Keeping it clean

When Indian hospitality giant Taj launched a dry hotel in Dubai five years ago, there was no shortage of analysts who were sceptical about its ability to make money. But having proved the doubters wrong, the hotel group is now planning to create a region-wide empire of deluxe properties where the only thing dizzying will be profits. Richard Agnew reports.

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By  Richard Agnew Published  January 22, 2006

|~|Hotel-facade-night-200.jpg|~|Plush: The Taj Palace has seen high occupancy rates, despite rapidly increasing supply of hotel rooms in Dubai.|~|January’s been a dry month in more ways than one for Helmut Meckelburg, Taj Palace’s boss in Dubai. Along with much of the local hospitality sector, the Indian hotel giant’s sales have taken a hit from the death of Dubai’s ruler, Sheikh Maktoum bin Rashid Al Maktoum, and the postponement of major events like the city’s annual shopping festival. Sitting in his plush office in the group’s five-star hotel, which doesn’t serve alcohol, Meckelburg gives the impression of a man in need of refreshment. “Most hotels have had their bookings cut by 20% to 50%,” the German admits. Since its launch in 2001, however, the Taj Palace Dubai has had more difficult challenges to overcome than the one it is currently facing. When plans were first drawn up for the hotel, which is fully owned by Dubai business magnate Juma Al Majid and operated by Taj, it faced serious doubts over its ability to make money. But by targeting wealthy Gulf business travellers and families, the hotel has already proved profitable — and not just on the back of the growth of the emirate’s tourism sector. “Dry hotels, until recently, have been seen as something that is incomplete,” Meckelburg says. “This creates a mental block with the client because they think, ‘I don’t want to stay in this hotel because there is something missing.’ There were quite a few doubters but we’ve been successful in changing this perception — our product is excellent, we have the largest hotel rooms in Dubai and we have an excellent selection of restaurants, so we are as good as any other five star deluxe hotel in the city. “Also, 45% of our market is made up of travellers from the GCC and to them it’s an advantage. They like to stay in a set-up like this, which has a clean image.” Much of the early scepticism centred around the Taj Palace’s ability to cope without revenue from alcohol — which Meckelburg says can make up over 10% of a hotel’s overall earnings. “There is a financial issue — you don’t have a liquor bill so that reduces your spending,” he concedes. “But the owners simply do not want to make a profit from selling alcohol. It’s the same as Islamic banking. It is not all that much revenue – as a total I would say it was 8% to 12%. That’s not a small amount, but if the owner says he doesn’t want to sell liquor we, of course, comply. It’s not as big a handicap as you would have thought.” Meckelburg is keen to show that the hotel’s results have justified its backers’ initial investment. He says the hotel's room occupancy rate has come in at over 90% for the last three years, but overall revenue jumped by a third last year, helped by increased use of its spa and restaurants, as well as a large rise in average room revenue. He also says the hotel had 44 days on the trot recently where it was fully booked out. Going forward, though, the German concedes that its location in the centre of the Deira district of Dubai, where traffic is getting more congested, and the rapidly increasing supply of rooms in the emirate, will create more pressure on the rates the hotel can charge. “The growth cycle in Dubai has been much longer than many analysts expected. While the capacity of rooms has consistently grown, the demand has also grown, and even in 2006 we will see growth in both areas. The average rate in Dubai now is comparable to London and New York. But come 2007-2008, Dubai might see a slight imbalance in favour of the supply of hotel rooms, which means the hotels' rates might come down.” He adds, though, that if the government’s target of 15 million tourists a year by 2010 is reached, the hotel sector won’t experience a serious crunch: “There will not be any growth in 2007/2008 in terms of rates — there might even be a short term decline. If it gets too expensive a certain segment might move somewhere else — Malaysia, for example. “But if the tourism board continues to promote Dubai as successfully as it is now I don’t think there will be any problem in the long run. As long as we maintain a healthy rate, the balance will be fine.” Taj – widely regarded as India’s leading hotel chain — is also pressing on with its expansion plans in the Middle East, regardless of these concerns. For one, Meckelburg says the group has already received several approaches from local investors who are looking for an international company to manage dry hotels in the GCC — and not just in markets where alcohol is banned outright, such as Kuwait, Sharjah and Saudi Arabia. “We have changed our minds about dry hotels,” Meckelburg says. “In the beginning, we would not have considered any other dry hotels in the region but the success of this one has made us more flexible. The amount of requests we are getting from companies to manage dry hotels is quite large. “It’s a new concept that will become part of the landscape. There are quite a few owners who would like to build dry hotels that have approached us, and not just in Dubai. In Saudi Arabia there is a high likelihood for two or three. In Kuwait, also, there is a likelihood of at least one.” The German adds, however, that there isn’t yet scope for a new division to be created within the business to manage dry properties. “It’s not something that will become a brand. We’ve proven that the concept is mature but it is not something we want to build a brand around yet. We can run a dry hotel but a brand has to have a global presence and the concept of a dry hotel would not have a chance in many countries. Creating a brand costs a lot of money and doing it only for one region might not be profitable. At the moment there is no thought going into creating a dry brand.” Nevertheless, the hotel group is eyeing further opportunities for expansion in Dubai and the wider Middle East, outside the realm of non-alcohol serving hotels.It already operates hotels in Oman and Yemen, and says openings are being scoped out in Qatar, Lebanon, Egypt and Morocco. Next month, its top management team is also set to fly over from India to launch construction work on the 220-room Taj Exotica Resort on Dubai’s Palm Jumeirah — which it will manage on behalf of UAE property developers, ETA Star. Meckelburg also reveals that early discussions are underway over a development in Dubai in which the hotel group will have an actual stake: “There are talks going on. We are looking at a couple of options, and if the product is correct, we might go in with some equity participation.”||**||

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