China Business Weekly

September 5, 2005

Room for Change p. 5

LU HAOTING and SUN XIAOHUA

The hotel lobby is not exactly lavishly decorated. No marble floor, no crystal lamps, no piano... Just a few couches and some green plants.

It lacks a fancy banquet hall. A fully equipped conference room is nowhere to be found. There is no pool to take a dip in, no sauna to relax in. A small restaurant is the hotel's only extra facility.

This hotel in Beijing, however, is located next to the five-star Kunlun Hotel, It is full throughout the year and ranks as the best of Home Inn's 50 outlets across China.

"What our guests care about is whether they can get a good sleep, not whether the tap is gold-plated," says Liang Rixin, chief operating officer of Home Inns & Hotels Management Co Ltd.

The rapid growth of the three-year-old, Shanghai-based hotel chain is a reflection of China's increasing demand for economy hotels. The world's top companies are flocking to China to open luxury facilities, but some investors are ready to cash in on the opposite trend.

Jinjiang Inn, a subsidiary of Shanghai-based tourism consortium Jinjiang International Group, plans to open 120 outlets by the end of this year and 200 by 2006. Jinjiang Inn, with more than 80 outlets, is China's largest economy hotel chain.

Home Inn plans to be China's first hotel brand to list overseas and it is busy expanding its network across southern China. The company is a joint venture between Beijing Tourism Group and Ctrip.

US-based Super 8 entered China last year and plans to open more than 200 hotels across the country by 2008.

"The lack of clean, comfortable, convenient and affordable rooms in China has created huge opportunities for economy hotels," Liang says.

In the United States, economy hotels account for 70 per cent of the total industry. But China's hotel industry is developing at two extremes, Liang says.

"On one end, there are too many small guest houses and hostels that are cheap but offer poor service. On the other end, there are a lot of expensive fancy hotels. There are very few choices in between."

The number of luxury hotels in Europe and the United States are only one-seventh of the number of economy hotels. In China, the ratio is the opposite. There are seven times more upscale hotels than economy hotels, according to statistics from the China Hotel Association.

The rise in disposable incomes means more Chinese are travelling. Many of them are no longer satisfied with the dirty bed sheets, shared bathrooms and poor safety on offer at many cheap guest houses. But spending 400 yuan just to have a sleep at night is still something many consider too extravagant.

"Economy hotels without recreation facilities emphasize the function of being a place to sleep. This is definitely what many people want," says Jiang Qikang, deputy secretary-general of China Tourist Hotels Association.

Jinjiang Inn focuses on improving the sleeping and bathing facilities while simplifying other services, says Shu Peiling, the chain's marketing director.

"That's because we know that most customers, especially business travellers, prioritize these two things. People need a good night's sleep if they want to do business the next day."

Liang says Home Inn's customers are business travellers usually owners of small and mid-sized enterprises (SMEs), white-collar employees at large corporations and leisure travellers who earn more than 4,000 yuan a month.

"It's not surprising to see a Mercedes-Benz in our parking lot. Many private entrepreneurs stay at our hotels when travelling alone on business," Liang says.

"To them, clean lodging and broadband Internet services are enough. They don't need to show off in a fancy hotel when travelling alone."

SMEs have become a thriving part of China's economy by contributing half of the nation's gross domestic product (GDP).

To attract more entrepreneurs from SMEs, Jinjiang Inn plans to launch a SME membership programme that gives them special discounts on room charges, Shu says.

Value for money

Home Inn charges between 168 yuan and 298 yuan a night. Prices at Super 8 are even higher, at approximately 350 yuan a night.

"Economy hotels are not cheap hotels," Liang says.

"What we are trying to do is to provide customers with the best value at the best price."

Home Inn's outlet near the Kunlun Hotel, for example, charges the highest price - 298 yuan - and rarely offers discounts, Liang says.

"You might get this kind of price at a three-star hotel if it was discounted, but our hotel is always full when many other cheaper hotels have high vacancy rates," Liang says.

"It's all because of its location. All the hotels around it are far more expensive than it."

Mitchell A. Presnick, president and chief executive officer of Super 8 Hotels (China) Co Ltd, agrees.

"Every price has to be suited to that market. The market determines our prices," he says.

Super 8's most expensive outlet is in Wangfujing and charges 380 yuan a night.

"Our hotel is an economy hotel compared with many of the expensive hotels in Wangfujing," Presnick says.

"That one does very well and is a very good property for us."

Many mid-range Chinese hotels are overstaffed and have ageing facilities. They struggle with low occupancy rates, but economy hotels prosper. Home Inn and Jinjiang Inn boast average occupancy rates of over 90 per cent. Super 8's average occupancy rate is about 75 percent.

Liang says economy hotels maintain low costs. Usually an average of 150 employees serves every 100 rooms at three-star hotels. At Home Inn, only 35 employees serve the same number of rooms. There is no room service and service desks are not located on every floor. Fax and printing services are usually handled at the front desk by request.

"We make full use of every staff member we have. No one is sitting and waiting there," Lang says.

To save electrical costs, there is no central air conditioning system at Home Inn. Each room is equipped with a separate unit. In winter the rooms are heated by a municipal heating system.

Olympic opportunities

Super 8 is in talks with Peking University to renovate a guest house affiliated with the school, Presnick says. The US hotel chain is expanding across China through franchising.

"We hope other guest house managers and owners will see the hotel Super 8 is helping to renovate," Presnick says.

"They can do the same thing. It's not very expensive, but it's good enough to serve the market during the 2008 Olympic Games."

The Beijing Tourism Administration (BTA) is trying to renovate 4,000 low-end hotels and guest houses in the city by 2007 to avoid exceeding supply. This will accommodate up to 500,000 domestic travelers to the capital city during the Olympic Games.

"We are working closely with the BTA on before and after lodging issues," Presnick says.

"It is always an issue before the Olympics that you have to have enough rooms to satisfy everybody. But after the Olympics, you have a different issue: How do you maintain a healthy hotel industry when everybody is a bit tired after the party?"

Cendant Corp owns the US chain. It franchises 6,374 hotels around the world. Super 8 operate in the United States, Canada and China.

"The Chinese market is more than big enough for us to explore," Presnick says.

"Since 1974, it has taken 30 years for Super 8 to open about 2,100 outlets in North America. In China, we plan to do it in 15."