Disruptors: Shaking up the budget hotel market

This article first appeared in Enterprise, The Edge Malaysia Weekly, on March 13, 2017 - March 19, 2017.
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Budget hotels will soon have the largest market share of the hospitality sector. The global market is worth some US$200 billion while the Southeast Asian market is US$15 billion to US$20 billion.

Meanwhile, the Southeast Asian budget travel market, which includes low-cost flights, is worth US$350 billion a year. Online sales of budget accommodation contribute a hefty 20% to 25% to this. 

In Malaysia alone, the budget hotel market is worth US$2 billion to US$3 billion. So, it is only natural that entrepreneurs vie for a piece of the action. But according to Sameer Kaushik, country manager of ZEN Rooms Malaysia and Sri Lanka, his company did not begin solely with that end in mind.

He tells Unlisted & Unlimited that it was not the potential profit but an encounter with a cockroach in a hotel room in the Philippines that spurred co-founder and global managing director Kiren Tanna to establish a chain of high-quality, affordable hotels.

Tanna used to work for global management consulting firm McKinsey and Co, which put him up in four- or five-star hotels whenever he had to travel. But when he left the firm to start Foodpanda Asia, he decided to check out three-star budget hotels and was impressed with their facilities.

“As a corporate traveller, he rarely utilised amenities such as the gym or swimming pool and thought that staying at a budget hotel was a steal. For a fraction of the price, you could stay in accommodations that had the same basic amenities, but without paying extra for the amenities you do not need. Then one day, in the Philippines, he checked himself into a budget hotel and found cockroaches in his room,” says Kaushik.

This is a common affliction among independent budget hotels or hotel chains, he points out. “Sometimes, even if the reviews are good or it looks good from the outside, it can yield unpleasant surprises such as a non-working television set, non-functioning air conditioner or weak WiFi.”

After the cockroach incident, Tanna started thinking about the quality of budget hotels — sometimes they were good, but sometimes they were not so good. What if there was a service that could inspect and certify them, just like those for restaurants?

That was how the seed for ZEN Rooms was planted. With his management consultancy background, Kaushik spent several months doing research before he approached Berlin-based Rocket Internet, which builds online start-ups and has stakes in e-commerce businesses.

The company put him in touch with Nathan Boublil, who had sold a start-up in the data aggregation space. The people at Rocket Internet figured it would be a good fit because Boublil had experience in the hospitality industry. The Frenchman was Cambridge-educated and a former investment banker at Deutsche Bank. He had also won the Entrepreneur of the Year award at Cambridge in 2013.

Tanna and Boublil spoke on the phone and hit it off immediately, so much so that the latter packed his bags and flew to Jakarta the next day to join Tanna in starting ZEN Rooms.

It was the middle of 2015. The two partners used a budget hotel as their office. The hotel was also the first to sign up for their service.

“We had no team, no infrastructure. We would conduct interviews in the restaurant of the hotel. We signed up the first 10 hotels ourselves. Then, we got our first team on board. Very soon, we had a country manager and strong sales team for Indonesia,” recalls Boublil. 

Within three months, they went from 10 to 200 hotels in Indonesia. “We also set up marketing, distribution, operations and other functions. We never looked back,” he says.

LEVELLING THE PLAYING FIELD

ZEN Rooms seeks to bridge the gap between established budget hotels that offer quality accommodation but charge a 30% or 40% premium on room rates due to their branding and the independent ones that offer cheaper rooms. 

“Every ZEN Rooms guest is guaranteed cleanliness, free and fast WiFi, a comfortable double bed, air conditioning that works, a hot shower and 24/7 customer support,” says Kaushik.

Also, rather than flood the market with more buildings, the company employs the “hotel within a hotel” concept. Instead of building its own hotels, it partners existing hotels, which makes it easier to scale.

“We identify hotels that are not doing well but are in good locations, or hotels that are doing well but need an extra boost, and partner them to boost occupancy and sales,” says Kaushik.

Today, ZEN Rooms is also available in Hong Kong, the Philippines, Thailand, Malaysia, Singapore and Sri Lanka. “We started in Southeast Asia because the start-up market here was on the verge of a breakout. There is a growing number of technology start-ups and the governments in this region offer great support,” he says. 

“Malaysia is one of the best places to start a business. It is very easy for a business to take off here and there is strong support for the digital economy from the government, which is great.” 

Kaushik says the Zen Rooms team is very happy with the fast growth in Malaysia as well as becoming one of the top five budget hotel players in the country within a year of entering the market. “The number one budget accommodation chain in the country is Accord Group, with 43 hotels and 3,000 rooms; followed by Tune Hotels (14 hotels and 2,400 rooms); Sun Inn (28 hotels and 1,400 rooms); ZEN Rooms (100 hotels and 1,100 rooms); and Silka Hotels, which is under 

Dorsett Hospitality International (4 hotels and 750 rooms).”

Globally, ZEN Rooms went from zero to 5,000 rooms in only 15 months and achieved month-on-month growth of 30%. In Malaysia, it has achieved month-on-month growth of 50% since entering the market. 

Kaushik says ZEN Rooms has been profitable, with revenue growing 20 times in the last 12 months. He attributes the growth to innovation, competitive pricing, fast set up and implementation and high standards. 

He adds that the price point is an important factor in helping the chain achieve its goal of becoming the leading budget accommodation provider. He also emphasises the importance of technology, which helps the company offer prices that are below market rates.

“Traditional hotels find it difficult to innovate as they do not see the business value in technology. For example, you do not actually need a front desk officer. Just like budget airlines, we have a kiosk where the customer can conduct a self-check-in, which cuts costs and allows the customer to check in at any time. We are experimenting with this technology in Indonesia and other countries,” says Kaushik.

By implementing the right technology, it will decrease the inefficiencies in the system, hacking a further 20% to 30% off the cost of running a hotel, he adds. “Also, since we operate on a large scale, this will benefit our partners. Because in terms of procurement, we have bigger negotiation power. Thus, procurement of quality items becomes much more affordable.”

Kaushik says the rooms come with a flat rate and the cheapest one in Malaysia costs only RM45. He adds that budget hotels should be priced lower than flights to this country. 

“It makes no sense for reliable Malaysian budget accommodation to be pricier than flights to this country. Thus, we made sure that 70% of the ZEN Rooms in Malaysia are below RM100. We believe this will democratise travel, allowing people to explore more places and spend more within the country,” he says.

In terms of identifying hotels to partner with, Zen Rooms has a standard process. “First, we have a local team that collates a database of how the local hotels are performing, its online reviews and other such matters. After profiling the hotels, the team reviews the database — the accommodation, its location and price. From there, we funnel the database into a list of hotels,” says Kaushik.

“Once we have the pre-selected list, our sales manager or business development team conducts a soft audit of the hotels. Here they find out the quality of the rooms, the linen, the lighting, the condition of amenities such as the WiFi connection, among others. They also have a list of questions that they ask hotel managers. From there, we narrow down our list of preferred hotels.

“Finally, once we have selected our partner hotels, we discuss how we will promote the premises and if need be, request an upgrade of the premises. If they require funding to do so, we will provide the necessary support.”

Once these upgrades have been done, the onboarding process commences. ZEN Rooms takes care of the branding and promotion of the hotel and provide training for the staff.

“It is not a one-off training, but an ongoing one as we conduct audits on the quality of the hotel and its service on a weekly basis. Once we have familliarised them with our processes and systems, the hotel is ready to go live,” says Kaushik.

This process takes less than 21 days, he adds. “In Malaysia, we can do it in two weeks.”

He says it is not difficult to convince hotels to give up their rooms to ZEN Rooms even though it charges less and can be viewed, in some sense, as competition. “On the contrary, it is an absolute win-win situation. Most independent budget hotels we partner run at only half occupancy. We help them improve quality by forcing upgrades — fixing the WiFi and air conditioning, providing deep cleaning, conducting staff training and so on. These result in significantly higher occupancy rates and customer satisfaction. 

“We are not competitors, we are partners. ZEN Rooms serves as an effective distribution and marketing channel. Our brand ensures high standardised quality across all locations and makes booking small independent hotels risk-free for customers.”

FUTURE PLANS

Kaushik says the biggest challenge today is ensuring that customer satisfaction is maintained. “How do we maintain customer satisfaction even if we grow very large? How do we keep innovating and getting new ideas and concepts? How do we localise our operations and yet standardise our processes across all the countries? These are our challenges. We are not concerned about competition as most traditional hotel businesses are not innovating as much as we are.”

ZEN Rooms will be expanding to other cities in the country and aims to become the leading budget accommodation player in Malaysia. “We will be expanding to Johor Baru, Cameron Highlands and Sabah and Sarawak soon. Our goal is to be one of the top three budget hotel players in Malaysia by the end of this year,” says Kaushik. 

In five years, it plans to have 5,000 hotel rooms, which will make it the number one budget hotel player in the world. “We are already one of the top three budget hotel players in Indonesia and the Phillipines. By the end of this year, we should be in the top three in all the countries we are operating in.”

The company will continue to focus on expansion as well as creating new products where there is a demand for them, he says. “For example, in Malaysia, we are coming up with ZEN Homes. I have observed that apartment rentals, Airbnb rentals are really big here. So, since there is a demand for this, why not tap it?”