China is becoming one of the world's top tourist destinations, and with the domestic travel market ballooning as well, the hotel industry is booming. But even so, foreign investors and most major international hotel chains are still exhibiting reluctance to invest in bricks and mortar, sticking instead to the soft end of the trade.
This year, with SARS-hit 2003 for comparison, China's inbound arrivals are forecast to grow by 22%, with a rise of at least 10% annually forecast for the foreseeable future. By 2020, according to the World Tourism Organization, China will become the world's number one travel market.
By then, China is expecting to host around 180 million overseas visitors a year, more than four times the 38.8 million who visited in 2002 (the year before SARS hit) and more than double the 77 million tourists who currently visit France – at present the world's most visited country.
In anticipation of these arrivals, China has already become the fastest growing hotel market in the world.
"Huge numbers of hotels are being built, so opportunities for international groups like Hyatt and Marriott are enormous," said Nigel Summers, director of hospitality consultancy, Horwath Asia-Pacific.
But while there is a long line of Chinese hotel developers looking for capital, to date foreign money has largely been risk-averse to investing in the Chinese hotel market, deterred by worries about oversupply, high land costs and tying large amounts of money up in ventures often at the mercy of local officials. One major exception has been Robert Kuok's Hong Kong-based Shangri-La group, which operates 17 hotels in China, all but one of which is run as a joint venture or is majority-owned by Shangri-La itself.
To date, though, most other major hotel brands such as Hyatt, Intercontinental and Marriott are content to make their money through management contracts rather than property ownership. For example, Shanghai's most high-profile (and high-rise) hotel, the Grand Hyatt, located in the top 34 floors of the 88-storey Jinmao Building, is managed by Hyatt but owned by the Jinmao Group.
It is an arrangement that works for both sides – the brands minimize risk exposure and the Chinese hotel owners, with an internationally recognized sign on the wall, can charge rates on average 20% higher than domestically- managed properties. In 2002, a Horwath Asia-Pacific survey showed internationally managed 5-star properties charged an average room rate of RMB 727, compared to domestically managed rates of RMB 604.
Getting into bed with foreign chains has other benefits too, tying properties into global booking networks, databases, marketing support and loyalty programs.
As a result, backed by a construction boom linked partially to the 2008 Beijing Olympics and the Shanghai World Expo in 2010, the stream of hotels eager to link up with international chains shows little sign of drying up. Beijing's Olympic Committee, for example, plans to more than double the city's portfolio of 392 star-rated hotels in time for the Games. Shanghai also plans to double its tally of 342 hotels in time for 2010.
Such dramatic expansion has raised concerns of an accommodation glut, like the one that hit Sydney after the 2000 Games. It's a factor that Chris Tsoi, marketing director of the JW Marriott Shanghai said would be a short-term inevitability. "It's happened in the case of every recent Olympics," he said. "In the short run it will be a challenge to fill rooms, but in the long run China's huge economy will sustain the increased capacity." One sector hoteliers will be looking at to sustain demand is the massive domestic travel market.
According to the China National Tourism Administration, even taking the impact of SARS into account, in 2003 the domestic travel market was worth US$41.64 billion – up from US$26.6 billion five years earlier and more than double the US$17.41 billion spent by overseas visitors.
With domestic travelers already vastly outnumbering overseas visitors, analysts say the signs point to demand moving away from big city "trophy hotels" towards new opportunities in two key sectors; resort hotels, and the mid-range and no-frills hostelries.
"Customers are becoming far more discerning in what they want out of a hotel in terms of quality, product and value for money," said Howarth's Nigel Summers. "As yet China doesn't have an established quality budget brand and in most other markets this is by far the largest sector."
Pioneering international entry into the budget sector, he said, is France's Accor, which is using its own money to launch its 3 star, low-cost Ibis brand in the China market. In April, the company said it was investing US$200 million in opening 50 Ibis hotels across China by 2008, charging room rates of around RMB 200 a night.
A key factor in this sector of the market is China's highway development and steadily climbing car ownership. As more people begin to travel by car, such low-cost, out-of-town properties increasingly make commercial sense.
One of Accor's first developments is the Ibis Tianjin, which opened in late April 2004. Situated in an out-of-town industrial park, it is aimed squarely at the budget conscious business traveler and is the group's first wholly-owned hotel in China.
Accor's move, meanwhile, is being watched closely by its competitors. Marriott, for example, has begun expanding its network of 3-star Courtyard by Marriott hotels.
Intercontinental, the world's largest hotel group which owns the Holiday Inn and Crowne Plaza brands, says it is planning to double its hotel portfolio in China to around 90 hotels by 2006, with expansion in the below 5-star sector leading the way.
"I think the market has opportunities for the limited service, no-frills type hotels," said Edmond Ip, Intercontinental's Chief Operating Officer for North Asia. To date, Ip said, Intercontinental's mid-range Grand Plaza brand has grown from three to 15 hotels in two years – a trend, he added, which is expected to continue.
So expansion is there, but what about profitability? Intercontinental's Ip would only say that the situation spoke for itself: "If we didn't have certain results, we wouldn't have been here for 20 years, investing in training, call centers and doubling the number of our hotels by 2006. If you look at our actions, you can draw your own conclusions."
At the budget end of the market, Ip said Intercontinental had yet to bring its own budget brand, Express by Holiday Inn, to the China market although it has performed well in Europe, North America and elsewhere in Asia.
According to market surveys, Holiday Inn itself is already one of the best-known international brands among Chinese consumers, with many seeing it as a trusted homegrown brand. That, said Steve Shellum, editor of trade magazine Hotel Asia-Pacific, is successful payback for a company that has been in the Chinese market for 20 years.
Holiday Inn's success, he said, has come from its commitment of time and money into building brand recognition – an important factor, not just domestically, but because of the anticipated growth in China's outward-bound travel market, already the biggest in Asia.
As more and more Chinese go abroad they will be looking for hotel brands they trust, and those that have already established a good name for themselves in China will be an obvious choice.
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