Homogeneous Competition in China’s Budget Hotel Industry

China’s budget hotel industry, that has under 10 years’ history, has again belong to the limelight. On a single hands, it’s the domestic giant Home Inn with an acquisition spree however it’s the rapid growth of worldwide predators. In less then four years, the amount of budget hotels in China had grown from 166 in 2004 to 1476 in October 2007, almost a thousandPercent growth. Because the industry gets to be more mature, many problems formerly taken underneath the carpet are actually surfacing.

Cost challenge

When compared with ordinary hotels, cheap rent may be the major feature of budget hotels, along with the primary reason behind the industry’s fast expansion. But because the amount of budget hotel surges in China, budget is just about the greatest issue faced by budget hotels presently.

“Cost increase is really a dire problem for budget hotels. Aside from general cost inflation, costs connected with expansion activities happen to be the main reason behind cost increases in many budget hotel chains.” stated Mr Hu Shengyang, Chief executive officer of Shanghai Inntie Hotel Management Talking to. Hu recommended the power of location selection by budget hotels as well as their exponential development in figures have led to a discount of potential sites. This intensifies your competition for top grade qualities between hotel brands, directly pushing up site acquisition costs. Meanwhile, additional fees for example personnel, building and management will also be rising.

“The problem of cost increase might help your budget hotel industry be rational.” stated Mr Cheng Jun, vice-Chief executive officer of Hanting Hotel Management Group. Over a payback duration of 1-24 months previously, Cheng believed that the present payback duration of 3-five years for budget hotels is much more reasonable inside a normal market.

Mr Hu also agreed that cost increase should result in the whole industry more concentrated. Although some small chains might have to exit because of cost pressure, large budget hotel brands could accelerate their proper progress, to be able to secure an initial-mover position later on.

The withdrawal of Top Star Hotel, now acquired by Home Inn, has demonstrated the purpose. Industry insiders commented that to be able to rapidly list the organization on stock market, Top Star were furiously expanding its hotel figures, in an unsustainable price of 15% greater compared to industry average. The failure of Top Star should provide the Chinese budget hotel industry an alert signal.

Homogeneous competition

Not just pricing is growing, budget hotels in China will also be facing the issue of “decreasing earnings”. Based on market research report in 2007, the typical cost per room had decreased from 328 yuan/day in 2005 to 208 yuan/day in the year 2006, and occupancy rate also lower from 89% to 82.4%.

“On a single hands it’s the rise in hotel figures, however these hotels share exactly the same market positioning, therefore, the inevitable cost war between budget hotels.” stated Mr Hu. He described the early kind of budget hotels in China was just a copy from the budget hotel models from Western countries. When a pilot hotel was demonstrated effective, exactly the same model could be duplicated in other metropolitan areas by the organization. Other new comes would even the proven model, therefore inducing the problem of homogeneous competition over the budget hotel industry. Once the industry what food was in an earlier stage, this homogeneity problem might be taught in strong market demand. But because the saturates, consumers are now able to convey more choice. Hotel operators thus have to lower their prices to draw in customers.

But Mr Cheng could not agree, stating that the primary reason for homogeneity is quite because of unsophistication of the profession. He noticed that budget hotels will also be known as “limited service hotels”. In civilized world, according to differentiated demand from various target groups, this is of “limited services” can be quite different. Many multinational hotel chains have a large number of hotels, which may be classified into 8-12 grades based on different customer demands, for example tourism and business travel.

“Because the market matures, hotel chains will in the end become homogeneous.” stated Mr Cui Tao, a built-in marketing expert. “Your competition between budget hotels later on won’t perform a store-to-shop basis, but on the collective basis. Within this competition process, every aspect of a company, for example branding, culture, business design and price control, will have to be used together to attain a core competitiveness that can’t be replicated easily.”

Management difficulty

“You will see only two kinds of hotels that may survive in China: individualized hotels and systemic hotel chains.” Mr Cheng forecast. He believed that individualized hotels can survive on their own uncopyable, improvements, while the benefit of hotel chains is going to be their scale and uniform quality.

However, Mr Cui believed that the there’s a contradictory relationship between qc and scale, “Bigger scale may mean growing brand risk, however the formation of the brand requires scale.” Within this sense, the standardisation of budget hotels isn’t just a problem of person breakthrough, however a procedure for structural brilliance. “From building a couple of hotels in managing lots of hotels, the techniques for standardised management could be quite different.” stated Mr Cui, with a profound background in franchise business management.

Hanting Hotel Group, a comparatively new comer towards the industry, is showing more caution. It’s understood that aside from improving the treating of standardised systems, Hanting can also be strictly controlling the amount of franchisees. At the moment, only 10% of Hanting’s hotel chain are franchised hotels. Mr Cheng accepted that “franchised hotels tend to be more hard to communicate with regards to standardised management. Therefore before our management capacity could be substantially improved, it might be far better to control the amount of franchisees.”

As far as budget hotel in Singapore goes it does not get any better than Fragrance Hotel, which operates 21 hotels all around the island. It has been among the biggest chains of economy hotels over here from its establishment in 1998.

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