China’s budget hotel industry, which is less than 10 years old, has once again come into the spotlight. On the one hand, there is the domestic giant Home Inn on an acquisition spree; on the other hand, it is the rapid expansion of international predators. In less than 4 years, the number of cheap hotels in China grew from 166 in 2004 to 1,476 in October 2007, almost a 1000% growth. As the industry becomes more mature, many issues that were previously swept under the rug are now coming to the surface.

cost challenge

Compared with ordinary hotels, cheap rent is the main feature of budget hotels, as well as the main reason for the rapid expansion of the industry. But as the number of budget hotels in China increases, budget has become the biggest problem facing budget hotels today.

“Cost escalation is a serious issue for economy hotels. In addition to general cost inflation, costs associated with expansion activities have been the primary reason for cost increases at most economy hotel chains” . said Mr. Hu Shengyang, CEO of Shanghai Inntie Hotel Management Consulting. Hu suggests that the concentration of location selection by budget hotels and their exponential growth in number has resulted in a reduction in potential sites. This intensifies competition for high-end properties among hotel brands, directly increasing site acquisition costs. Meanwhile, other costs such as staff, construction, and administration are also rising.

“The rising cost situation may help the budget hotel industry become more rational.” said Mr. Cheng Jun, Executive Vice President of Hanting Hotel Management Group. Compared with a payback period of 1-2 years in the past, Cheng thought that the current payback period of 3-5 years for budget hotels is more reasonable in a normal market.

Mr. Hu also agreed that rising costs should make the entire industry more focused. While some small chains may have to exit due to cost pressure, large budget hotel brands could accelerate their strategic progress to secure a pioneering position in the future.

The withdrawal of Top Star Hotel, now acquired by Home Inn, has proven the point. Industry insiders commented that in order to quickly list the company on the stock market, Top Star was furiously expanding its number of hotels, at an unsustainable cost of 15% higher than the industry average. Top Star’s failure should give China’s budget hotel industry a warning signal.

Homogeneous competition

Not only are costs rising, cheap hotels in China are also facing the problem of “revenue decline”. According to a 2007 survey report, the average room price had decreased from 328 yuan/day in 2005 to 208 yuan/day in 2006, and the occupancy rate also fell from 89% to 82.4%.

“On the one hand, it is the increase in the number of hotels, on the other hand, these hotels share the same market position, hence the inevitable price war between budget hotels.” Mr Hu said. He explained that the early types of budget hotels in China were simply a copy of the budget hotel models in Western countries. Once a pilot hotel was successful, the company would replicate the same model in other cities. Another novelty would also be the proven model, which would give rise to the problem of homogeneous competition throughout the economic hotel industry. When the industry was at an early stage, this homogeneity problem could be covered by strong market demand. But as the industry becomes saturated, consumers may now have more options. Therefore, hotel operators have to lower their prices to attract customers.

But Mr. Cheng disagreed, saying the key reason for the homogeneity was rather a lack of sophistication in the industry. He pointed out that budget hotels are also called “limited service hotels.” In developed countries, depending on the differentiated demand of different target groups, the meaning of “limited services” can be very different. Many multinational hotel chains have thousands of hotels, which would be classified in grades 8-12 based on different customer demands, such as tourism and business travel.

“As the market matures, hotel chains will inevitably become homogeneous.” said Mr. Cui Tao, an integrated marketing expert. “Competition among budget hotels in the future will no longer be store-to-store, but collective. In this rivalry process, all aspects of a business, such as brand, culture, business model, and cost control, would have have to combine to achieve a core competitiveness that cannot be easily replicated.

handling difficulty

“There will only be two types of hotels that can survive in China: individualized hotels and systemic hotel chains.” Forecast of Mr. Cheng. He calculated that individualized hotels can survive with their unique and uncopyable features, while the advantage of hotel chains will be their scale and uniform quality.

However, Mr. Cui thought that there is a contradictory relationship between quality control and scale, “larger scale may mean higher brand risk, but building a brand requires scale.” In this sense, the standardization of cheap hotels is not only a matter of individual progress, but a process of structural superiority. “From managing a few hotels to managing dozens of hotels, the methods for standardized management would be quite different.” said Mr. Cui, who has deep experience in franchise business management.

Hanting Hotel Group, a newcomer to the industry, is showing more caution. It is understood that, in addition to improving the management of standardized systems, Hanting also strictly controls the number of franchisees. At present, only 10% of the Hanting hotel chain are franchise hotels. Mr. Cheng admitted that “franchised hotels are more difficult to communicate when it comes to standardized management. Therefore, before our management capacity can improve substantially, it would be safer to control the number of franchisees.”

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