Homogeneous Competition in China’s Budget Hotel Industry

China’s budget hotel industry, which has less than 10 years of history, has returned to the spotlight. On the one hand, there is the domestic giant Home Inn in a wave of acquisitions; on the other hand, it is the rapid expansion of international predators. In less than 4 years, the number of cheap hotels in China had grown from 166 in 2004 to 1,476 in October 2007, almost a 1000% growth. As the industry becomes more mature, there are now many problems that were once hidden under the rug.

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, the budget has become the biggest problem facing budget hotels today.

“Rising costs are a serious problem for budget hotels. Aside from general cost inflation, costs associated with expansion activities have been the main reason for cost increases at most budget hotel chains.” said Mr. Hu Shengyang, CEO of Shanghai Inntie Hotel Management Consulting. Hu suggested that the concentration of location selection by budget hotels and their exponential growth in numbers 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 personnel, construction and administration are also increasing.

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

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

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

Homogeneous competition

Not only costs are increasing, cheap hotels in China are also facing the problem of “declining revenue”. According to a survey report in 2007, the average price per room 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 position in the market, hence the inevitable price war between budget hotels.” Mr. Hu said. He explained that the first type of cheap hotels in China was simply a copy of the models of cheap hotels in Western countries. Once a pilot hotel was successful, the company would duplicate the same model in other cities. Another novelty would also be the proven model, which results in the problem of homogeneous competition in the budget hotel industry. When the industry was in an early stage, this homogeneity problem could be covered by strong market demand. But as the industry saturates, consumers can now have more options. Therefore, hotel operators have to lower their prices to attract customers.

But Cheng disagreed, saying the key reason for the homogeneity is due rather to the industry’s lack of sophistication. He noted 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 graded 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 collectively. In this rivalry process, all aspects of a business, such as brand, culture, business model and control of costs, they would have to be combined to achieve fundamental competitiveness that cannot be easily replicated. “

Management difficulty

“There will only be two types of hotels that can survive in China: individualized hotels and systemic hotel chains.” Forecast from Mr. Cheng. He calculated that individualized hotels can survive thanks to their unique and non-copyable characteristics, 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 budget hotels is not just a matter of individual advancement, 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. Currently, only 10% of the Hanting hotel chain are franchised hotels. Cheng admitted that “franchised hotels are more difficult to communicate when it comes to standardized management. Therefore, before our management capacity can be substantially improved, it would be safer to control the number of franchisees.”

For more information on Chinese companies, visit www.chinabizintel.com