U.S. Hotel Chains Should Rethink China Strategies

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Clearly, the biggest story in the world of hotel development for the past several years has been the hunger by U.S. lodging chains to expand in China. Never have we seen such a rush to plant brand flags than we've seen throughout Asia, and mainland China in particular. Here's a sampling of what some chains are doing:

• IHG, one of the first companies (under the original Holiday Inn banner) to open in China, doubled its footprint in the country in the past two years. One-quarter of its existing rooms are in China with more on the way. The company says it's considering launching a new brand in the country.

• The day after last June's New York University International Hospitality Industry Investment Conference, a pack of Starwood senior leaders boarded a plane for China, where they spent a month learning the country's culture and business environment. The company plans to have 100 properties open by the end of the year. Twelve Sheratons will open in 2012 with 80 planned by 2015.

• Marriott has 23,000 rooms in China with another 17,000 rooms in the pipeline.

I could go on, but you get the idea. Most U.S.-based hotel brands are betting the farm on China as their number-one growth vehicles for the next decade or so. Interestingly, one outlier appears to be La Quinta, which has its sights set south, with most of its expansion planned for Mexico and Central and South America. It may turn out to be the smartest move of any of the major brand companies.

A lot of economists and geopolitical deep thinkers believe the Chinese economic bubble may be ready to burst, or at least develop a slow leak. According to the New York Times, in 2007, the Chinese economy grew by a whopping 14.2% and as recently as 2010, the economy expanded by 10.45%. Things have slowed considerably since then, with the Chinese government scaling back its growth projections for this year from a previous 8% to 7.5%, which would be the slowest pace for 22 years. The official forecast is for 7% growth through 2015. That's hardly gangbusters.

The hotel business in the country has softened, too. According to STR, both occupancy (+0.3%) and rate (+2.5%) growth remained sluggish in 2011, resulting in an anemic 2.8% rise in RevPAR. Yet, more than 140,000 hotel rooms are under construction.

Even so, the country is the largest in the world with a rapidly growing middle class and is still grossly undersupplied with hotel rooms, particularly in cities and areas outside the major metropolises. Even some cities with multi-million-person populations have few high-quality hotels. Beijing, Shanghai and the other key gateway cities are already feeling a glut of rooms, especially in luxury and ultra-luxury hotels bearing U.S. brands. The real opportunities are mid-scale and economy brands in the scores of secondary and tertiary cities.

I'm sure Frits (Starwood), Arne (Marriott) or Richard (IHG) don't follow my advice, but if they did it would be to take another look at their Asian growth plans. China and the rest of the continent hold tremendous promise for the hospitality business. However, that promise may not be realized as quickly as some hope.

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