Companies

Tougher times ahead for Shanghai hotels

By Shi Yingying (China Daily)
Updated: 2010-11-16 11:00

SHANGHAI - With the end of the Shanghai Expo, some budget hotels near the site are also likely to close shop within the next two years.

"We knew it (the hotel) wouldn't stay in this location for too long," said a marketing executive from Green Tree Inn who wished to remain anonymous.

He said that was why the company arranged a five-year lease for the site. "We arranged for it to open two years before the Expo began, tried to earn as much as possible during the six-month event and planned to keep it open for another two years."

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"We invested in this hotel according to a 'five-year plan' and intended to break even by the third year," he said.

Green Tree Inn's Pujian Road branch is one of the nearest hotels to the Expo's Pudong site.

For most branded budget hotels, the period for the recovery of investment is four-and-a-half years with a return on investment (ROI) of about 23 percent, according to Zhao Huanyan, a tourism industry expert from Shanghai Academy of Social Sciences. High-end hotels need 15 years to recover their investment.

But thanks to the Expo, Shanghai's hoteliers found it much easier to make money, with hotel occupancy rates nearing 100 percent during the event.

Most budget chains increased their room rates by an average of 60 percent from May to October. For example, the nightly rate for a double room in Green Tree Inn's Pujian Road branch increased from 359 yuan ($54) to 899 yuan.

However, the hotel market cooled right after the end of the Expo and a price war was "inevitable because of the expected fall in demand, estimated to be around 20 percent", said Sue Gan, executive assistant manager of InterContinental Shanghai Puxi.

After the Expo, budget hotels suffered more than high-end ones in terms of room rate, with the nightly rate for Green Tree Inn's double room falling to 349 yuan, 10 percent lower than prior to the Expo.

According to Zhao, Shanghai's budget hotels have been involved in a fierce price war three times in recent years. The first time was in 2007 when leasing costs rose by 29 percent because of higher rent, electricity, gas and water rates. Following that, salaries rose amid the 2009 financial crisis. Finally, new franchises started battling for trade.

Dai Bin, vice-president of China Tourism Academy, said the price war was not a good thing. "The needs of the hotel market are flexible. New rooms can enter the market with new hotels but it's difficult for them to leave," he said.