This is part two of a two-part interview with Chien Lee, founder of Chinese private equity fund NewCity Capital. Click here to read part one.
A decade ago, small business owners and middle class travelers faced a dilemma: Break the bank staying in a plush foreign hotel or take a risk and check into a cheap local room where you may or may not receive hot water, a television or basic provisions. Today, they have more choices than ever before and soaring demand is driving industry innovation.
At the heart of this development has been 7 Days, one of the largest budget hotel chains in China and now a cornerstone brand of a hospitality group backed by the likes of Carlyle Group and Sequoia Capital. Its co-founder Chien Lee remains enthused by the prospects the market offers and sees huge opportunity in the largely underserved mid-tier market.
In the second part of an interview with China Economic Review, Mr. Lee talks about chasing the middle class, ponders the difficulties currently being faced by the big luxury hotel groups and gives his thoughts on why marketplace services like Airbnb will take time to take off in China.
What was the opportunity you saw in the market when you launched 7 Days in 2004, and how has the market changed since then?
Ten years ago, China was just opening from manufacturing into domestic consumption. The market was growing. My partner and I saw the opportunity in the consumer sector. I lived in the US for 20 years from the 1980s and I saw that most of the businesses were run by individuals, just mom and pop owned stores. But in the 1980s, the big brands took over the small retail chain store. For example, you used to go to a mom and pop store to buy stationary but in the 1980s Staples and Office Depot opened up and all of those mom and pop stores closed. They took over the whole market.
So in 2004, we saw a lot of no-star hotels or zhaodaisuo (hostels), individual owned or local government-owned. They didn’t have brand names or proper management because they were individual. So we saw the market there, we saw the Chinese economy was opening up, a lot of small businesses were starting and a growing middle class that liked to travel. People across the social spectrum liked to travel. So the budget hotel was a huge, huge market and that’s why we launched 7 Days.
There are now several budget hotel brands in China. What are your thoughts on that?
I think it’s really healthy. We only have four or five brand names in this space in China, like 7 Days, Home Inns, Hanting, Jinjiang. But China still has a lot of market space. You see, at the beginning, we only had the first or second tier cities, but now we are going into the third tier city, fourth tier city and even the small town – we are going there and that is a huge market.
Another thing is urbanization – that will play a significant role in budget hotels. Because you are transforming this small town or village into a small city so you need budget hotels. I think budget hotel market still has a lot of potential going forward.
7 Days has around 2,000 hotels in 230 cities. What is the geographical spread?
Many on the east coast. At the beginning, we focused on the first or second cities. But now we focus on third or fourth cities so we are more spread out now. We are moving out west slowly. We are spreading into small towns in the west. We are looking all over China, not just specific areas. If there is a market, we will go there. We are already in emerging centers like Wuhan and Chengdu, and probably, if there is the opportunity, we will open more there.
What are the biggest challenges 7 Days has faced in establishing its position in the Chinese market?
The biggest challenge is the people. China has its market already, it is there, but it is the people who manage these hotels. There are 2,000 7 Days hotels, which require almost 4,000-5,000 managers for the hotels due to shift changes. People are really important; it is one of the challenges. The other is how to maintain the quality of the hotel and the brand name.
Other companies have the same thing. The management team at 7 Days is more personal, it is people first in the company corporate culture, that is number one. On the business side it is always customer first, how to be dedicated to the customer.
Earlier this year 7 Days was taken private and is launching some new mid-market hotel brands. Can you tell us more about your plans?
Our founders, Carlyle Group and Sequoia Capital formed a concession to take the 7 Days private and now Plateno Hotels Group is a hotel operator. Our brands include Lavande Hotel, James Joyce, Portofino, 7 Days, and the Zmax Hotel. We see the middle market is huge going forward, besides the budget hotel, and because China has a lot of medium and small business across the whole economy and we see a lot of business travelers need facilities. They travel a lot between city to city. Also, we see the room to create a couple of good brand names for the middle-level hotel in China, which is why we have got into this market.
By moving into the middle-market, are you not risking getting into competition with foreign hotel groups that have a strong presence in the mid-upper segment?
The Chinese market is so big that there is room for a few mid-end hotels in the market, easy. We are localized, we understand the market and we already have a platform through 7 Days, and we have 70 million club members, which provides a lot of data. And also we don’t need a third-party registration system. We have 70 million members and our own reservation system and that gives us a lot of advantage. We have the infrastructure to get into the middle market and we understand the market. I see a lot of foreign names, some have success, some they do not. Also, I haven’t seen any hotels dominating the middle market yet, no major hotel names and brands, unlike the budget hotel market. Even Holiday Inn, they are here, but they do not have a dominating brand name and that is very important. I’m not saying only us, but you need to have three or four dominating names in the middle hotel market.
China has seen a massive build up of luxury hotels in recent years, especially foreign brands, but that market is currently struggling with low occupancy rates and falling room rates. What is your view on all this?
I see a lot of foreign luxury groups coming to China and they are going through some difficult times at this moment but my opinion is that this is a cycle and that the market will come back because the economy keeps growing and the middle class keeps growing and urbanization is coming so the market will come back, but how long, that depends.
Marketplace services in the US such as Airbnb that match rooms in private homes with travelers are challenging established hotels. Do you see something similar happening in China?
There is something similar starting up in China. I see a couple of services renting out condominiums and rooms as a private service. It has started but it is not fully there yet, it is way far away. It is not near to becoming competition to hotels yet because of their size and their location. They are mostly in tourist areas; for example in the US it is mostly happening in places like Orlando, Florida, near Disneyland. So they do not pose competition in China yet.
Does this have something to do with the culture as in China people see their home as a very private place?
It is a little bit of a cultural thing. The culture in China is changing a little bit. Going forward I don’t where it is going, but there is still
a long way to go before it can be accepted here.
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