China Budget

Survival of the Fittest The Challenges and Promise of China’s Budget Hotel Industry

Financial Advisory

Foreword

At first glance, the budget hotel sector1 looks promising over the long term. It offers a reliable value proposition: a clean, dependable, inexpensive place to stay for business people and tourists. These hotels offer better facilities than most one to two star hotels or guesthouses in many cities and districts where previously the economy hotel experience could best be described as uncomfortable ­ ­all at a similar price level. –­ There is also the potential to attract three-star hotel guests, as facilities are very similar and budget hotel prices are often better value for money. As a result, guests are likely to trade up to or switch to budget hotels. Because of the –­ world economic turmoil of 2008 ­ ­2009, there are reports that some guests of four to five star hotels are trading down to budget hotels in order to cut their potential travel budgets (Exhibit 1). In addition, the number of business travellers, the main target group for budget hotels, is forecast to resume growing. Occupancy rates, at an average of 82% for 2007, were also higher than other hotel categories. In 2008, at the beginning of the economic slowdown, the leading player, Home Inns & Hotel Management, reported an average occupancy rate of 85%, compared with 91.1% in 2007. 2 In a sign that the worst of the global slowdown may be over for the Chinese budget hotel sector, occupancy for Home Inns was 92.4% for the Second Quarter of 2009, compared to 88.2% for the same period in 2008, and to 82.6% in the First Quarter of 2009 (Exhibit 2). 3 Budget hotel chains feel more and more confident, the large ones ­ ­Home Inn, Hanting, 7 Days, Greentree –­ Inn, and Motel 168 ­ ­have announced aggressive –­ expansion plans in adding over a hundred hotels each in 2009, split between direct-operated and franchise hotels. 4

Exhibit 1. Competitive Landscape in the China Hotel Industry...