China’s budget hotel industry, which has less than 10 years of history, has returned to the spotlight. On one hand, there’s the domestic giant Home Inn on a spree of acquisitions; on the other hand, it is the rapid expansion of international predators. In less than 4 years, the number of budget hotels in China grew from 166 in 2004 to 1,476 in October 2007, nearly 1000% growth. As the industry becomes more mature, many issues that were once swept under the rug are now coming to the surface.

cost challenge

Compared with ordinary hotels, cheap rent is the main feature of budget hotels, as well as the main reason for the rapid expansion of the industry. But as the number of cheap hotels in China increases, budget has become the biggest problem faced by cheap hotels today.

“Cost escalation is a serious problem for budget hotels. In addition to general cost inflation, costs associated with expansion activities have been the main reason for cost increases at most budget hotel chains” . said Mr. Hu Shengyang, CEO of Shanghai Inntie Hotel Management Consulting. Hu suggests that the concentration of location selection by budget hotels and their exponential growth in number have resulted in a shrinking of potential sites. This intensifies competition for high-end properties among hotel brands, directly increasing site acquisition costs. Meanwhile, other costs like staff, construction, and administration are also rising.

“The rising cost situation can help the budget hotel industry become more rational.” said Mr. Cheng Jun, Executive Vice President of Hanting Hotel Management Group. Compared with a payback period of 1-2 years in the past, Cheng thought that the current payback period of 3-5 years for budget hotels is more reasonable in a normal market.

Mr. Hu also agreed that rising costs should make the entire industry more focused. While some smaller chains may have to exit due to cost pressure, big budget hotel brands could accelerate their strategic progress to secure a pioneering position for the future.

The withdrawal of Top Star Hotel, now acquired by Home Inn, has proved the point. Industry insiders commented that in order to quickly list the company on the stock exchange, Top Star was furiously expanding its number of hotels, at an unsustainable cost 15% higher than the industry average. The failure of Top Star should give China’s budget hotel industry a warning sign.

homogeneous competition

Not only are costs rising, cheap hotels in China are also facing the problem of “revenue decline”. According to a 2007 survey report, the average room price had decreased from 328 yuan/day in 2005 to 208 yuan/day in 2006, and the occupancy rate also dropped from 89% to 82.4%.

“On the one hand, it is the increase in the number of hotels, on the other hand, these hotels share the same positioning in the market, hence the inevitable price war between budget hotels.” Mr. Hu said. He explained that the first types of cheap hotels in China were simply a copy of the cheap hotel models in Western countries. Once a pilot hotel was successful, the company would replicate the same model in other cities. Another novelty would also be the proven model, which would give rise to the problem of homogeneous competition throughout the budget hotel industry. When the industry was at an early stage, this homogeneity problem could be covered by strong market demand. But as the industry becomes saturated, consumers may now have more choice. Therefore, hotel operators have to lower their prices to attract customers.

But Mr. Cheng disagreed, saying the key reason for the homogeneity is rather due to the industry’s lack of sophistication. He pointed out that budget hotels are also called “limited service hotels.” In developed countries, depending on the differentiated demand of different target groups, the meaning of “limited services” can be very different. Many multinational hotel chains have thousands of hotels, which would be classified into grades 8-12 based on different customer demands, such as tourism and business travel.

“As the market matures, hotel chains will inevitably become homogeneous.” said Mr. Cui Tao, an expert in integrated marketing. “Competition between budget hotels in the future will no longer be store-to-store, but collective. In this process of rivalry, all aspects of a business, such as brand, culture, business model, and cost control, would have combine to achieve a core competitiveness that cannot be easily replicated.

handling difficulty

“There will only be two types of hotels that can survive in China: individualized hotels and systemic hotel chains.” Mr. Cheng’s forecast. He reckoned that individualized hotels can survive on their unique and uncopyable features, while the chains’ advantage will be their scale and uniform quality.

However, Mr. Cui thought that there is a contradictory relationship between quality control and scale, “larger scale may mean higher brand risk, but brand formation requires scale.” In this sense, the standardization of budget hotels is not just a matter of individual progress, but a process of structural superiority. “From managing a few hotels to managing dozens of hotels, the methods for standardized management would be quite different.” said Mr. Cui, who has deep experience in franchise business management.

Hanting Hotel Group, a newcomer to the industry, is showing more caution. It is understood that, in addition to improving the management of standardized systems, Hanting also strictly controls the number of franchisees. At present, only 10% of the Hanting hotel chain are franchised hotels. Mr. Cheng admitted that “franchised hotels are more difficult to communicate when it comes to standardized management. Therefore, before our management ability can be substantially improved, it would be safer to control the number of franchisees.”

For more information on Chinese companies, visit www.chinabizintel.com