Despite a growing number of challenges facing the Chinese hotel industry, including increasing costs, high employee turnover, and decreases in ADR and occupancy rates, international hospitality companies still see huge growth potential ahead in China.
Major players like Starwood, Hilton, and IHG first entered the country in the 1980s, when almost all hotels operated under management contracts with expat-dominated teams, but Best Western only joined the market in 2002. According to William Dong, president and CEO of Best Western China, a master licensee of the brand, the timing was right. (Best Western China is one of three master licensees of the brand, along with India and Korea.)
By the early 2000s, local staff and owners had accrued the necessary experience and knowledge to self-manage properties rather than extend costly international management contracts. While some owners decided to create their own brand name or team up with domestic hotel chains, others were seeking franchise relationships similar to those that Western countries offered.
Best Western China has since grown to 39 properties, with 13 in the 2014 pipeline (eight Best Western core, one Plus, and four Premiers). Distributed over 17 provinces, Hong Kong, Macao, and Mongolia, the operating portfolio consists of 30 Best Western core hotels and nine Premiers.
Two years ago, the company’s focus for development growth shifted from primary cities, coastal areas, and capitals, such as Shanghai, Beijing, Guangzhou, and Shenzhen, to third-tier cities and county towns. Travelers to these markets often seek out brands that can deliver consistency and quality. “They really want to search for a brand, because a brand can guarantee them something,” said Dong, during a press conference at the Best Western OL Stadium Hotel Beijing. Meanwhile, developers are drawn to having an affiliation with a brand that can provide a global distribution system, a loyalty program, and quality assurance.
Best Western will target future development in western China, moving away from primary cities affected by oversupply. Other markets on the company’s radar include Taiwan and Nepal.
Challenges in China
Dong admits it’s a tough business for hotels in China. For one, the government centrally controls financing, which impacts the speed of development. In 2010 and 2011, the government released a large amount of funds to the market, so Best Western had more projects. “But last year, we were affected by the finance, so we had only four new hotels,” Dong said. “The government tied up the funding.”
Apart from funding woes, hotel developers face other issues beyond their control, such as the country’s economic situation and even the approvals process, Dong said. Opening dates are often hard to estimate because of these external factors. For example, Best Western has a hotel in Liaocheng in the Shandong province that was ready to open five months ago but is still waiting on approval from the fire department.
Additional challenges in China include high labor costs. In the past, hotels could find ways to avoid paying employee benefits, which can add up to 50 to 60 percent of a worker’s salary, but the government has cracked down on requirements in the last two years. The hotel industry in China has one of the highest staff turnovers in the world because workers can find higher paying jobs that require less responsibility, Dong said.
Revenue of hotel restaurants, bars, meetings, and exhibitions also has been affected ever since Chinese President Xi Jinping announced a crackdown on corruption among government officials in 2012. A number of anti-graft and anti-extravagance measures have been introduced at the central and local levels, covering everything from travel and government vehicles to official dinners and special privileges. In Beijing, government bodies and government-owned companies are prohibited from hosting conferences and meetings at five-star hotels, Dong said. The anticorruption campaign has impacted China’s overall economy, including a slowdown in the luxury market.
To adapt with the changing times, Dong said developers have altered their design plans for new construction hotels. Whereas established hotels in gateway cities contain a lot of facilities, new hotel projects are likely to feature up to 50 percent more rooms instead. Multifunctional spaces with moveable partitions also are being built in favor of grand ballrooms.
“[Hotels] used to have huge rooms, funny decorations, and gold panels,” Dong said. “Now, they realize the market has changed, and people probably pay more attention to hygiene, to cleanliness, and to things like WiFi, lighting, and bathrooms.”
There also has been a shift in terms of market segment. Of the nearly 800 hotels in the overall pipeline throughout China, there is an equal number of economy and mid-market properties being developed compared to upscale and upper upscale hotels, said Ron Pohl, senior vice president of brand management and members services, Best Western International. “That’s a significant shift in targeting that mid-economy [level] in secondary and third-tier cities.”
Domestic travelers drive the hotel market in China, with domestic trips nearing 3 billion in 2012, according to the latest data from the China Tourism Academy. Robust domestic demand can be attributed to increased discretionary income levels among the growing middle class, as well as more companies giving staff paid annual leave, Dong said. Travel also flourishes during China’s two seven-day Golden Week national holidays—Chinese New Year and National Day.
On the other hand, growth in inbound tourism has been slower than anticipated. International arrivals hit 57.7 million in 2012 but only increased 0.25 percent from the prior year, the data show. Dong cited economic strains in North America and Europe, the weak exchange rate of the U.S. dollar to the Chinese yuan, and traveler trepidation about pollution as a few reasons for the slowdown. As such, international travelers account for less than 10 percent of Best Western China’s business, he said.
Outbound tourism continues to grow exponentially. Chinese outbound travelers reached 97.3 million in 2013, an increase of 14 million compared to 2012. That number is estimated to break 100 million in 2014. By growing its footprint in China, Best Western can build brand recognition and loyalty to capture more business worldwide. “Best Western has more than 4,000 hotels all over the world,” Dong said. “We want [Chinese travelers] to go anywhere there is a Best Western. If we have a proper presence here in China, that will influence some of those Chinese travelers when they travel abroad.”