Hotel chains vying for Chinese market share

A bird's eye view of Accor SA's luxury Sofitel Boao Hotel in Hainan province. The French hotel group plans to open 40 more hotels in China in the next three years. [Photo/China Daily]

Hotel chains are growing for more Chinese market share

Leading international hotel chains are fending off fears of a glut in the sector after building booms in the run-up to the Beijing Olympics and Shanghai World Expo, with a number of major European players acquiring new properties and expanding their Chinese presence.

Langham Xintiandi Shanghai hosted its soft opening party less than two months after Marriott International Courtyard Hotel opened its Shanghai property in late August. At least 10 more hotels are expected to open in Shanghai before the end of the year.

The list includes London-based hotel group Guoman's first property in China, Guoman Hotel Shanghai, Hotel Indigo Shanghai on the Bund and Hilton Shanghai Hongqiao.

About 10,000 star-rated properties are expected to be completed in the country by 2015, according to the China National Tourism Administration.

Industry analysts attribute China's hotel-building boom to the weak economies in Europe and the United States. Finding little room for growth in their traditional markets, global hotel chains are focusing their expansion on emerging market economies, particularly China.

"One particularly strong market is Shanghai," says Elizabeth Randall, managing director of hotel research company STR Global. The World Expo in Shanghai, which broke previous Expo attendance records, boosted Shanghai's revenue per available room (RevPAR), a key indicator of hotel performance, in the first nine months of 2010 by 64 percent from a year earlier to $104.50 (77.10 euros).

STR's latest report of the Asia-Pacific region notes that Shanghai achieved the largest increase in all three key performance metrics. The city's hotel occupancy rate rose 29.5 percentage points to 73.3 percent, and the average daily rate increased 34.2 percent to $142.64.

US hotel chains were the first to establish their presence in the Chinese market but major European brands have been catching up in recent years.

France's Accor operates seven sub-brands and manages 98 properties in China, 43 of which were opened in the past three years.

Its major properties include the luxury Sofitel, upscale Pullman, MGallery, Grand Mercure, midscale Novotel, Mercure and budget brand Ibis. The company says it will open 40 more hotels in China in the next three years.

The group's expansion plan for China has set a new direction, according to Robert Murray, Accor's senior vice-president in China. It will "step up its expansion into the second- and third-tier cities" rather than focus only on Beijing and Shanghai, Murray says.

China was the third largest market for IHG, the British company that also owns former US brands InterContinental and Holiday Inn, two years ago. The number of properties under the management of IHG's various brands in China have surpassed that in Britain to become its second largest market. But the US remains its biggest market.

"Our business in China is highly profitable, with annual revenue in excess of $1 billion (746 million euros)," says Keith Barr, managing director of IHG in China.

"Our development strategies have helped us secure a 15 percent market share in China," he says.

Starwood, one of Accor's major US competitors in the Chinese market, has an even more ambitious expansion plan. With 62 properties in China under its management, the company says it will open 86 more in the coming years. China is now the US hotel chain's second-largest market after the US. One in every three new Starwood hotels that opened or plans to open in 2010 and 2011 are in China.

To show it was serious about the China market, the company flew its entire team of top executives to Beijing in late October to meet Chinese government officials, property owners, travel agents and potential investors.

"As a travel company, we know firsthand the importance of getting out and meeting face-to-face with key stakeholders, and in the case of China, seeing really is believing - the magnitude of growth and urbanization here is hard to understand unless you experience it firsthand," says President and CEO of Starwood Frits van Paasschen.

But not everyone is as bullish. Artemis Wang, a former member of Accor's branding team in China, says that the possibility of overbuilding is a real worry to luxury hotel operators. "They are in a dilemma," she says. "They know that the supply of hotel rooms in the major Chinese cities has overtaken demand, but nobody wants to stop building for fear of losing market share," she says.

The building boom has brought to the forefront numerous issues that could erode quality and, eventually, brand image, analysts say. Shortage of qualified staff has always been a problem confronting hotel operators. And that problem is becoming uncontainable with so many new properties coming on board, creating an almost insatiable demand for experienced staff.

The surge in property prices has also undermined the bond between the owners of the hotel properties and the management companies. Industry sources say that many hotel property owners are finding it more profitable to convert their hotels into offices that can generate higher rental income.

"Quantity is one thing and quality is another," Wang says. "It's fairly easy to open a new hotel here in China, but hard to maintain one. When local property owners and hotel management companies have conflicts and can't work anymore, they pull out, and that's what we called de-branding."

Wang also mentions "brand confusion" for Chinese customers, when overseas hotel giants usually have more than five sub-brands under their umbrella and upgrade their properties in China. Sofitel is four-star hotel in Europe but became a five-star one in China, while Holiday Inn and Howard Johnson are "economy brands" in the US but turned into four-star and five-star hotels in China.