How Patanjali G. Keswani placed a big bet on India’s middle class with his Lemon Tree Hotels, and won

In the early 1990s in a newly liberalised India, there were two very distinct sets of clients that hotel owners catered to: one, the polished, upscale customer who would put up at luxury properties like the Taj hotels; and two, the rest, who would be left to the mercy of often unorganised and inconsistent guest houses and budget hotels. That was until Patanjali G. Keswani (popularly called Patu Keswani) thought of a middle path.

What changed in the 1990s is that a larger set of consumers—India’s burgeoning middle class—started looking for better accommodation. “They were willing to spend and make a trade-off for better quality,” explains Keswani, Chairman & MD of Lemon Tree Hotels (LTH). “It was like an epiphany,” he recalls, adding that looking at the hotel stats then, he discovered that there were only 25,000 branded rooms in India, of which 20,000 were at 5-star properties. “It was a very inverted pyramid of demand. So, clearly there was a white space, but the question was how do you create a brand in the mid-market space?”

Keswani decided to do something that was refreshingly different. LTH opened its first property in Gurugram (then called Gurgaon) in May 2004 with 49 rooms. Taking a cue from fresh lemons, the property mirrored the crisp and zesty essence of the citrus fruit in the sights, sounds and smells at every corner.

Keswani, an alumnus of IIT Delhi and IIM Calcutta, who worked with the Tata group for 17 years till he turned entrepreneur, had planned to build just one hotel, run it efficiently, and then take it easy and play golf and bridge. But fate had other plans.

“When we started, it [the hotel] was a pure mid-market product,” he says, adding that it was like a 3-star property with “4-star service levels”. But some customers who had upgraded from guest houses said it was too expensive, while some who had downgraded from 5-star properties said it was a step below what they were willing to trade off, he recalls. “So, we expanded both upwards and downwards,” says Keswani, 65.

Today, LTH owns and operates 101 hotels across 64 destinations, including in Dubai and Bhutan and owns/leases/operates/franchises hotels across the upscale, upper-midscale, midscale, and economy segments. And among the Indian hotel chains, it is the third-largest in terms of the number of rooms. LTH has 9,707 rooms; IHCL—that operates the Taj hotels—tops the list with around 20,000 rooms, followed by ITC with around 12,000 rooms.

While LTH flourished, nothing could prepare the hospitality space for Covid-19. There were significant fluctuations over two years due to evolving travel restrictions and health risks. According to the Ministry of Tourism, the share of India’s travel and tourism industry in the country’s GDP declined from approximately 5.2% in FY20 to a mere 1.1% in FY21.

“For our sector, Covid-19 was like a nuclear bomb. Suddenly, your revenue dropped by 85%,” says Keswani, adding that when one talks of resilience it’s about an entrepreneur’s ability to withstand shocks. “[But] there are some events where no matter what you say, you can never plan,” says Keswani, the winner in the Resilient CEO category of the BT-PwC India’s Best CEOs ranking this year.

LTH has shown a remarkable recovery since those tough years. It posted consolidated profit after tax (PAT) of Rs 140.54 crore in FY23, after posting a loss of Rs 137.36 crore in FY22; gross sales have almost doubled to Rs 874.99 crore in FY23 from Rs 402.24 crore in FY22. And there are 50-plus hotels in the pipeline.

According to financial services firm IDBI Capital, there will be robust inventory addition through management contract/franchisee to drive sustainable margin improvement in the mid- to long-term at LTH. “We continue to like LTH amongst the mid-scale hotels segment given its scale of operations. With the renovation of existing hotels under LTH and Keys (another LTH brand), we expect ADR (average daily rate, or the average rental revenue earned for an occupied room per day) to get a substantial push in the mid-term,” it said in a recent report.

Keswani says that in the short run, the highest growth will come from the luxury segment. “It’s the tip of the bell curve. It’s visible in the premiumisation trend,” he says, adding that the hockey stick growth will come from the mid-market space, where LTH is a leader. “I think in the next five years, close to 40% of India will get urbanised. That’s all these Tier II, III, IV towns. Naturally, there will be a growth in consuming class with demand coming from smaller towns and cities.”

According to the HVS ANAROCK India Hospitality Industry Overview 2022 published last year, in 2022, mid-scale hotels continued to dominate the market, accounting for 48% of all signed properties. The hotel industry is seeing a significant structural shift, with substantial investments directed towards expanding the mid-scale segment to cater to the needs of the growing middle class, it says. “The next big opportunity [will be] with GenZ. They’re aspirational, brand conscious, willing to live on credit more and more and moving into middle-income affluence,” says Keswani, adding that as more young people move into the Rs 15 lakh or higher income category, they will start consuming better.

Brokerage firm Motilal Oswal expects LTH’s strong momentum to continue going forward, led by further improvement in occupancy and average room rate (ARR, a metric similar to ADR), on the back of a resilient demand scenario. “We expect mid-teen ARR growth in FY25 with the occupancy rate of over 70%,” it said in a recent report, adding that it expects further increase in ARR within key brands such as ‘Lemon Tree Premier’ and ‘Lemon Tree Hotels’. “Supply is growing at ~5% p.a., while demand is growing at a much faster pace on a pan India level,” it added.

Experts say that domestic travel has emerged as the dominant force in the last few years, with Indians opting for road trips, staycations and workcations. The LTH boss says staycations, the rise of ‘bleisure’ (a combination of business and leisure) travel, the shift towards sustainable practices, and advancements in technology are upcoming industry trends that he’s well positioned to cash in on.

Keswani, who can often be found dressed in sweatshirt and trousers—and sporting a ponytail—in the boardroom, says nothing keeps him awake at night except Netflix. But he warns of the biggest potential threat his industry faces. “What happens when Google, Facebook, Amazon, or Apple use their global platforms, to bundle deals together like flights, restaurants, and hotel bookings? That’s the only thing that will disrupt my outreach to the customer and my brand.” That is something to chew on.

@PLidhoo