International hotel brands like Hilton Hotels and Sheraton Hotels & Resorts have long been associated with first-class service and fluffy bath robes. But now in China, the two major chains have been caught up in government crackdowns on spas and entertainment clubs that allegedly sell escort and sex services in the same buildings as their hotels.
The Hilton Chongqing was shut down temporarily in June after police raided its Diamond Dynasty karaoke club, situated in the basement of the building, which is owned by Chinese developer Kingrun Real Estate.
Police arrested 102 people, of whom 22 were formally charged for alleged involvement in prostitution activities. Peng Zhimin, Kingrun’s 47-year-old owner and a major shareholder of Hilton Chongqing, ran Diamond Dynasty and was arrested on multiple charges, including allegedly managing a mafia-style crime organization. The National Tourism Administration subsequently stripped the hotel’s five-star rating.
The Hilton isn’t alone. The Great Wall Sheraton was also besmirched in May when police raided the Passion Club, in the west hall of the hotel’s building complex, for providing escort services.
In both cases, major international hotel brands risked being embarrassed by dubious entertainment venues, even though they have no involvement in its operations. A number of such clubs are not run by hotels themselves, but actually through local investors who own the property. Management and branding of the property is subcontracted to hotel chains.
In a statement to China Economic Review, Hilton acknowledged that Diamond Dynasty is located in its hotel complex, but said that, "Hilton Worldwide has no involvement whatsoever with the management or operation of this KTV lounge, which is a separate business."
Similarly, a spokesperson for the Great Wall Sheraton said, "Sheraton is only a hotel management company" and wasn’t involved in running the Passion Club.
Playing with prestige
While hotel brands could do without the negative attention that their proximity to illegal and seamy activity has drawn, independent property owners benefit from having both a five-star hotel and entertainment clubs, or spas, in their developments. "Many property owners here in China are looking for hotels. The reason for this is that when you build a hotel, you polish your image. They increase the value of the property," said Jan Büttgen, general manager for hospitality services at Shui On Development.
Although international hotel brands inject prestige to property, developers’ return on investment can be slow. This is partly due to stringent hotel requirements some have for the properties they manage. "There are very clear and detailed needs for these hotel management companies. Once these needs are met, then they put their logo in front of the door," Büttgen said.
Running clubs and spas is one way of cashing in on a property’s prestige. In some cases, the income from such venues is more substantial than that of hotels, said Wingsee Auyeung, managing partner at PKF Consulting, a hotel consulting firm, in Shanghai.
"Property developers view income from night clubs as major augmentation to income from the hotels," Auyeung said.
Still, even though the Hilton Chongqing and Great Wall Sheraton were not involved with operating its entertainment clubs, the brands risk being tarnished among customers who are unlikely to distinguish between a hotel’s owners and its management.
If the ownership and management structure remains intact, international hotel brands will have to ensure even clearer separation of its management, operations and physical spaces.
"International hotels do see this as a problem," Auyeung said, adding that he expects many chains will gradually set stricter ground rules with owners in the future.
"Maybe the spas won’t be allowed in the same premises, or adjoining the hotel. There may also be more security, including stricter after-hours visitor registration."