Visitors to the Olympics in Beijing this August may be surprised to find that China is rapidly becoming a modern country — a place where business people are on the road all the time, families get in the car and go to the beach, and groups of retirees are herded all over the country on sleek tour buses.

For a tourist who wants to take pictures of peasants wading through emerald rice paddies, the new China may be a disappointment. But that's not the case for global hotel executives. Despite concerns that too many high-end hotels are being built in Shanghai and Beijing, most hospitality companies remain bullish about China's long-term prospects.

Although most of China's 1.3 billion population won't be picking a chocolate off their pillow anytime soon, industry consultant McKinsey & Co. estimates that by 2015 urban households in China will be one of the largest consumer markets in the world — almost on par with Japan.

Already, there are a wide range of accommodations available in China, from budget hotels such as Super 8 all the way up to high-end boutique hotels, such as the Commune by the Great Wall, a Kempinski-managed boutique hotel outside Beijing comprised of 11 houses, each designed by a different architect, spread out over three square miles.

While some analysts fear a correction in the Chinese economy, gross domestic product (GDP) continues to grow more than 8% a year, just as it has for the past 15 years. The travel market is rising even faster — 12% to 15% annually, says Mitchell Presnick, CEO of Tian Rui Hotel Corp., Super 8's master franchiser in China.

And as travel spending grows, new hotels keep popping up to capture the rising demand. This is especially true in the economy segment, Presnick says, where the growth continues at the same 75% annual pace it's kept for the last six years.

Presnick's group is doing its share to maintain that pace. The first Chinese Super 8 opened in Beijing in 2004 and as of December 2007 had opened its 65th hotel. “We're all over,” Presnick says, from the western most province of Yunan to the eastern corner, across the border in Hong Kong. “We want to basically create a national footprint so a guest can go to any part of the country and find a Super 8.”

Super 8 isn't alone. Other Western hotel companies from Marriott to Accor are extremely active as well, not to mention some large homegrown contenders.

The strategy being pursued by Super 8's owner, Wyndham Worldwide, is typical of what the other large Western hotel companies are doing in China — trying to capture the breadth of the market through a number of brands that stretch from the lower middle class to the affluent. In Wyndham's case, that means, in ascending order: Super 8, Ramada, Days Inn, Howard Johnson and Wyndham.

The great glut forward

Although demand may well be limitless over the long haul, aligning that growth with today's needs could prove difficult. At the moment, China has the second largest hotel development pipeline in the world, behind the United States, reports Lodging Econometrics, a global lodging real estate consulting firm based in Portsmouth, N.H.

As of the third quarter of 2007, China had 1,021 hotels in its construction pipeline, a total of 274,211 rooms. Of that number, 778 hotels are presently under construction, 137 will be started in the next 12 months and 106 are in the planning stages. The majority will be completed in 2008 and 2009.

The volume of hotel development in China has grown steadily over the past 15 years, according to Patrick Ford, president of Lodging Econometrics, but he predicts that development is “going to crescendo” in 2008 and 2009.

However, the slowdown Ford predicts after 2009 may not be enough to prevent some oversupply. “A lot of markets are looking to be oversupplied in the next few years,” says Damian Little, a Beijing-based director of the Horwath Hotel, a tourism and leisure consulting group.

Beijing may be especially vulnerable. With 13,000 new rooms opening next year, a significant rise over current availability, Little says, it's unclear how that will affect vacancy rates once the Olympics are over. “There's a very big question about how big an impact that supply will have and how long that impact will last.”

Even without all those new rooms, the occupancy levels are already falling all over China, according to the Deloitte Hotel Benchmark Survey. China's overall occupancy rate as of November stood at 68.3% year-to-date compared with 71.2% for the first 11 months of 2006. Average room rates rose 7.4%, however, from $118.60 to $127.40. As a result, the industry ended up slightly positive despite the occupancy decline, with revenue per available room (RevPAR) over that period up 3.1%, from $84.06 to $87.06.

In the country's biggest hotel markets, the story was mixed. In Beijing, occupancy fell 3.6% over that same period, from 75% to 72.4%, even as the room rate rose 9.2%, from $119.48 to $130 a night, raising RevPAR 5.2%.

But Shanghai didn't even have the silver lining of rising RevPAR. Occupancy in the city fell about 3%, from 70.5% to 67.4%. A weak rise in the room rate, 2.3%, couldn't make up for the falling demand. As a result, local RevPAR shrank 2.2%.

One challenge in assessing the possibility of hotel room overhang is that it's difficult to count lodging availability in China. “The idea of what a lodging unit is in China is different from what you're familiar with in the States. In China, they're everything from dormitories to rooming houses to fleabags and so forth,” says Ford of Lodging Econometrics.

Harry Tan, chairman and CEO of the Days Inn China unit of Wyndham Worldwide, estimates that there are 15,000 rated hotels in China, which leaves a lot of room for growth. The U.S. has about 60,000 rated hotels, which serve less than a quarter of the population, he notes.

The potential for oversupply could be highest at the luxury level, particularly in the big cities that attract the most foreign travelers. However, the budget segment is expected to keep on growing without a pause. “The budget sector is continuing to experience rapid growth and will do so for some time to come,” Little says. He foresees consolidation in the budget arena as smaller brands are gobbled up by larger players.

Budget blossoms

One reason budget hotels may keep on growing is not only that there are a lot of people on tight budgets in China — average annual income is about $2,025 — but the lean cost structure of the budget hotel may also suit the market better.

The Chinese hotel business tends to be like a lot of other Chinese industries, some operators say — low prices, low margins and a lot of competition. “The profit margin for hotels in China is very low,” says Tan of Days Inn. Even in the major cities it's difficult to find a room over $350 a night, he notes. That's far short of what top-end rooms typically go for in London or New York.

But the prospect of low returns doesn't faze some investors, who aren't necessarily measuring their gains in hotel revenue. “Generally speaking, in a lot of international cities, the financial model comes first, but in China, in some Chinese corporations, they have other considerations in addition to the returns of the project,” says Stephen Young, senior vice president for international development for Wyndham in eastern China and Indochina.

Often, government-owned companies decide they want to build a hotel for reasons of their own. Other hotels are purchased sometimes as a trophy in the same way American millionaires buy baseball teams or newspapers. “It's not a money-making venture for them,” Tan says.

The hotel architecture reflects different aspirations. At the upper end, many properties are iconic, and intended to be important monuments within the community, sometimes as the centerpiece of a larger mixed-use development.

At the lower end, design is more of an afterthought. Analysts say these places look similar to American budget hotels, but more include food service and are located in city centers.

The lure of budget hotels

These budget hotels attract a scrappier investor, someone still very much focused on the bottom line. Presnick of Super 8 says that his franchisors tend to be individuals, or groups of individuals. Individuals will even invest in a single room.

Most are new to the hotel business, a factor that's not a liability, since many investors have run other kinds of businesses or have been involved in real estate development before. “What they lack in some cases in operating experience they more than make up for in entrepreneurial savvy,” Presnick says. But they are all real estate people first: only 10% to 15% of the owners in his group operate their hotels themselves.

Franchising is only one of the models western hoteliers are using to crack the Chinese market. Like many hotel companies in China, Wyndham is also building up its management contract business.

The management contract model seems likely to stay popular until China trains more hotel managers. Although China has many schools to train staff in basic hospitality services, few programs exist to develop senior supervisors.

Franchising and management contracts help most hotel companies stay clear of the high-flying Chinese property market. Still, some players want to boost their real estate exposure not by buying buildings, but through long-term leases.

Aside from its franchising model, Presnick's group is operating hotels for which it has taken out long-term leases. “We lease the property for 10 or 20 years, we renovate it, and then we operate it.”

Bennett Voyles is a Paris-based writer.

The coveted Chinese traveler

Most of the big hotel companies are already in China, but even those that aren't won't be left out of the Chinese travel boom. In fact, hotels at every major destination on the planet stand to gain from the growing number of Chinese tourists traveling abroad.

In nearby Macao, for example, a former Portuguese colony and special administrative region of China, the economy grew by 18.5% last year, fueled mostly by growing numbers of day trippers from China and Hong Kong drawn to what is now displacing Las Vegas as the world's largest gambling destination.

Thailand, linked to China by five airlines, expects to see 3 million Chinese visitors by 2010, and South Korea expects that its 2006 total of 750,000 Chinese travelers will double to 1.5 million by 2010, according to a recent report from Deloitte & Touche.

Outside Asia, popular destinations include France, which draws more than 500,000 Chinese visitors a year, according to French government figures. The United States, meanwhile, attracted 320,000 Chinese visitors in 2006, reports the Department of Commerce.

In fact, Chinese travel in the U.S is downright booming. The number of Chinese visitors has risen 28% a year on average over the past six years, according to the Department of Commerce, despite some down years after 9/11.

In 2006, those travelers had a mean annual household income of $63,000 (over $13,000 more than 2005), and 74% were traveling for business.

Visitors stayed an average of 13.3 nights in a U.S. hotel or motel on their visit. Retailers should also take note: shopping was their most popular activity, 90% shopped during their visit and 82% ate out.

All this Great Wall jumping hasn't gone unnoticed in the hotel industry. Wyndham executives, for example, see creating some brand recognition among Chinese travelers going abroad as an important dividend to their Chinese strategy, according to Stephen Young, Wyndhams' vice president of development in east Asia.

While the number of Chinese travelers is already growing fast, Young believes that momentum will continue to build, at least in the U.S. A new agreement signed last December by the commerce secretaries of both countries makes it significantly easier for Chinese tourists, and not just business people, to visit the U.S.

The Department of Commerce estimates that it could bring as many as 579,000 Chinese travelers to the U.S. by 2011, nearly double the current number, which is great news to Young. “I think this is quite an important event.”
— Bennett Voyles