Jakarta Globe | Insight

Industry Calls for a Halt on New Hotel Permits

Jakarta. The established hospitality industry in Jakarta is calling on the government to impose a moratorium on permits for new hotels amid an oversupply situation and wide-scale disruption of traditional services by online booking platforms, while the industry also experiences a “brain drain.”

Alexander Naoyan, chairman of the Jakarta Hotel Association, which counts among its members more than 40 four- and five-star hotels, said the oversupply situation applies to most major cities in Indonesia, including the capital.

Room Rate Decline

“The average room rate has been declining in major cities, let’s say Jakarta, Bali, Surabaya, Medan and Yogyakarta,” said the former managing director of The Dharmawangsa Jakarta, a five-star hotel in Kebayoran Baru, South Jakarta.

“In the hotel industry, everything has a trickle-down effect. Let’s say, due to weaker demand, five-star hotels lower their prices. What would happen to the four-star hotels? Of course, their customers would be attracted to five-star hotels. Then, four-star hotels will have to lower their prices and this has a knock-on effect on lower-star hotels,” he said.

The latest Central Statistics Agency (BPS) data shows hotel occupancy rates in Jakarta stood at around 57 percent in January.

“This is really bad; there was a time when a hotel could have 115 percent occupancy rate. When their room use turnover was still high,” Alexander said.

The veteran hotel executive, with more than 30 years’ experience, said hotel associations, including the Indonesian Hotel and Restaurant Association (PHRI), have been pushing over the past eight years for a moratorium on new permits by the Jakarta provincial government, including under former governor Basuki “Ahok” Tjahaja Purnama.

“It didn’t fall on deaf ears, but apparently we are always beaten in the name of the almighty investment. It is not too much different; government officials will mostly say, if we close the tap, it means no new investment, no job creation and it will not stimulate the economy,” said Alexander, who is also a PHRI executive.

Digital Disruption

While oversupply problems have not been resolved, the industry is facing digital disruption, with online hotel and booking platforms challenging traditional business models.

“A particular online budget hotel and booking platform could go as low as Rp 150,000 [$11] per night because everyone can now suddenly become a hotel owner. This is jeopardizing the pricing strategies of one-star hotels in Jakarta. The room is good, the service is good, but when you walk outside the building, you may realize it is on the corner in an alley. At the end of the day, you wouldn’t mind, because you pay so little for a relatively fair service,” Alexander said.

“The way to look at it is like how Blue Bird [an established taxi company] sees Uber. Would it like them? I don’t think so. But if you own a car, which is being used for Uber, what would you say? Good, right? Because you put your car to maximum productivity. The same analogy works for the hospitality industry,” he said.

Alexander did not name a particular brand, but Indonesia has seen an upsurge in online hotel and booking platforms such as Airbnb, Nidarooms.com, tinggal.com, Zenrooms.com (owned by Rocket Internet), Airyrooms.com and RedDoorz. The last one offers a hotel chain service advisory to hotel owners, should they agree to certain terms and conditions.

This means property owners can become hotel owners and they will have the pride of putting the logo of RedDoorz in front of their properties, if they agree to the terms.

This digital invasion did not just come from online hotel and booking platforms, but also travel fare aggregator websites and travel metasearch engines such as Agoda, Traveloka and Tiket.com. When asked whether these types of services are disruptive, Alexander’s reply was an emphatic “very!”

“These companies are competitors to traditional travel agencies, but they have very strong claws in the industry nowadays. Why? Because they control high traffic onto their platforms. Where in the past, hotel owners could tell traditional travel agencies to take a particular percentage in commission for marketing a room, today, these online travel agencies can tell hotel owners ‘it is your own loss if you don’t use us; we can boost your hotel occupancy rate on the back of our strong user traffic.’ But in return, they demand very high rates,” Alexander said.

Without mentioning names, he said online travel agencies could ask for more than 20 percent commission if they manage to find occupants for a room. In the past, paying 8 percent commission to a travel agent for a luxury suite would be considered high, “but of course it all depended on the hotel’s location and [nearby] attractions,” Alexander said.

“To be a good hotel owner, you now have to combine all methods. You still need to promote your room directly by yourself, use online travel agents, or create your own online booking service,” he said.

Brain Drain

On a much more fundamental level, the executive who has worked for Delhi-based The Oberoi Group, said the industry is still pushing the government to provide a comprehensive system that will impose requirements for certification of various job layers within the industry.

If the government asks each hotel owner to show that their staff have secured the required certificates, it would help the industry maintain a high standard of service. The hospitality industry, just like many others, Alexander said, is experiencing what he calls a “brain drain” in top-level management, with many skilled executives attracted to lucrative positions abroad.

“Usually, when you want to open a hotel, you may want need to hire a general manager who has worked in other hotels right? Or at least one level below that. O.K., if you don’t want to bother with all of that, just do a strategic partnership with a hotel chain. Unfortunately, they won’t find suitable candidates either in the market, because new hotels open every year,” he said.

“Then, what would happen? They may take [someone from] two, to three levels below. Can you imagine what damage they could do? So, I am sorry to say, you will have a general manager, who was just a restaurant manager, or front office manager. Let’s say hotel owners find this out and fire them, but when they move, would they return to their old jobs with a lower salary? I don’t think so,” he said.

“All of this would not happen if the government imposed a strict certification system on anyone working in the hospitality industry. The government could just ask where is the certificate of your general manager, manager, etc. In the end, it is the hotel owners themselves who benefit from this certification enforcement,” said Alexander, who has also worked for the Four Seasons hotel chain in Bali for 15 years.

Alexander said, in accordance with international practice, a hotel general manager may require 54 certificates in different aspects of the hospitality business, which are actually subordinate jobs.

“Securing all of those shall not be difficult if we have a proper system in place; let’s say for every executive within the hospitality business, whenever they will be promoted, they will have to take a test to get a certificate first,” he said.

Unfortunately, of the 54 certificates required by a general manager, less than a third are available in the country and many are not standardized, with some tests done by non-hospitality industry players.

“For example, for hotel engineering, the certification comes from the engineering sector, not from the hospitality industry,” he said.

At the end of the day, in the face of such tough challenges, Alexander said dozens of hotels in Jakarta are currently for sale, as owners cannot afford to repay bank loans and meet other financial commitments.

“This is not a joke; let’s say in your feasibility study to your bank, in which I suppose you would put an optimistic number; you put your average room rate per day at Rp 500,000 and you tell the bank you are targeting an 80 percent occupancy rate. Maybe your moderate calculation is that you could survive an average room rate per day of Rp 500,000 and still manage a 50 percent occupancy rate. But what happens? You are facing an average Rp 300,000 room rate per day and 40 percent to 45 percent occupancy rate. How would you survive?” Alexander said.

He said according to his observations, there are currently very few hotels that have not partially closed down some of their operations.

“For example, if they can’t figure out how to pay the electricity and water for one entire floor, they will shut that floor down, or just keep open some rooms. This is what is happening. Even owners of some starred hotels rent out rooms to customers on a monthly basis, with fares similar to the cost of renting a luxury apartment, as they desperately try to cover some very basic operational costs,” Alexander said.

He said the government needs to pay serious attention to the industry and expressed hope that the Tourism Ministry’s target of attracting 20 million foreign tourists to Indonesia annually by 2020 could be realized.

“If we have that many foreign tourists, everyone in the hotel industry, be it digital disruptors, hotel operators and owners, will have a large enough margin to sustain decent operations,” he said.

Meanwhile, he said, stronger regulation of the industry is the best answer.