MGM Hospitality is placing a big bet on the growth of China’s tourism market, announcing in May that it will open as many as 30 hotels in the country over the next 3-4 years. But the company was quick to point out that its decision was driven by a recent change of heart – and its fear of losing out to other hotels that are expanding.
“If I had spoken to you nine months ago I would have said we may get to about 15 hotels in China in the next three to four years,” said Michael Sagild, Asia-Pacific managing director for MGM Hospitality, in a July interview with Bloomberg. “Today, it may be 30 because in the last four months there’s been an absolute rush on brands [to open hotels].”
MGM isn’t alone in its construction boom. Starwood Hotels & Resorts Worldwide, which already has 70 hotels in China, plans to open one hotel in the country every two weeks in 2011. Meanwhile, InterContinental Hotels Group (IHG) announced plans earlier this year to launch a new mid- to high-end brand that will specifically target the Chinese market.
But international hotel brands may be checking into China too hastily. As the hospitality industry brings in more brick and mortar, the risk of oversupply runs high.
According to STR Global, the Asia-Pacific region reported year-on-year increases in occupancy in only two of the first six months of 2011. While regional demand has grown 2% during the first half of the year, a 3% increase in supply in the same period has reduced net occupancy rates. In China, hotels saw 62.3% occupancy in June, a 2.4% fall from a year earlier.
As the number of rooms grows, hoteliers in China must focus on long-term solutions to survive. That includes stepping away from the rate-lowering game, where hotels have been undercutting each other. Continually slashing prices is obviously not a sustainable solution.
Any long-term progress will depend heavily on a shift in Chinese consumer demands. There are signs that travelers may be focusing less on price and more on the quality of hotel services and brands. This presents an opportunity for hoteliers to not just attract business for its guest rooms, but to boost income from hotel spas, event venues, and food and beverage outlets.
A risk of oversupply is a concern, but that’s not to say more rooms aren’t necessary. The average annual number of domestic tourists increased by 11.7% in 2010, reaching 21 million. A recent IHG report estimated that by 2025, China will have more hotel rooms than the US. With six times the American population, it may be about time.
The recent construction push is a result of many international hoteliers realizing that, to be a global player, they must be prominent in China – the world’s largest, fastest-growing tourism market. But while it’s easy to add rooms, filling them with loyal guests may prove more difficult.