Gone are days when the traveller to China was forced to make do with substandard accommodation. The international hospitality industry has been quick to replace the dearth of quality accommodation with a wealth of four- and five-star hotels. A walk down one of Beijing's main thoroughfares or a glimpse at Shanghai's skyline will show luxury hotels occupying some of China's most prestigious and architecturally exciting properties. Yet although there are plenty more five-star hotels planned, in ever taller and more luxurious buildings, it is the budget end of the market that is seeing the swiftest growth.
The concept of a luxury hotel in China is a relatively new one, but the concept of the branded budget hotel is even younger. The bulk of the hotel market is at the lower end, and until recently cheap hotels have been of a poor quality in properties that are rapidly deteriorating. In the last couple of years, however, a number of companies have been offering a branded, standardised product for the traveller who does not want to splash out.
Since the Chinese system that gives out stars to hotels doesn't recognise establishments with fewer than three stars, budget hotels generally fall under their radar. They are often described as having two-star lobbies with three-star rooms containing four-star bed. The aim is to offer this product for around RMB200 a night. These hotels are targeting not only the cost-conscious business traveller, but also the increasingly affluent middle class for whom leisure travel is becoming a greater priority. Neither can be neglected, "In order to reach very high occupancy rates, you need to have a well-balanced combination of both business and leisure travellers," says Gilles Larrive of Ibis Asia, the budget hotel line of Accor Group.
Budgeting for a big expansion
The budget hotel industry's major players are at varying stages of development. Jin Jiang Inns, which is part of the hotel subsidiary of government-owned Jin Jiang International, currently has 80 hotels, with a further 100 in various stages of development. Home Inns, which has been developed with the cooperation of travel website Ctrip.com, has over 100 hotels. The main foreign player, Accor's Ibis brand, has only three hotels currently in operation. There are also companies focused in particular localities, such as Shanghai's Motel 168 and Guangzhou's 7 Days Inn.
These companies should not be seen in isolation from their plans to expand; all have big plans. Ibis might only now have hotels in Tianjin, Chengdu and Qingdao, but it has another 20 hotels under construction. It expects to have around 100 hotels in China before the decade is out. Jin Jiang Inns is going to be opening hotels on a weekly basis, so that by 2010 they should have 600 hotels.
Such ambitious expansion plans are not solely based on future expectations of demand. In fact, they need to set up as quickly as possible to soak up the enormous demand that already exists for cheap rooms. "I think that the hotel business in China is going to be absolutely booming for the next five years," says Christopher Sheldon, vice president of operations for Jin Jiang Inns.
"When we open a hotel, after it's given about a year to mature, its occupancy rate is about 90%. When another hotel chain opens next door, our occupancy rate will drop to about 80%; but after six months, it will probably have climbed back up to near 90%," In the hotel industry, an occupancy rate of around 60% is generally considered to be the break-even point and 70% is thought to be healthy. So in terms of filling up rooms, budget hotels have no problems.
Another reason that the hotel companies are going big is because the individual revenue from each hotel is not that high. "For this budget hotel model to work, you've got to go for a big scale.," says Nigel Summers, director of Horwath Asia Pacific, a consultancy specializing in the hospitality industry. "If you're not going to go for hundreds and hundreds of properties, it's not worth bothering with. The properties are small, and the rates are small, so you've got to fully commit to it and have very large expansion plans."
It is in order to fuel this expansion that two of the major companies are going public, with Home Inns expecting to raise US$80 million by listing on the NASDAQ, and Jin Jiang International's hotel division going public on the Hong Kong Stock Exchange for around US$300 million.
Growing Pains
Expanding at such a speed is not without its problems. The key feature of a branded budget hotel is that it offers a standardised product with a reliable level of service. Essential to this is finding good people to staff the hotels, talented managers especially. At the luxury end of the hotel market, the poaching of managers can be quite ruthless. The employment problem at the budget end is quite different: with so many hotels opening up, sometimes in fairly remote cities, there is a discrepancy between the supply of managers and the new level of demand. To ensure that managers are up to the job, companies must spend plenty of money on training - either on a brick-and-mortar school or on a set of travelling trainers. What might seem like a negligible cost for a more upmarket hotel can be a real burden to a budget hotel brand.
"When you're running a budget hotel the costs can creep up if you're not careful," says Sheldon. "If you're trying to keep it under RMB200, you've got to keep an eye on the payroll, the cost of soap, the cost of land, et cetera." One of the ways budget hotels do this is eschewing many of the extras that can be found in a luxury hotel; such as business centres, gyms and, usually, restaurants.
One of the biggest costs is land. The wrong plot could make a budget hotel completely unviable. In Beijing, for example, land is so expensive that it is difficult to keep around the target price anywhere within the city centre. There are ways round this, however. "We work very closely with developers who are building multi-purpose developments," says Ibis' Larrive. "If you have a shopping centre with, say, a Carrefour in it, it matches a budget hotel much more closely than a five-star hotel." The cost of land is spread amongst the multiple properties that are on it.
The future of cheap
It is not yet obvious what direction budget hotels are going to take in the medium term. "It'll be interesting to see what a budget hotel will look like in five years," Sheldon says. "As people get more sophisticated and experienced, they start forcing the quality of your amenities up."
Chinese travellers will likewise start to expect more as they continue to get richer. This will leave budget hoteliers with a choice: should they maintain their current standards, and with it the current price, or should they charge more, and bump up the level of quality offered, thus satisfying their current customer's increasing demands? In other words, do today's budget hoteliers want to become tomorrow's medium-priced hoteliers, or do they want to remain at the budget end?
Whichever they choose, they will leave a gap in the market either above them or below. A gap that will be swiftly filled by new hotel entrepreneurs. Which is good news for the consumer, as the Chinese citizen is now being catered for by the hotel industry more than ever before.
