickson, managing director of Indian Hotels Co. Ltd. (IHCL) and managing director and CEO of IHCL’s operating company, Taj, to make sure that happens. The Hawaiian-born Bickson has the right credentials. He learned about luxury hotels from some of the best in the business: George Rafael; Robert Burns and Adrian Zecha. During his 25-year career, Bickson honed his knowledge of the 5-star hotel business and the 5-star hotel market as the general manger of Regent International properties and other ultra-luxury hotels in Asia, Europe and the United States. He took over the reigns at Taj in 2003, at a time when the Tata Group was setting a course for aggressive, global expansion.

Though a number of seasoned corporate executives were still job shopping post 9/11, Ugeux says Tata saw Bickson as the best match for Taj. “He knew the United States well. He could act decisively, almost instinctively, because he knew the key markets by heart,” says Ugeux. “He could tell Tata what was ‘normal’ at the negotiating table in the United States and what was not. He created a lot of enthusiasm within Tata for the takeover of The Pierre.” Adds Manav Thadani, managing director, HVS International, New Delhi, “Raymond was brought in to provide Taj with some international exposure in the luxury segment His move to India coincided with the turnaround in the Indian hotel industry. He made the right moves, but he got a lot of help from the market.”

The Taj Mahal Palace and Tower in Mumbai, built in 1903, is a pillar of strength and flagship for the company now with global aspirations.

Bickson was clear about why Taj needed The Pierre and what it would take to maximize the return on investment. He had been in the thick of the competition as general manager of The Mark, New York City, immediately before joining Taj. “When you are looking to create an international presence, you cannot be in ‘B’ sites,” says Bickson. “We knew we would have to look for trophy properties and for portfolios that could provide entrée into key markets. A single transaction such as The Pierre gives us unbelievable visibility. Once we turn around The Pierre, we will be known as a company that can do the job. That opens up tremendous opportunities.”

From elegant gilt-edge announcements heralding The Pierre’s new flag to a flurry of press conferences, Bickson is working hard to keep Taj’s name in the public consciousness. If all goes according to plan, this project will showcase the skills Bickson hopes will entice prospective owners and investors to take a second look at Taj.

Assessing markets and potential is one of the things Taj has proven it can do—not surprising for a company now helmed by a man who earned Gallivanter’s Guide’s “Best Hotel General Manager” award in 2000 and who ranked among Leaders’ list of top 10 hotel general managers in the late 1990s. Taj used the expertise of Bickson and his team to hone in on what was missing in The Pierre during the due diligence. “There is a US$250 rate gap between The Pierre and the market leaders. To close that gap, we looked first at the room product,” Bickson says. When The Pierre emerges from its US$35 million renovation, it will have larger guestrooms, pampering bathrooms, cutting edge technology and revitalized design. “If Taj does a good job with the renovation, it can get the rate. New York is red hot,” says Michael Sullivan, managing director, HVS Capital Corp., Denver.

Selling rooms is only half the equation. Taj’s management sees an opportunity for differentiating the group in owners’ eyes by delivering a more diversified profit base. What U.S. or European owner would not like to see a food and beverage department that could drive 40% to 45% of the bottom line? Taj’s innovative approach to F&B has made it a profit-building pioneer—not only in the fine dining sector, where it was among the first to outsource with star chefs and to experiment with different international cuisines, but also on the café level. Taj’s Bombay Brasserie, which generated solid brand equity in the UK and Europe, is getting a new look. Taj also plans to open the first of its new concept whole foods/organic foods restaurants by the end of the year. From edgy to elegant, this inventive F&B approach has broadened Taj’s appeal to a younger market. “The new F&B concepts have been very well received. In India, F&B can make or break a hotel, especially when it comes to creating a perception about a hotel,” Thadani says. “In this context, Taj has done the right thing, and it will show on the bottom line.”

The aim clearly is to provide turnkey profit solutions. Bickson is parlaying Taj’s banquet and function experience to The Pierre, which this year alone will generate US$25 million worth of business. Hotels such as The Pierre also will benefit from Taj’s newly launched Jiva Spa brand. “Why go to someone else to create an ayurveda spa? We want to create a destination spa for Taj under a Taj brand,” Bickson says. “Then we may be able to take our special Taj spa menu and incorporate it into all our different spas. We will be taking advantage of being in India, the ayurveda aspect and all that. We will be weaving a whole package into our spa services.” Bickson sees potential for 16 spas within three years.

Taj is rounding out its management offer with residential management capabilities. “Developers come to us with mixed-use projects that blend commercial, retail and residential. They want a company to have the value-add of residential management. But they also want to benefit from the shared infrastructure of spas and trendsetting restaurants. It is a model that works,” Bickson says.

$100 Million War Chest
Clearly, for a brand in a hurry, not every project will be like The Pierre. Taj has brought down its gearing from 1.7:1 to 1:1 and is not about to tip the balance anytime soon. Outside of India, the chain’s strategy will be to grow with management contracts “as much as possible,” according to Bickson. Inside of India, he is moving the company toward an “asset light” business model. The goal is to shrink its owned portfolio from 60 to 30 and redeploy the capital.

However, that does not mean the group will shy away from investing when necessary—whether that involves important single assets or portfolio acquisitions. “With US$100 million earmarked for expansion, we have enough leverage to use as opportunities arise. We have no trouble raising money,” says Anil Goel, Taj’s senior vice president, finance. To illustrate the point, he notes that a recent US$150 million bond issue was oversubscribed in three hours.

Full Arsenal
Bickson, Goel and the Tata Group are banking on a ready war chest, operational expertise at the luxury level and entrée to India’s billion-strong population to put Taj on the short list for new projects in key European cities as well as in India and the rest of Asia, the Middle East and the United States. Taj has to stay strong in India, especially with competition coming in from heavy hitters such as Shangri-La and Four Seasons. It plans to do so not only with luxury properties and the “value-add” of a luxury residences management offer, but also with new eco-tourism projects being developed with Conservation Corp. of Africa and the rollout of its no-frills indiOne concept.

Taj’s new indiOne budget brand is being launched in India to capture the growing mid-market, which is about to witness a rooms shortage.

indiOne would give IHLC a share of what consultants predict will be India’s burgeoning mid-tier and budget hotel markets. With a middle class of 240 million and compounded annual growth in domestic travel of more than 14% (according to Jones Lang LaSalle Hotels), India is bracing for a mid-tier rooms shortage within the next three to five years. “indiOne is addressing a market that, in India, is under-served, under-organized in secondary and tertiary cities and very scalable,” Bickson says.

With development costs at a modest US$2 million and a room rate of US$18 to US$20 per night, Goel sees IHLC adding 1,000 indiOne rooms a year for at least the next five years. The first generation will be company owned. After that, franchising could be a possibility.

“The need of the hour in India is for good quality budget hotels. indiOne has the potential to fill that gap. I can easily see Taj having 70 to 80 indiOnes in operation in the next five years,” Thadani says. indiOne reflects some fresh approaches to design, but the look is not the only thing that differentiates it from the handful of mid-tier brands that tried and failed in the Indian market. “Taj has the human resource skills to operate these hotels. Manpower requirements in India are going to become very challenging in future, and other chains will need to address that.” Getting a jump on other chains is key. “This strategy will enable Taj to capture all ends of the market, city by city,” Thadani says. Playing catch-up will be tough. “India is a difficult market to penetrate and understand,” Thadani notes. “You need a lot of patience. There are many hurdles. But, if you can survive, the rewards are certainly there.”

Some consultants question the benefit of budget portfolios for building EBITDA. They argue that adding one luxury hotel does more for EBITDA than dozens of 40-room properties—and is less of a drain on corporate time and resources. Goel disagrees. “indiOne will generate cash returns at the same level as luxury hotels, but with a shorter gestation period. You have to look at the combination of EBITDA and returns. We see our growth as being one-third in the luxury sector and two-thirds in the mid-tier/budget sector. Both have robust margins. If a project does not clear our 16% to 18% return hurdles, it will not get done—regardless of the segment,” Goel says.

Brand Building
Growing IHLC into an international company will be as much about marketing as development. “Anyone who wants to grow from being a regional player to an international brand has to understand that the process requires an enormous investment,” says Arthur de Haast, global CEO, Jones Lang LaSalle Hotels, London. “There has to be substantial infrastructure for both marketing and management. Many ‘brands’ are really just collections of hotels. They are linked together under a common name but have no real bond.”

The Taj Exotica Resort & Spa in Mauritius symbolizes Taj's growing resort portfolio, which includes the Jiva Spa brand.

Bickson is taking a two-step approach to addressing those concerns. The first involves a brand architecture exercise to make sure Taj has a well-defined identity. “We do not want any confusion in the mind of the customer,” Bickson says. What he does want is clearer delineation within Taj Hotels, Resorts and Palaces’ portfolio. “The company grew organically but not strategically during the 1970s and 1980s. It planted flags wherever there were opportunities. As a result, the Taj portfolio ranges from 5-star hotels and palaces to some 3- to 4-star hotels in secondary markets. We do not want to dilute Taj’s brand equity at the luxury market, so we are looking at creating a new brand for the upscale hotels,” Bickson says.

Most likely, the new brand will carry a “by Taj” tagline to leverage the name without eroding the luxury image of Taj. In the meantime, Bickson has earmarked Taj’s core luxury hotels for membership in Leading Hotels of the World. He is beefing up support with an expanded sales and marketing office in New York City and a new sales office in Frankfurt. More will be opening in Europe, the Middle East and Asia as the brand grows.

Supporting far-flung development is never easy. Taj has the advantage of marketing savvy that Thadani terms “Taj’s main strength.” But it faces the problems of servicing single assets that will have to go it alone until the brand proliferates. The ever-optimistic Bickson refuses to be daunted. “You can grow organically with an acquisition such as The Pierre or you can go after a small chain. Growing a brand depends on getting the right targets. We have signed four management contracts in the last seven months. That is not bad.”