Super-8 shows vast budget hotel
potential By Tom Miller
BEIJING - Until the late 1990s, most
travelers and businessmen in China had a limited
choice of accommodation: while the lucky few
checked into expensive five-star hotels, the
unfortunate majority had to brave the musty rooms
and surly service of zhaodaisuo, the cheap
state-run hostels that traditionally served as a
work unit away from home.
But surging
demand from China's growing band of entrepreneurs
and middle managers for quality but inexpensive
accommodation is now fueling an investment boom in
the country's fledgling economy hotel sector. Both
domestic and international operators
are
scurrying to get a foothold in what they predict
will become a highly lucrative market.
According to a survey by consultancy
Datamonitor, China's hotel industry generated
$13.3 billion in revenues in 2003. A recent report
by Guolian Securities, a Wuxi-based brokerage,
says foreign-invested hotels take the lion's share
of the profits by exploiting their superior
management, resources, and branding expertise. In
2002, the period covered by Guolian's report, just
8% of all star-rated hotels in China were
foreign-run, but they accounted for 15% of room
occupancy rates, 29% of revenues, and a massive
70% of profits. Guolian notes that China's hotel
structure is "irrationally" skewed toward the top
end of the market, with four- or five-star hotel
rooms accounting for around a quarter of the
national total. The average in developed
countries, the survey says, is just 10%.
International hotel chains are now eyeing
the untapped potential of the two- and three-star
economy sector, which currently accounts for
roughly 60% of China's 10,000 starred hotels. The
French company Accor, which owns the upmarket
Sofitel brand, opened an economy Ibis hotel in
Tianjin at the end of 2003, offering rooms from
just 128 yuan (US$15.83). Further hotels are
planned in Chengdu and Qingdao.
But the
most aggressive of the foreign chains is US-based
Cendant Hotel Group, whose China portfolio already
contains the mid-market hotel brands Howard
Johnson, Ramada and Days Inn. Super 8 Hotels
(China), the China subsidiary of Cendant's Super 8
Motels, the world's largest chain of franchised
economy hotels with over 2,000 outlets scattered
across North America, is the most ambitious of the
international economy brands operating in the
mainland. Super 8 China is rapidly carving out a
niche as the top foreign player in the sector.
The first Super 8 in China opened in
Beijing in May 2004; there are 10 Super 8s
scattered across the country, with a further 12
due to open over the next few months. Reas
Kondraschow, the managing director of Cendant's
international arm, says China represents "a
multi-tier opportunity" for the company,
complementing the "inroads" Cendant has already
made at the mid-market level.
The Super 8
brand is managed in China by the Tianrui Hotel
Corporation, a privately held company based in
Hong Kong that has committed to developing more
than 55 Super 8 hotels during the next five years
under a master license agreement. Tianrui
initially estimated this would generate $150
million of gross revenue, but the rapid success of
the business has persuaded the company's
management that the brand could do even better:
Tianrui is now targeting a total of 300 Super
8-branded hotels by the time of the Beijing
Olympics in 2008.
Cendant licenses the
rights to the Super 8 brand in China, Kondraschow
says, to take advantage of Tianrui's local
business knowledge and marketing expertise. Adding
the licensee middleman makes sense for Cendant
because it reduces the commercial risk it would
incur from trying to franchise directly in China's
murky market, where franchising law remains opaque
and enforceability of contracts poor. Both Days
Inn and Howard Johnson already operate under a
similar licensing system.
Tianrui is run
by Mitch Presnick, an old China hand and former
vice chairman of the American Chamber of Commerce
in Beijing. Under the licensing deal, Tianrui
identifies suitable properties for the Super 8
franchise and then sells on the rights to the
Super 8 brand. Every franchise, however, must
first be approved by Cendant's management.
Kondraschow says that, in terms of product
quality, the differences between direct
franchising and licensing to a middle party are
negligible: "The end results are similar, because
we keep a great deal of control over all our
brands, whether licensed or franchised." Cendant
has a team in Hong Kong that inspects Super 8's
franchises to help maintain quality assurance and
brand standards, which adds an additional layer of
supervision to Tianrui's own control systems.
Apart from quality assurance and access to
Super 8's international operating systems,
franchise membership provides marketing support,
staff and management training, and a comprehensive
room reservation system. Online travel agents,
such as Ctrip and Elong, usually require high fees
and quality assurance from hotels seeking access
to their networks, typically taking a cut of 30-60
yuan per room reservation per night - some 20-30%
of an economy hotel's room charge. But Super 8
franchises gain automatic listings on China's top
15 travel websites at a reduced cost.
The
initial Super 8 franchise fee is currently set at
380,000 yuan, with ongoing management costs
charged at 5.6% of revenues. To encourage hotels
to convert to Super 8 status, Tianrui provides
credit to hotel owners to renovate their
properties to the required standard.
The
company is now in the process of putting together
an investment fund of $15-25 million to allow
outside investors to take minority stakes in Super
8 properties where the owners require additional
funds. Presnick views the fund as an opportunity
for commercial real estate investors, both Chinese
and foreign, to get a foothold in China's hotel
sector. Since January this year foreigners have
been allowed to wholly own economy hotels, whereas
mid-market and luxury hotels still require a local
joint venture partner.
For customers,
Super 8 hotels offer exceptional value for money.
A room with twin beds, free broadband Internet
access, digital TV and ensuite bathroom at the
Hemei Super 8 hotel in Hangzhou, just a short walk
from the West Lake, costs only 158 yuan - less
than $20. The average daily rate of Super 8 rooms
is between 180 and 200 yuan. Presnick argues that
the Super 8 brand delivers the quality and
occupancy rates that can turn a mediocre hotel
into a truly profitable business. A year after the
first Super 8 opened in China, occupancy rates are
at 85%, 25% above the national average. This means
healthy profits for hotel owners, he says, who can
expect a five-year return on their franchise
outlay.
The affable Presnick, a
self-professed "junkyard dog" who came to China in
1988 to make his fortune, is sure that China's
highly fragmented hotel sector, plagued by
inconsistent service and poor management, is ready
for the kind of good-value, branded hotels that
swept through the North American market in the
1960s and 70s. After more than 15 years of
sniffing and scratching around for suitable
business opportunities, he is convinced that he
has finally found his pot of gold. "I'm
evangelical about selling economy hotels to the
Chinese," he enthuses, "because there is a lot of
money to be made."
Tom Miller is
the Beijing correspondent of the China Economic Quarterly
(CEQ), a magazine that reports on the
Chinese economy and business environment. He can
be contacted at tpxmiller@gmail.com.
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