No vacancy: Foreign hotels are few in China's budget segment

For all the rapid growth of budget hotels in China, the sector remains dominated by local players. Between them, China’s three largest budget hotel chains – Home Inns (HMIN.NASDAQ), 7 Days Group (SVN.NYSE) and China Lodging (HTHT.NASDAQ) – comprise about 40% of the sector. Chains such as those run by Jin Jiang Group (2006.HK) and assorted smaller, unlisted firms make up the remainder.

There are foreign chains at the budget end of the spectrum – notably private US firm Wyndham Worldwide’s Super 8 budget chain, which operates 121 hotels in China – but analysts say that overseas players operate at a disadvantage here. In a market where speed matters, foreign companies struggle to keep up.

"They are expanding in China, but not as fast as Chinese chains," said Julie Ke, an analyst with Guotai Jun’an Securities in Hong Kong. "This is because their global decision-making procedure is much slower than the local brands."

A major issue for foreign firms is the weak potential for profit. In the cutthroat budget sector, the cachet of an international brand doesn’t help to attract travelers whose main consideration is price.

Ibis Hotels, operated by French hotel giant Accor (0H59.LSE, AC.Euronext), is singled out by analysts as a rare and aggressive foreign entry into the budget market. But a room at the Hotel Ibis Beijing Sanyuan costing US$50 a night – pricer than at most local budget chains.

Being seen as local is also an operational and branding advantage for domestic players, says Parita Chitakasem, research manager at Euromonitor International in Singapore. "[They have] in-market knowledge. Just by being local, any company and any industry already has a first-mover advantage," she said.

Consequently, some foreign groups avoid the budget area completely. Responding to questions from CHINA ECONOMIC REVIEW, UK-based InterContinental Hotels Group (IHG.NYSE, IHG.LSE) made it clear that its Holiday Inn Express chain, while aimed at travelers "who value competitive rates" is not a budget brand.

"We have no budget brands, and no plans to expand in that segment," said an IHG spokesperson.