China’s hotel industry has been in the news again, despite having a history of less than 10 years. It is Home Inn, the national giant on an acquisition spree. On the other it is the rapid expansion international predators. The number of Chinese budget hotels has increased by almost 1000% in less than four years. It grew from 166 in 2004 up to 1476 in October 2007. Many problems that were previously ignored are now being highlighted as the industry matures.
Budget hotels are more affordable than ordinary hotels and this is why the industry has experienced rapid expansion. Budget has become the greatest challenge for budget hotels as China’s number of budget hotels increases.
Budget hotels face a serious problem with rising costs. Costs associated with expansion have been the main reason for cost rises in budget hotel chains, apart from general cost inflation. Shanghai Inntie Hotel Management Consulting CEO Hu Shengyang. Hu suggested that the increased number of budget hotels, and their increasing numbers, has led to a decrease in potential sites. This increases the competition between high-quality properties from hotel brands, which directly drives up site acquisition costs. Other costs, such as building, personnel and management, are also increasing.
“The cost rise can make the industry of budget hotels more rational.” Vice-CEO of Hanting Hotel Management Group, Mr Cheng Jun. Cheng believes that the current payback period for budget hotels, which is 3-5 years, is better than the 1-2 year payback period in the past.
Hu also agreed with the idea that industry consolidation should be made possible by cost increases. Although some smaller chains might have to close due to financial pressure, the large budget hotels brands could speed up their strategic development to ensure they are in a position to be first-movers in the future.
Home Inn has now purchased Top Star Hotel and withdrawn it. According to industry insiders, Top Star was expanding at a rate of 15% more than the industry average in order to list it quickly on the stock exchange. Top Star’s failure should be a warning sign for the Chinese budget hotel sector.
Budget hotels in China are not only facing rising costs, but also a problem of declining income. A 2007 survey found that the average room price had dropped from 328 Yuan/day in 2005, to 208 Yuan/day 2006, and that occupancy rates had fallen from 89% to 84%.
“One hand, it’s the rise in hotel numbers. On the other, these hotels share the same market positioning. This leads to the inevitable price war among budget hotels. Hu said. He explained that China’s first budget hotels were a copy of Western budget hotel models. The company would replicate the model in other cities once the pilot hotel had been successful. The proven model would be replicated by other companies, creating a problem of homogeneous competition in the budget hotel sector. This homogeneity problem was possible when the industry was in its early stages. However, strong market demand could have covered it. As the industry grows, however, consumers have more options. To attract customers, hotel operators must lower their prices.
Cheng said that homogeneity was not due to industry incompetence. He also pointed out that “limited-service hotels” are also known as budget hotels. The meaning of “limited service” in developed countries can vary depending on the target group. Multinational hotel chains often have thousands of hotels. These hotels can be divided into 8-12 grades based on different customer needs, such as business travel or tourism.
“Hotel chains will become more homogeneous as the market matures.” Cui Tao is an integrated marketing expert. The future of competition between budget hotels will not be on a shop to shop basis but rather on a group basis. To achieve core competitiveness, all aspects of a business such as branding, culture and business model must be combined.