Overcapacity may be the word most frequently associated with China’s luxury hotel market – particularly in developed, first-tier markets. But Ritz-Carlton, a subsidiary of Marriott International (MAR.NYSE), thinks there is room for growth as the city looks to secure its position at the top of domestic and international business itineraries. With the hotelier opening its second hotel in Shanghai this June and the world’s highest hotel in Hong Kong by the end of the year, Mark DeCocinis, regional vice president for Asia-Pacific, talked to CHINA ECONOMIC REVIEW about opportunities for expansion beyond the first tier.
Q: Was the decision to open another Ritz-Carlton in Shanghai based on the World Expo?
A: We made a decision a long time ago to have a second hotel in Pudong. Pudong was designated to be the city’s financial area 10 years ago, and it certainly has developed to meet the needs of the business community. Look at the exhibition and meeting spaces – all have been located in the financial district and toward the airport. When we scout for a location, first of all we look at where our guests are traveling on business or leisure. Shanghai is primarily a business destination, so our location at the Portman Ritz-Carlton in Puxi is ideal. In Pudong, we need a hotel that is close to all the offices in that area. We found a great partner in Sun Hung Kai (0016.HK) and developed a beautiful hotel with architecture that reflects a modern feel. With office, retail and some residential components, it works very well and caters to all the needs of our visitors.
Q: There are a lot of five-star hotels in China. How does Ritz-Carlton differentiate itself?
A: Here in China it took time for people to understand what Ritz-Carlton is. We don’t have different brands or serve different markets – we only serve the top 1-3% of leisure and business travelers, who have very high expectations for service and standards. That’s what differentiates us from everyone else. We made strategic decisions to enter locations such as Beijing, Shanghai, Guangzhou, Shenzhen and Sanya because that’s where our customers were traveling. The importance of Shanghai to luxury travelers in particular is unparalleled. People want a fast, efficient, reliable service, and one that’s consistent. At the Ritz-Carlton they know they’ll be taken care of.
Q: Who are your customers?
A: For all of China, about 60-70% of our clients are domestic travelers. A financial group may be from North America or Europe, but it still has Chinese employees and managers. Many hotels in other countries rely heavily on financial services firms, and I think that is also where you have significant upswings and downswings in business. The great thing about many Chinese cities is the diversity: finance, manufacturing, services and tourism. You also have the big state-owned enterprises here, something you wouldn’t have in other countries.
Q: And how does your pricing structure differ in China?
A: In terms of rates, we are just as flexible here as anywhere else – you always have to be flexible. In order to be in business in the long term, you must look at the relationship with a given company. We have key accounts with companies that we give special pricing to because they give us a volume of business, and we leave it up to each hotel to figure out what’s important to them in the community there. You have to make a decision that’s right for that hotel. These days you always have to be flexible on a city-by-city, hotel-by-hotel basis.
Q: Ritz-Carlton has two hotels in Beijing, and will now have two in Shanghai – aren’t these markets at saturation point?
A: There are indeed many five-star hotels in Beijing, Shanghai, and also Guangzhou and Shenzhen, often at a level not seen in other parts of the world. But you also have the largest number of travelers to these cities. Many new hotels were gearing up for the Olympics, but a lot of those establishments hotels would have been built in the capital anyway. Similarly, the World Expo didn’t have a significant effect on building more hotels in Shanghai because the city is already a very strong business destination.
Q: What about expansion beyond first-tier cities?
A: In China we expect to open another three hotels over the next five years. Right now there’s no talk of a third hotel in Beijing or Shanghai, but that’s not to say it won’t happen in 10 years. With economic growth running at least at 8%, there are another dozen cities that we are looking at. When I went to Guangzhou and Shenzhen 10 years ago, at that time our customers were not traveling to these places and rates were very low, but we could see the potential. With this in mind, locations that we’d like to have a presence in include Chengdu, Hangzhou, Qingdao, Lijiang, maybe another in Sanya and some other secondary cities where there’s a lot of business growth.
Q: Do you work with the same partners all the time? What is their involvement in your hotels?
A: We have a very good relationship with all our partners – like Sun Hung Kai in Shanghai and Hong Kong. But we don’t have the same partners for all our hotels. We have worked with Guangzhou R&F (2777.HK) on the Ritz-Carlton hotel in Guangzhou as well as on several Marriott hotels in Beijing. We have also partnered with Jin Mao Group in Sanya, Galaxy in Shenzhen, and Financial Street Holdings and Huamao in Beijing. We work with developers on an individual basis because their operations are different. But each one is heavily involved in the details of the hotels we build, which is unlike many partners in other countries. They really take a very particular interest in the design. They want to make money, but they also want to build something that reflects on them in the community, something that they can be proud of – that’s a great deal of pride and face to them.
Q: Are there any other directions you see Ritz-Carlton taking in China?
A: We are looking at building our residence business in China. We have residences in Bangkok, Singapore, Kuala Lumpur and also in Guangzhou, and would like to expand this to Beijing and Shanghai. We are exploring projects with current and new partners. When you put Ritz-Carlton on a building, the real estate value increases by about 30%. Long term revenue growth lies in hotels, and residential property.
Q: How important is China to global operations?
A: China is fueling growth for our hotels in Asia and for the entire company. China contributes about half of the 35% revenue that Asia-Pacific generates in terms of global operations. In the first quarter of 2010, growth in North American was fairly flat with some slight improvement in Europe and the Middle East. China, on the other hand, continues to impress, and we are very optimistic about the future.