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1. Executive Summary
S ince the Chinese government instituted a more open economic policy in the
1990s, the nation’s hospitality industry has witnessed two areas of great prosperity, its luxury (four- and five-star) hotels on one end of the hospitality spectrum and its budget hotels at the other end. This article, however, will focus on the mid-scale hotels, many of which are independent. According to China Hospitality
Development and Innovative Trend Analysis During the 12 th Five-Year Plan, a report issued by China Tourism Research Institute,
In 2012 there were 57.72 million overnight international tourists and
2.96 billion person times of domestic travelers (if 15% of them were estimated to require accommodation, the overnight domestic tourists would amount to 44.4 million). Among these customers, 40% of overnight international tourists and 25% overnight domestic travelers prefer mid-scale hotels.
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Interestingly, the huge potential for mid-scale hotels is based on a large group of traditional independent mid-scale hotels experiencing a difficult transition. This article will make the case that an understanding of the mid-scale market in China offers opportunities for success, despite its current challenges.
2. Industry Background
In order to understand the Chinese mid-scale hotel market, it is necessary to recognize three distinct matters: the hotel star-rating system in China, the overall market for three-star lodging in China, and the background of these hotels.
2.1 Hotel Star-rating System in China
The fundamental hotel classification system in China is the Star-Rating Standard for
Tourist Hotels issued by the State Bureau of Quality and Technical Supervision on
September 1, 1993. According to this standard, the ordinary tourist hotels are classified into five levels: one-star, two-star, three-star, four-star and five-star hotels. www.ILCongress.com
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Chinese Hotel Rating
System 2
1-Star
Pricing lowest
Star-rating Standard for Tourist Hotels in China
Functions lodging & food
2-Star inexpensive
3-Star
4-Star relatively high high loding, food, more comprehensive services lodging, food, comprehensive services, recreational services lodging, food, complete travel services
5-Star very high lodging, food, complete travel services, a hub of social life
Facilities guest room guest room, restaurant, shop, barber, poster service guest room (some 20 square meters with refrigerator and color TV), restaurant, shop, barber, business center, wine bar, coffee bar, beauty lounge
All-inclusive
All-inclusive with perfect equipment and large-scale facilities of great design
Service basic good satisfactory excellent superb
Feature meet customer's basic travel needs economical meet the demand of middle class
Hilighting indoor design serve as a hub of social, meeting, recreation, shopping and fit-keeping activities
2.2 The Three-Star Hotel Market in China
The 2013 National Star-Rated Hotels Statistics Report issued by the China National
Tourism Administration offers the following statistics:
Market Share
By the end of the first quarter 2014, there were 11,906 registered star-rated hotels operating in China, with 5,709 three-star hotels representing 47.95% of the total.
2013 Market Share of
All Hotel Types (by
Star-rating) Source: Q1
2013 National Starrated Hotels Statistics
Report 3
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Geographical Distribution
We may also see in this report that these three-star hotels are mainly distributed in central-government-controlled cities (Beijing, Shanghai, Tianjin, and Chongqing), the economically advanced coastal provinces in southeast China, top tourist destinations, and the capital cities in other provinces.
ADR and Occupancy
The Q1 2013 National Star-Rated Hotels Statistics Report indicates that the average
ADR of these three-star hotels is currently 206.22 CNY ($33.67 USD) at the average occupancy of 47.94%.
4 In some first-tier cities, such as Beijing and Shanghai, the ADR of 3-star hotels basically fluctuates around 350 RMB ($57.14 USD).
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2.3 Background of Three-star Hotels
According to The Development History of the Chinese Hospitality Industry ,
“In the 1980s, hotels were mainly built in major cities. After 1993, all provinces, cities, towns and even counties started to build their own hotels. Even some less-developed regions managed to spend money on constructing a few high-level hotels. …Many hotels are not built for market demand. Rather, it was applied as a window towards an exportoriented economy. …By the end of 2004, … in terms of legal entity, state
-owned and collective-owned hotels accounted for 50.35% and 9.25% of the total star-rated hotels.” 6
We should also note that this data comes from 2004 and governmental three-star hotels afterwards kept growing while the trend of building one- and two-star hotels quickly shifted to economy hotels after 2000. Some huge state-owned enterprises, wealthy business people as well as recent real estate developers also built mid-scale hotels for their respective purposes.
Of course, we also have a limited number of chain hotels in this category, such as
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branded international hotel Holiday Inn Express, and the flexible star-rated hotel league Starway Hotels, managed now by China Lodging Group. However, if these chained three-star hotels are deducted, “about 90% of the market segment are all independent hotels,” according to Brand Competition Market Trend Report of Mid-scale
Hotels.
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2.4 Definition of Mid-Scale Hotels in China
Does “mid-scale” simply refer to these three-star hotels? Not exactly.
Apart from these hotels, we also have many non-star-rated hotels in this sector, especially from two kinds of hotel chains: some hotel chains are mainly focused on the middle market themselves, such as Vienna Hotels and Orange Hotels; other hotel chains from the economy sector have launched middle-market concepts, such as Ji
Hotels of China Lodging Group, Yitel of Home Inns, Metropolo of Jinjiang Inns,
Lavande Hotel of Plateno Hotel Group, etc. Such hotels don’t really provide the complete services or facilities required by the star-rating standard, but they have clearly designed the products that can meet the real market needs by offering excellent food and lodging experience, which makes it unnecessary to register to be a star-rated hotel to win credibility and recognition from customers.
Despite the variety of definitions of this market segment within the hospitality industry in China, we may define a mid-scale hotel in this way: It is a hotel priced between an average economy hotel (priced similar to one-star and two-star hotels) and an average four- and five-star hotel (with ADR roughly between 200 CNY to 350
CNY, or some $33 to $57 dependent on the location of the hotel) equipped with such key facilities as rooms and restaurant in line with the standard of three-star hotels.
Under this definition, even though we have a limited number of existing non-starrated mid-scale hotels operated by hotel chains, it is safe to say that the vast majority are traditional independent hotels. This is exactly where both the challenges and the opportunities lie.
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3. Turning Challenges into Opportunities
3.1 Challenges to China’s Traditional Independent Mid -scale Hotels
Currently, there are four threats to traditional independent mid-scale hotels in China:
1) ownership issues
2) questionable or inappropriate positioning on the hotel scale
3) marketing challenges due to a reduced market share
4) poor financial performance.
3.1.1 Ownership Issues
.”
The majority of China’s three-star hotels were built to serve political purposes, to function as a “window to the outside.” The hotels were not operated as a fully functioning business entity until the middle of the 1990s, when they became fully responsible for their own profit and loss during the economic reform. It will take a long time for the management teams to get used to modern hospitality technology and gain significant managerial expertise. In short, such mid-scale hotels do not have enough experienced professionals to serve new customers—the rising middle class, business people and tourists.
Private owners in China tend to manage mid-scale hotels themselves. Even if some hire outside operators, they are inclined to get very involved with business decision-making at all levels. Given most of these private owners don’t have a hospitality background, the effectiveness of the operation is limited.
3.1.2 Marketing Challenges and Reduced Market Share
Most of China’s independent mid-scale hotels are more than ten years old. Even though some have undergone renovations, rarely do they update their structure from inside out to keep up with the current fashion. Moreover, the wear and tear of many years of usage make these hotels decreasingly popular.
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Price
According to Zhao Huanyan, Chief Knowledge Officer of Huamei Consulting,
In China, mid-scale hotels are not substantially differentiated from luxury hotels in terms of pricing. In Europe, America and India, the latter are usually priced three or four times the former. Owing to the imbalanced supply and demand in the hospitality market in China, the overbuilt luxury hotel market is expected to reduce the rate as supply exceeds demand. On the other hand, some well-priced economy hotels successfully raise their rate.
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As a result, if their budget allows, customers would rather stay in luxury hotels if the price gap is not too much,. A mid-scale hotel does not produce a much larger cash flow than an economy hotel of similar size—but it certainly costs more to operate.
Promotion
Economy hotels can promote themselves as a good value and four- and five-star hotels market themselves as a hub of social activities and elaborate services. Lacking such eyecatching characteristics, traditional independent hotels struggle to offer a compelling story to attract customers.
Place
Mid-scale hotels have a difficult time distributing their inventory. Since an independent mid-scale hotel does not belong to any hotel chain, it does not have support from a centralized reservation system, which would generally bring at least 20% of the business to a chain property; on the other hand, super large domestic OTAs such as
Ctrip and Elong have dominated the online distribution market. Through this inventory advantage, Chinese OTAs are charging as much as 15% of the total room rate including service charge, further cutting down the profit margin of mid-scale hotels. An independent hotel usually commits limited capital to a website and booking engine, and therefore cannot compete at the e-commerce level with large chains and luxury independent hotels.
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3.1.3 Under-performance of Mid-scale Hotels
According to Mr. Zhao Huanyan,
Mid-scale hotels, especially represented by individual three-star hotels, account for almost half of China’s total hospitality market. Despite this huge scale, they generally underperform. From one-star to five-star hotels, only three-star hotels cannot make ends meet.
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This can be viewed clearly in the table below:
2010-2012 Average Profit Per Hotel of All Hotel Types (by Star-rating)
5-Star 4-Star 3-Star 2-Star 1-Star Total
Average Profit Per Hotel in 2010 11,002 95 -220 10 48 10,935
Average Profit Per Hotel in 2011 10,541 97
Average Profit Per Hotel in 2012 8,559 103
Unit: thousand CNY
-112
-131
16
12
67
78
10,609
8,621
Some believe traditional independent three-star hotels will soon fade as a viable lodging option.
3.2 Current Opportunities for Traditional Independent Mid-Scale Hotels
Despite the many challenges to the mid-scale market in China, this business sector may see renewed vitality in coming decades. This will likely occur as a result of trends affecting both the economy hotel sector and the luxury hotel sector.
3.2.1 Development Trends of Economy Hotels in China
Source ： Discussing
Relevant Issues on the Development of
Mid-scale Hotels in
China by Zhao
Huanyan.
The introduction of standardized Western budget/economy hotels in the late 1990s has been well-received by both the general public and business people, both groups with a limited budget for travel. According to the 2014 Top 30 China Economy Hotel Brands by
Inn.net.cn, as of July 2014, “China boasts 12,078 economy hotels, managed by 514 brands”.
10 The top five players are Home Inn, 7-days Inn, Hantin, Jinjiang Inns and Green
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Tree Inns, which have over 700 hotels each. Home Inn has over 2,000 hotels (including its Motel 168 brand).
However, for economy hotels, the picture is not as rosy as it seems. In recent years, the
Chinese government has raised the nation’s minimum wage again and again, leading to a surging labor cost in the economy hotel sector. Meanwhile, the rent for commercial buildings has risen as well. Rent for some properties in strong locations have even doubled in recent years. The economy hotels, however, cannot charge more than necessary to offset the rising cost and their profit margin is thinning significantly.
According to China Business Magazine ,
In 2010, the profit margin of Home Inn and Hantin was as high as over
10%,; now the profit margin for China Lodging Group (previously
Hantin), 7 Days Inn and Home Inn are 5%, 7% and 1% respectively. …
The high profit margin years are now gone.
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Meanwhile, many hotel guests have seen their incomes rise, giving them more purchasing power and the ability to stay in higher-end hotels.
To seek more profit and grow with their customers, numerous economy hotel tycoons have developed their own mid-scale hotel brands. They have made huge investments, betting heavily on the coming era of mid-scale hotels by leveraging their existing brand resources.
3.2.2 Current Governmental Frugality Campaign
The hospitality industry is profoundly influenced by politics. The current governmental frugality campaign that has taken effect since President Xi Jinping took office in 2013 is one example.
Struggling due to the nation’s slow recovery from the 2008 financial crisis, luxury hotels in China have become heavily dependent on domestic business, including government-related business. However, soon after the central government enacted
“Eight Rules and Six Prohibitions,” dictating simplified meetings, events and gifts as
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well as the policy of restricting “spending on official receptions, vehicles and overseas trips,” luxury hotels relying on high-end F&B service suffered a great deal.
To make things worse, until now, they lost room and F&B business not only from local and national government entities but from those state-owned enterprises as well. The situation has become so serious that some luxury hotels even would give up their four- or five-star ratings or ask for a lower rating to be listed with more limitedbudget hotel properties.
Considering that President Xi’s regime looks likely to extend into a second term, it is quite likely that such austerity measures would continue into the next decade.
Meanwhile, these governmental organizations and state-owned enterprises would naturally consider lower-priced mid-scale hotels.
3.3 Possible Solutions for Future Independent Mid-scale Hotels in China
By taking a look at activity in the current hospitality market in China, we can see that there are at least two ways for existing independent three-star hotels to survive: take on a brand or become a boutique hotel.
3.3.1 Branded Chain Hotels
Since 2010, different hotel groups have planned or launched mid-scale brands to join the race for this potential market. The forerunners in this endeavor have been Vienna
Hotels and Orange Hotels. Then the top five economy hotel groups and domestic and international luxury brands followed suit. The table on page 11 gives a complete picture of these major mid-scale brands.
These mid-scale market brands obtained strong feedback by differentiating themselves from economy hotels and luxury hotels through the following efforts, as explained by Zhao Huanyan:
They provide 1) a secondary space outside the guest room, such as gym, reading bar, tea bar or movie bar; 2) a quality product element apart from the basic needs, such as innovative F&B service or health
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related add-on service; 3) multiple cultural and art experiences through design, culture and environment; and 4) enhanced service quality.
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An existing traditional independent mid-scale hotel, if seeking to attract a brand, can simply choose from these brands to see which one suits its own unique circumstances and offers the best brand resources, including PMS, CRS, broad OTA access, marketing support via traditional and social media, and so on.
Key Branded Chain Players in the Mid-scale Hotel Market in China
Hotel Group Mid-scale Brand
Mid-scale-market
Focused Hotel
Chains
Vienna Hotels
Orange Hotels
Hotels Vienna
Hotels
Orange Hotels
Orange Hotel Select
Upgraded Economy
Hotel Chains
Home Inn
China Lodging
Plateno Hotel Group
Yitel
Ji Hotels
Lavande Hotel
International Luxury
Hotel Chains
Jin Jiang Inns
IHG
Metropolo
Holiday Inn Express
Domestic Luxury
Hotel Chains
Hilton
New Century
BTG-Jianguo
Hilton Garden Inn
Manju Hotel
Tangram
3.3.2 Boutique Hotels
Another bold strategy by which to revive a struggling traditional mid-scale hotel is to transform it into a boutique hotel.
‘Boutique hotel’ is a term … to describe hotels which have typically between 10 and 100 rooms and often contain luxury facilities in unique or intimate settings with full service accommodations … Typically
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boutique hotels are furnished in a themed, stylish and/or aspirational manner. Boutique hotels are often individual and focused on offering their services in a comfortable, intimate, and welcoming setting, so they are very unlikely to be found amongst the homogeneity of large hotels.
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This concept was introduced to China in the late 1990s when a few opened in such major cities as Beijing, Shanghai and Shenzhen. With small scale and outstanding theme design and service concepts, boutique hotels have set a new trend for the
Chinese hospitality industry. It has become more popular in economically advanced regions and some international brands have also joined the game. According to
91dyzx.com
,
The data provided in the 2013-2017 Development Forecast and
Investment Strategic Planning Analysis Report on China’s Boutique
Hotels, issued by Forward Industry Research Institute, there are now over 200 boutique hotels in China, mainly located in well-developed coastal cities such as Shanghai, Beijing, Shenzhen, etc. and well-known domestic resorts such as Lijiang of Yunnan Province. As the market for large-scale star-rated business hotels becomes saturated, wellpositioned boutique hotels will be pursued by all parties.
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In view of the comparative smaller scale of a three-star or equivalent independent hotel, this kind of asset naturally fits the concept of a potential boutique hotel. This transformation could be more likely if the scenario were to meet the following criteria:
1) the building demands overall refurbishment
2) the hotel is of small scale, preferably no more than 100 rooms
3) the hotel is situated in a fashionable city (Beijing, Shanghai,
Guangzhou, Shenzhen or other top-tier city) or in a quality resort market (Sanya, Xiamen, Guilin, Lijiang, Zhangjiajie or other leading tourist destinations
4) the local culture or ideally the building itself supports a unique experience for the customer
5) very harmonious and detail-oriented service is provided with careful
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protection of privacy
6) the hotel is managed by a group of skilled, experienced professionals
4. Conclusion
In China’s rapidly changing hotel space, traditional independent mid-scale hotels have been struggling for survival, squeezed by fast-growing economy hotels and over-built four- and five-star luxury hotels. Right at this turning point, the profit margin bottleneck of major domestic economy hotel brands and the pressure on luxury hotels from the current governmental austerity campaign jointly give rise to a huge opportunity for the revival of mid-scale hotels. They can either join one of the suitable mid-scale hotel brands or be reinvested in and transformed into a more profitable boutique hotel.
About the Author
Gang Lu | Cornell University
Since 2012, Gang Lu has flourished as a business development manager for RateGain, one of the world’s leading travel and hospitality IT solution providers. With RateGain, he helped to expand business in mainland China and Taiwan, working closely with
Marriott, Wyndham, Starwood, Interstate China, and Regalia to meet their demand for
OTA revenue management. Prior to his tenure at RateGain, Gang Lu worked for more than eight years in various positions for Jinjiang Inn Hotels. His roles included president secretary, personal assistant to vice president of operations, hotel development project manager, hotel general manager, assistant brand standard manager and finally overseas project manager for the company’s partnership with
Louvre Hotels in France. He is currently a student in Cornell University’s School of
Hotel Administration, where he focuses on real estate and revenue management.
Contact the author: gl433@cornell.edu
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References
1. “ China Hospitality Development and Innovative Trend Analysis during the 12 th Five-Year Plan .”
Eastmoney.com. www. finance.eastmoney.com/news/1355,20130922324497858.html
2. Trans. from China Hotel Rating System. baike.baidu.com/view/3601098.htm
3. Trans. from Q1 2013 National Star-rated Hotels Statistics Report, 1. www.cnta.gov.cn/html/2014-5/2014-5-30-10-18-21885_1.html
4. Ibid, 2.
5. Trans. from www.9dianmh.com. www.9dianmh.com/news/19735404.html
6. Trans. from The Development History of Chinese Hospitality Industry, 6. wenku.baidu.com/view/ c9c62a553c1ec5da50e270ca.html
7. Trans. from Brand Competition Market Trend Report of Mid-scale Hotels. res.meadin.com/
IndustryReport/92700_1.shtml
8. Zhao Huanyan. Trans. from blog article, “Discussing Relevant Issues on the Development of Midscale Hotels in China.” blog.sina.com.cn/s/blog_5d440f940101f9ae.html
9. Ibid.
10. Trans. from 2014 Top 30 China Economy Hotel Brand by Inn.net.cn. www.inn.net.cn/a/baogao/ yanjiu/2014/0714/1197.html
11. Trans. from China Business Magazine . www.traveldaily.cn/article/69651.html
12. Zhao Huanyan, Trans. from blog article “Discussing Relevant Issues on the Development of Midscale Hotels in China.” http://blog.sina.com.cn/s/blog_5d440f940101f9ae.html
13. Wikipedia.org. “Boutique Hotel.” en.wikipedia.org/wiki/Boutique_hotel
14. Boutique Hotel . “Barometer of Hospitality Industry Development.” www.91dyzx.com/news/bencandy.php?&fid=27&id=102510
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