Promising investment outlook

On October 26, Home Inn was listed on NASDAQ, receiving $102 million from the issuance, 30 times more than what was formerly expected. From then on, budget hotels have become a hot sector for international capital.

The vigorous development nature of budget hotels catches people's eyes. Home Inn, the first of its kind in China, was set up in June 2002. However, by the end of June 2006, the number of its franchises had jumped to 82, with aggregate revenue of about 249 million yuan. He noted that the return-on-investment cycle for high-class star-ranked hotels is longer-about 15 years on average-but that of a budget hotel is around five years.

Fang Guofan, Senior Vice President of Super 8 Hotels (China), pointed out, "Currently, budget hotels account for no more than 30 percent in the Chinese hotel industry, but more than 70 percent in the United States."

He contended that the present situation of Chinese budget hotels resembles that of the United States between the 1960s and 1980s, which witnessed a fast development of budget hotels in both the number and variety of brands. Furthermore, franchise operations replaced traditionally separate operations.

The 2008 Beijing Olympic Games and 2010 Shanghai World Expo will also add great momentum for budget hotels. In 2005, the average price for one night at a budget hotel in Beijing was 210 yuan. Judging from the Olympic experiences of other countries, the profitability of budget hotels will also rise accordingly with some rooms being priced at as high as $100 to $200. The Organizing Committee for the 2008 Olympic Games estimated that Beijing will receive about 4.6 million overseas visitors and 96 million domestic travelers in 2008. From this estimation, the market scale of budget hotels is enormous.

Fang also noted that the growth of budget hotels stems from the sound development of the Chinese economy, especially in the tourism sector. More and more foreign businesspeople and travelers are coming to China and an increasing number of domestic travelers also contribute to the evolution of budget hotels. Furthermore, due to the long holiday factor (China has three seven-day official holidays), and more individual traveling, the demand for budget hotels is soaring. However, the number of budget hotels falls far behind the demand, creating a large development space for such hotels.

In and out

On November 14, 2006, 7DaysInn Group, the biggest of its kind in south China, signed an agreement with U.S.-based Warburg Pincus (WP) LLC, with the latter agreeing to invest $10 million in the hotel group for a share of stock.

The 7DaysInn Group was set up as a franchise hotel group by American venture capital and an investment company in Guangdong Province. Currently, the group owns about 20 outlets in such cities as Beijing, Guangzhou, Shenzhen, Dongguan and Changsha.

Chi Miao, Chief Representative of WP, stated that the rapid growth of budget hotels and their high profits are two important factors that attracted WP.

As a matter of fact, WP was not the only investor interested in Chinese budget hotels. On November 24, Morgan Stanley acquired 20 percent of the stock worth $20 million in Shanghai Motel, a franchise hotel management company.

In the process of market competition, apart from acquiring local brands, foreign investors are also keen on exploring the Chinese market with their own brands. The French Accor Group opened its first budget hotel-IBIS-in China in 2003, which owns eight outlets in the country. Accor also is searching for new hotel locations.

"According to our progression plan, from 2007, we will open 12 IBIS hotels every year, which means by 2009 we will have 50 outlets-the second largest IBIS destination only after the home country France, with over 400 IBIS hotels," said Zhang Shangzhi, Chief Representative of Accor in China and President of IBIS China.

The well-known American budget hotel brands like Super 8 have already located themselves in big cities in China.

While foreign hotel giants are developing their China plan, Chinese homegrown brands are also trying to explore the overseas market. Guangdong Yuehai Group opened a hotel in Paris several years ago. Beijing Tourism Group and French Accor group now jointly manage two hotels in Europe.

Currently, Jinjiang International is planning to acquire a Netherlands hotel with over 100 beds. Those Chinese-run hotels, targeting Chinese citizens traveling overseas with relatively low prices, belong to the category of budget hotels.

Zhang Minghou, assistant to the secretary of the China Hotel Association, told Beijing Review that Chinese travelers in Europe are caught in a dilemma. They can either choose a cheap inn with shabby conditions or may stay in high-rank hotels with high prices and no tailored service for Chinese customers.

Therefore, as Zhang noted, Chinese-managed hotels tailored to Chinese customers are emerging in European countries.

Professor He noted that this kind of overseas development strategy has a huge market potential. He cited statistics from the National Tourism Administration, which said that the number of Chinese traveling overseas reached 16.67 million in 2002, with an annual increase of over 30 percent. From 2001 to 2005, the annual growth rate of Chinese citizens traveling abroad reached 30 percent, and 31 million Chinese traveled overseas in 2005 alone.

The bureau expected the total Chinese "European travel" consumption will hit 2 billion euros in 2007. Of that figure, hotel fees make up a considerable part. This is good news for budget hotels for sure.

"We should be creative in opening hotels overseas," He noted. It won't be easy to establish a Chinese hotel brand in a world rife with Western brands. Chinese homegrown hotel brands should attach great importance to improvements in operation and service.

"The budget hotel market is entering a 'Warring States Period,'" said Zhang Yongan, professor of tourism at Jinan University. The core competitiveness of a budget hotel lies in its cleanness and convenient service through branding and word of mouth. But Chinese homegrown budget hotel brands are still lagging behind Western ones in terms of management and service. With economic globalization, homegrown budget hotels will have to face daunting challenges, and a market reshuffle is unavoidable. He predicted that Chinese budget hotels will likely be controlled by foreign capital.

Zhang told Beijing Review that the bottleneck for domestic budget hotels is the shortage of professionals, which is fatal to their future development.

The reform of state-owned hotel groups is also imperative, to make the operation of homegrown budget hotels more professional, said He. Jinjiang Inn is affiliated with a state-owned hotel group. In spite of its abundant money supply, the hotel's capital management tends to be rigid and inflexible.

He noted that the integration of state-owned and private capital would help boost the development of China's budget hotels.