Competitive pressures

Holiday Inn Crowne Plaza Shanghai s new executive lounge decisions are being made quicker."

Unfortunately for existing hotel groups, there seems to be no let up in the construction of new properties despite worsening market conditions and repeated government instructions that investment priority should be given to `non-luxury' projects. Obrist says he cannot understand the continued proliferation of four-and five-star hotels. For example, the Grand Hyatt Shanghai, which when completed later this year will be the tallest hotel in the world, will add to the competitive pressures in the Pudong area of the city.

Another new property is ITT Sheraton's Beijing International Club Hotel, opened last September and involving an investment of US$70m. The 286-room property positions itself as the only "real five-star hotel in Beijing", according to Ms Zhang Lei, deputy general manager of the hotel. With rack rates of between US$350 and US$750, the property has struggled to fill rooms in the current economic climate, with occupancy levels of between 40 and 50 per cent.

A buoyant local market

The downturn is not confined to falling overnight stays. Obrist says that the proliferation of new restaurants in Chinese cities has affected food and beverage revenues at its many outlets. Guests are now much more inclined to experiment with nearby restaurants and Obrist says the challenge for hotels is to be more imaginative in what they offer ?for example getting away from simply offering the traditional mix of Western, Japanese and Chinese cuisine and instead combining entertainment with dining facilities.

For all these problems, at least China is not suffering as much as other countries in the region. A big factor is the continued growth of the local market, spurred by rising levels of disposable income and a shorter working week. "There has been a massive increase in domestic tourism," says Watkins.

Local guests and diners accounted for 28 per cent of Shangri-La's China revenues in 1997, rising to 35 per cent in the first five months of 1998. The group is offering special room rates to Chinese nationals to stimulate the market further. However, Kleinschmidt expects the mainland segment to be impacted by slower economic growth: "GDP levels in China are behind projected targets and business travel normally follows that of the economy."

The competitive pressures are likely to force an adjustment to some future investment plans in the industry. "In Pudong, we will almost certainly see some changes in development plans," says Kleinschmidt. He also envisages reduced development in cities such as Dalian, Wuhan and Chongqing, where there has already been a lot of investment from Asian investors.

However, none of the major groups admit to cutting back their future expansion plans because of the Asian crisis. "China has been our saving grace," comments Watkins, pointing out that Shangri-La's many hotels in Hong Kong and Southeast Asia have suffered.

The Days Inn franchise owned by Cendant Corporation of the US made a big splash at the start of 1998 by saying that from a position of zero hotels in China in late 1997 it would become the largest foreign hotel chain there by the end of 1998. It opened 10 hotels at the start of this year and towards the end of June the group said that an additional 22 would be open in the following 30-60 days. "There is no pullback as far as we are concerned," adds a spokesperson.

Limited service hotels

Further investment inland and in smaller Chinese cities is likely to be a focus in coming years, along with greater activity in mid-price hotels. Days Inn has made its intentions clear and Holiday Inn is to expand its `Express' brand of outlets ?smaller, functional hotels with no restaurant facilities but with a coffee shop serving breakfast. Such outlets are much cheaper to operate than full-service hotels because they require far fewer employees and they will target the growing number of domestic business and leisure travellers.

The concept is popular in the US and there appears to be potential in China created by the growing number of domestic travellers. The big difference in China is the low level of car ownership, so a good location close to airports or railway stations is an important factor.

Holiday Inn still plans to open three new properties this year ?in Guiyang, Wuhan and Hangzhou ?and an additional five or six next year. Likewise, Shangri-La is sticking to its expansionist programme ?its Shanghai property in Pudong will open later this summer and new properties will be opened in Wuhan, Harbin and Beijing over the next 12 months.