REPORT FROM CHINA—Budget hotel chains in China are expanding rapidly to meet the needs of a growing business travel market. Leading domestic brands Home Inns, Jin Jiang Inns, 7 Days Group and China Lodging Group will open hotels throughout China, focusing on second- and third-tier cities, such as provincial capitals. By the end of 2011, if their plans pan out, they will rival some of the biggest hotel brands in the world.
Home Inns & Hotels Management
Sixty to 70% of Home Inns customers are business travelers, Ruan said. More than 95% are domestic, he added, noting the “overall hotel industry in China is still fragmented.”
Jin Jiang Inns
Jin Jiang Inns operates 530 hotels representing 65,000 rooms. They are minimum 10-year franchises requiring a sign-up fee of RMB200,000 (approximately $US30,000), plus RMB2,500 (approximately US$375) per room, according to Jeremiah Chen, director of marketing for the Shanghai-based company.
Its version of boutique is Bestay, a brand Jin Jiang launched in 2009; priced at about RMB100 (approximately US$15) per night, Bestay targets the “young generation … like graduates.”
Jin Jiang also plans to open a “high-class” hotel in Shanghai this year. While budget hotels court domestic travelers, tourists are the aim of “star-level” hotels.
In March 2010, the Ministry of Commerce announced a policy to double the number of budget hotels in China to 20% of the market, according to Jin Jiang.
7 Days
As of 30 September, 7 Days Group operated 461 hotels: 281 leased and operated; 180 managed, according to the company’s third-quarter earnings released on 9 November 2010. This represents 46,293 rooms in 75 cities.
CFO Eric Haibing Wu said in an e-mail that 201 hotels were in the pipeline: 51 leased and operated; and 150 managed.
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“Our ongoing expansion is at a national level and will cover first-, second-, and third-tier cities,” he said. “We will focus on opening leased-and-operated hotels within primary cities, which often possess the most attractive margin profiles, whereas expansion into secondary and tertiary cities will mainly be from new managed hotel properties. Our pipeline is split is about 20%, 50% and 30% for tier 1, 2, 3 cities, respectively.”
It takes three months to open leased and operated hotels, assets 7 Days rents, converts and runs; managed properties might take longer because franchisees control the timeline.
Wu said 7 Days is well established in southern China and in key cities, such as Shanghai and Beijing. Typical capital expenditures per room is RMB52,000 (approximately US$7,800).
While some franchisees in China own their hotels, 7 Days believes its leased contract model helps it maintain a lean cost structure and “highly scalable business model,” Wu said. He noted the China market has only 0.3 economy hotel rooms per 1,000 people, compared to 2.5 per 1,000 in the United States. With a growing middle class and a population of 1.3 billion, there are “significant expansion opportunities” for economy brands.
Only 15% of hotels in China are branded, compared to 68% in the U.S., “leaving a significant opportunity to build brand loyalty and allegiance among the growing population of young, upwardly mobile travelers.”
Wu noted 7 Days’ online booking model appeals to “overseas tourists.”
China Lodging Group (Han Ting Inns)
China Lodging had 200 leased-and-operated hotels and 168 franchised and managed hotels in 55 Chinese cities as of 30 September.
In its pipeline: 76 leased-and-operated hotels, 91 franchised and managed.
Average daily rate was RMB218 (approximately US$33), up from RMB196 (approximately US$29.40) during the second quarter, which China Lodging attributed to increased travel demand and business derived from Shanghai World Expo between May and November. It opened 44 hotels in Q3.