February/March 2008

As the Chinese hospitality industry grows and diversifies, China is likely to replace the United States as the third most popular tourist destination according to the “United Nations World Tourism Organization” (UNWTO). At present, China ranks forth after France, Spain and the United States. Due to the rapid development of the country’s tourism industry, the UNWTO forecasts that China will become the most popular destination by the year 2015. The coming mega events such as this year’s Beijing Olympic Games and the Shanghai Expo in 2010 will further fuel this trend. The number of overseas travelers to China increased from 10.5 million in 1996 to over 49 million within ten years and the “Pacific and Asia Travel Association” expects the inbound tourism to China to increase by five percent on year-on-year basis between 2007 and 2009. Figures published by the Ministry of Commerce showed that retail sales from the hotel and catering sector accounted for 14.1 percent of China’s total retail sales of consumer goods during the first quarter of last year. The sector rose 17.4 percent year on year to hit RMB 298.36 billion in the first three months of 2007.

Construction Boom

The Chinese nation is undergoing a massive construction boom which is unique in the history of lodging. The U.S. based hotel real estate consulting and research firm “Lodging Econometrics” (LE) sees a hectic pace in the hotel development in the whole Asia Pacific region and China in particular. Substantial tourism growth in China, India and the Gulf States was identified as one of the four mega trends influencing the global hotel industry. According to LE´s research, China had 782 hotel projects in the pipeline in 2007 with a total of 222,591 rooms. 598 of these projects are presently under construction or have already been finished last year. Due to the upcoming Olympic Games Beijing is catching up, but Shanghai is still China’s most sophisticated and brand-saturated hotel market with approximately 100 projects under way. The two metropolises in the South are also joining in the building boom: Hong Kong plans to add 50 new hotels to its portfolio and visitors to the gambling haven Macau will soon be able to choose among 36 new hotels.

Many of these planned hotels will be large, iconic buildings, constructed by the world’s most famous architects or designer groups. LE foresees that the market will be dominated by luxury brands such as InterContinental, St. Regis, Marriott, Hyatt, Hilton, Four Seasons, Shangri-La, Mandarin Oriental, Banyan Tree, and others. But the construction boom does not stop at the borders of the top-tier cities as many of the second-tiers such as Tianjin, Hangzhou, and Chengdu for example are also building feverishly with at least 20 projects in the pipeline. Guangzhou will be hosting the Asian Games in 2010 and has roughly 25 projects under way. These cities are planning a number of larger, internationally branded projects mostly in the “new city areas”, where convention centres, office towers and upscale residential units can be found. Generally, second-tier cities attract many China-based, mid-market brands like JinJiang, Motel 168, Jinling, and Wyndham’s Super 8, as well as others.

Increasing Competition

The current optimism is a big step since the 2003 SARS which had a devastating impact on Asia’s hotel industry. China’s recovery from the depression period is impressive and has been supported by the high volume of business travellers and increasing number of leisure tourists. This development has an impact on the domestic and international side of the industry. Different needs have to be fulfilled which results in a greater diversity across the hotel industry from luxury to budget hotels. Although the attention has centred on upper-end business hotel chains in the first-tier cities, a broader picture is evolving. There are an increasing number of budget hotels competing for customers and on the other end of the scale the so called boutique and design hotel sector is evolving in cities such as Shanghai, Beijing and near major tourist attractions.

As the number of hotels and choices increases, the battle for the best location intensifies. But the location is only one part of the rising competition. The countless new openings in tight labour markets such as Shanghai for example result in major problems in regards to recruitment. Each new hotel is a potential threat to “steal” skilled staff from established hotels. This means that hotels will have to face a situation of rising wages and problematic retention.

The Hong Kong based Shangri-La Hotel and Resorts did react to the threat of loosing experienced staff. In December 2004 the hotel company opened the Shangri-La Academy, the company’s own training centre near Beijing. It was opened to intensify employee development in pace with the group’s growth in China. The Academy offers five-week to three months training programmes and was opened to the public in August 2005 with programmes for potential hospitality professionals at the foundation level. Other major hotel chains established their own development centres as well. In February 2007 the UK based Intercontinental Hotel Group (IHG) opened its second hospitality-training centre, the IHG Academy in Chongqing, following the launch of the IHG Academy in Shanghai in September 2006.

Luxury Hotels

Luxury hotels eye strongly on the Chinese market and more and more of the world’s leading luxury hotels are going to invest. Shangri-La Hotels and Resorts for example have been present in China since 1984, when it opened its first hotel in Hangzhou.

In 2008, the Jumeirah Group from the United Arab Emirates will enter the market and plans to open its first China hotel, the 309-room HanTang Jumeirah Shanghai. The luxury group also plans to invest in Beijing, Hong Kong and in Hainan Island. Another luxury brand, the Conrad Hotels & Spa which is a subsidiary of Hilton Hotels Corporation will also open its first mainland facility in Shanghai this year. Further investments are planned in Beijing and Macau. The 362-room Conrad Shanghai will be located in the Xintiandi area like the Jumeirah Shanghai.

The German luxury hotel firm Kempinski is already present in China since 1992 but still intends to grow. The company announced that it will launch the luxury Tangula Express train in the second quarter of this year. The train will have suites and gourmet cuisine with a 24-hour butler service, spa and wellness treatments and will run from Beijing to Lhasa via Xi’an during the warm season and from Beijing to Dali, Guilin and Lijiang via Xi’an during the cold season.

Individual Lodging – Boutique Hotels

The first wave of hotels being built in a city are normally “safe choices” like chain hotels. At a later stage hoteliers and investors are more venturous which is the case in Shanghai for example. They cater to guests who are looking for different places than already experienced as leisure travellers are increasingly demanding stylish, unique and life-style friendly hotels. These so called boutique hotels are design-conscious, fashionable accommodations offering personalized services and luxury facilities; a trend that started in the 1980s. The age of boutique has come in the 1990s when younger people started to spend their vacation in cities and not only on the beach. Generally, they are smaller than the bigger group hotels and different in service, design and vibe.

Judging by numbers alone China is ripe for this trend. World Hotels, an association of more than 500 independent hotels, has noted a remarkable growth in the China region in the last year alone. In Shanghai, the number of boutique hotels in the group has jumped from one to seven such as “The Nine” or “Old House Inn”. One of the most unique boutique hotels in China is located in the Shuigan Valley near Beijing and called “Commune by the Great Wall”. It has been created by a group of twelve Asian star designers and has won an award at the 2002 Biennale in Venice. Since 2005 the hotel is run by the luxury hotel chain Kempinski.

In addition to the boutique trend, many hotels try to distinguish themselves by offering special services to their guests, as for example catering to the special requirements of their female guests.

Although boutique hotels are an increasing trend in China, the hospitality market is not likely to be dominated by such hotels. Especially in major cities as Shanghai it is a challenge to run a boutique hotel since the revenue that is needed to pay for the land prices is high.

Cost-Conscious Travelling – Budget Hotels

China’s budget hotel sector is being driven by the increasing number of cost-conscious business travellers seeking affordable-priced hotel rooms. The economy hotel industry started in 1997 when Jinjiang Inn, which is owned by the country’s largest hotel operator Shanghai Jinjiang International (Group) Co., opened its first budget hotel in the country. According to the Economy Hotel Report released by the Ministry of Commerce and the China Hotel Association the sector developed quickly in recent years with domestic players still dominating over overseas operators. There are an estimated 1,000 budget hotels in the country, operating under some 100 brands with Home Inns and Jinjiang Inn being the two biggest budget hotel chains in China. According to the report, although the market still has abundant room to grow, the sector has witnessed a 100 percent annual growth rate in the past two years in terms of rooms and brands. The report also reveals that the average cost to set up a budget hotel is RMB 7.3 million with an average per-room investment of RMB 55,000.

This modest investment with a relatively stable return attracts investors with a capital of RMB 5 to 10 million. There is the concern that the sector may overheat since such hotels mushroom and the investment return decreases. The average occupancy rate declined from 89 percent in 2005 to 82.4 percent in 2006 and the room rate decreased from an average of RMB 328 in 2005 to RMB 209 in the following year.

In October last year the economy hotel sector saw its first acquisition when Home Inn & Hotels Management Inc announced that it acquired the Top Star hotel chain for approximately RMB 340 million (USD 45.3 million). This acquisition, the first of its kind, may reflect a general trend of more frequent mergers and acquisitions in the future. A wave of acquisition is expected especially after the Shanghai World Expo when visitors and travellers to Shanghai begin to level off. Rising urban costs are a factor for all hotel owners, however economy hotels, although they have less costs for managing fancy facilities, tend to be mid-sized with fewer revenue-earning beds than five-star hotels. Quality control and service standardisation are also more difficult, since most brands franchise their operations in order to speed the growth rate.

Olympic Rush

Not only are the Olympic athletes competing for the gold medal, but hoteliers of the major hotel chains as well as tiny hostels are also looking forward to the gold rush they will be receiving come August 2008. Many hotels are set to increase their prices dramatically to about tenfold the current rate. In particular visitors that will stay for more than five days are likely to choose a budget hotel and might have to pay RMB 800 to 1,000 for a standard room opposed to the general tariff of RMB 60-180 during the rest of the year.

Conclusion

As a new middle class emerges in China, there will be a shift in demand for different hotel services; specifically budget and mid-market options will be in higher demand from both domestic and international travellers. Especially for this sector experts suggest moving quickly to second- or even third-tier cities and avoid concentrating on top-tier cities like Shanghai, Beijing or Guangzhou.

Consumers want to stay one step ahead of their peers, therefore hotel brands will have to work harder at creating new innovations. Brand execution is becoming more important not only in crowded but also untapped markets and qualified talent is a key strategic issue. The industry will in all probability face a series of mergers and acquisitions once the development has reached a peak.

Most forecasts believe in an enormous increase of the number of foreign visitors to China, but it still has to be seen how the country will cope with this impact. Although a lot of improvements have been made, it is still a long way for China to becoming the number one tourist destination in the world. Not only the language barrier has to be taken into account but also the internal transportation problem may be considered a challenge when reaching such large figures.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.