Success stories from midscale hotels in China

While an emerging middle class in China is leading to a tremendous need for more middle-tier hotels, there aren’t many examples of successful midscale hotels for real estate developers to look to in the country. Therefore, hotel owners and managers in China are beginning to do a lot of experimenting in the space, executives said during HVS’s China Hotel Investment Conference. "For middle-tier hotels, there is not a very clear definition," said Hawthorn Yang, deputy director with the China Tourism Academy. "Each individual has their own definition of what middle-tier is." Yang said the potential for profitability in the midscale space is lucrative. "I have done a series of research and analysis and within the 3- to 4-star space hotels are not so concentrated. For the middle-tier market we see a lot of opportunity," he said. The star classification system is complicated in China, said Brian Liu, VP of development in China for Wyndham Hotel Group.

However, he agreed a true mid-tier product would perform well. "Economy hotels can't differentiate from each other. Luxury hotels can't do low cost," Liu said. "But mid-tier hotels can be both low cost and differentiated." New territory Hilton Worldwide, for example, has just signed its first few contracts for Hilton Garden Inn hotels in China. "We don't have any Hilton Garden Inns or (Hampton Inn properties) in China," said James Wei, director of development in Greater China for Hilton.

"We are now getting ready to introduce Hilton Garden Inn to China and we’ve just finished the product definition and just signed some contracts. The first Hilton Garden Inn will be open by the end of this year or early next." A handful of Chinese domestic hotel companies that have traditionally played in the economy segment—specifically Home Inns & Hotels Management and Jinjiang Inn—are repositioning to capitalize on the midscale opportunity. Following the explosive development of economy brands in China, a similar midscale boom will follow, predicted Jason Zong, COO of Home Inns. Home Inns has a portfolio of 3,000 hotels, 10 of which are classified midscale. The company plans to add 10 more in 2013. 

 "In this industry, there is a trend of consumers and their demand. They will have higher demand of services," Zong said. "So we can estimate that in maybe the next five years we, and other large scale brands, will enter into the mid-tier space." He said Home Inn's idea of a midscale hotel can garner an additional 70% or even double the average daily rate of an economy hotel in China. The company has been working on introducing a mid-tier brand for nearly five years, he said, still hoping to get the positioning right. "Right now, if we have the opportunity to develop this mid-tier brand, the (average daily rate) will be 300 to 600 (renminbis, or $48.59 to $97.18)," Zong said. Potential for profits? 

He predicted Home Inns will experience "great development" of its mid-priced product across China during the next four to five years. Company executives think the profitability of a midscale hotel can reach close to that of an economy hotel, Zong said. However, he said many competitors don't share those same thoughts. "Whether this is lucrative or not, maybe different people have different views," he said. "We think this market can reach profitability that is close to the economy hotels." Liu, of Wyndham, said mid-tier hotel managers can introduce self-service check-in and check-out, laundry and shopping to reduce labor costs and increase profitability. Management companies also can centralize catering services, he said. However, Zong said challenges remain. "Whether it is profitable depends on the building and the model. First- and second-tier cities offer more opportunity," he said. 

Questions remain, Zong said. What is the appropriate room size? How many rooms should a midscale hotel have? "If we want to have wide-scale copy, we should have a system that can be applied," Zong said. "So the midscale trend is very promising, but we will see both challenges and opportunities." Wayne Li, VP of development in China for Accor, also said he sees great potentials for midscale hotels in China, particularly in tier-one cities.

 "Those markets already have a lot of 5-star hotels but what we need is a midscale market that can provide what the customers need," he said. "According to experiences in Shanghai and Beijing, those 4-star hotels, their occupancy and ADR are very helpful." Li said swimming pools are optional in 4-star hotels in China. And because developers are able to eliminate many options and simply provide what the customer really needs, a 200- to 250-room hotel can be profitable at 60% occupancy, he said. "In the U.S., this kind of brand has the highest (return on investment)," Li said. By Jason Q. Freed. Published on www.hotelnewsnow.com 25/04/13