In the 1950s a new sort of hotel started appearing next to exits on US highways. They were budget hotels with names like Comfort Inns, Motel 6 and Days Inn – and they charged just $6 a room. Fifty years later, budget chains started to sprout in China too. Over a 10 year period, the number of budget hotels has grown from practically zero to more than 6,700.
The business model has some Chinese touches. Hotel guests will sometimes find flyers slipped under their doors promoting the pleasures of overnight companionship. But when it comes to price, the budget hotels are hard to beat. For example, Motel168 (named originally after its competitive room rate of Rmb168 per night – its sister brand the more ‘premium’ Motel268) offers rates in Shanghai’s downtown Jing’an district of Rmb219 ($34.60) a night, compared with Rmb1,290 for the Hilton, a few minutes away.
But the question is whether the expansion drive over the last decade is now on hold, with the largest budget hotel operator, Home Inns, announcing a loss of Rmb103.2 million ($16.4 million) in the first quarter of this year.
The company, which runs almost 1,600 hotels in more than 210 Chinese cities, says the loss stems largely from the acquisition of Motel168 back in September 2011 and that it expects to be back in profit in the second quarter. David Sun, its chief executive, added that the budget operator is still forecasting a 20% revenue increase in 2012 and plans to add as many as 360 new hotels a year in the coming three years.
“We’ve felt sluggish demand from business travellers starting in November, especially in export-oriented regions,” Sun told Bloomberg. “We still need to build up our capacity and can’t just stop expanding amid a relative slowdown.”
Sun also says that Home Inns’ occupancy rate in the last quarter was 80.5%, down from 85.1% a year earlier and from 84.2% in the fourth quarter, although part of the decline was due to the Motel168 purchase. Revenue per available room, a key metric, slid 5.7% from a year earlier.
Home Inns, which says small business travellers make up about two-thirds of its visitors, isn’t the only hotelier to experience a tough time. Number two in the sector, Hanting Hotel, also focuses on business travellers, has seen its own revenue per room drop almost 20% from its peak in 2008 to just Rmb156 this year.
Meanwhile 7 Days Inn, which ranks third, saw total occupancy down almost 5 percentage points on a year ago, at 77.7% in the first quarter.
Although industry insiders are blaming the slowdown on the wider economy, analysts say the budget chains are also confronting a similar problem – namely, expanding too fast.
Take 7 Days Inn. It added 100 hotels in the first three months of this year. But it now admits that occupancy levels have been disappointing and that it has tried to offset some of the shortfall by increasing room rates by 3%.
“Hotels in some markets of China are clearly oversupplied for the next three to five years, and they won’t be generating good returns,” warns Nigel Summers, a director at Horwath Asia Pacific, a research firm which tracks the lodging industry. “China has had a very strong demand. The question is whether the increase in demand is going to be big enough to handle all the new hotels.”
Home Inns is responding by trying to broaden its customer base, especially among leisure travellers, which it regards as a growing segment of the market. As part of this approach it has been building higher-end hotels, in the hope of winning business from middle-class holidaymakers.
But it continues to add more hotel rooms, too. Last week it announced a Rmb60 million deal for eJia Express, an economy hotel chain in Anhui Province with 13 leased-and-operated hotels, including nine hotels centrally located in Hefei, the provincial capital.
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