Budget hotels ride room boom

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Anyone who has travelled cheaply in China will have vivid memories of the country’s zhaodaisuo – a term that literally means guesthouse but that, some argue, should be translated as “flea pit”.

In spite of the quality problem, however, it is becoming difficult to find a bed at many guesthouses because of China’s growing popularity as a holiday destination and a rise in the number of domestic travellers as economic growth pushes up incomes.

The outlook is improving, however, as international hoteliers and domestic operators open a wave of low-cost and clean hotels across the country in response to burgeoning demand for budget accommodation.

“Most travellers only stay at zhaodaisuo because they are cheap. What we offer is a cleaner alternative at a similar price” says Zheng Nanyan, chief executive of 7 Days Inn, a budget hotel chain. “I strongly believe economy hotels in China are on their way to replacing all the zhaodaisuo.”

These new hotels, which typically charge about Rmb134 to Rmb202 ($17-$26) a room a night, are already popular among both backpackers and business travellers from companies such as Lenovo, the computer maker, and TCL, the consumer electronics group, who require junior managers to stay at budget hotels.

Last year, the 600 budget hotels in China had an average occupancy rate of 85 to 96 per cent compared with an estimated 50 per cent in the thousands of zhaodaisuo or in China’s many one and two-star hotels.

The boom is drawing increasing attention from foreign investors. Warburg Pincus, the US private equity firm, last week became the latest foreign company to tap the market by buying a stake of more than 10 per cent in Guangzhou-based 7 Days Inn for an undisclosed sum, according to Mr Zheng.

The investment followed an initial public offering by Home Inns, China’s second largest budget hotel operator, which raised $109m on Nasdaq last month. Since then the shares have more than doubled in price. Shanghai-based Jinjiang International, which owns the popular budget chain Jinjiang Inn, is seeking a listing in Hong Kong next month.

“Warburg Pincus’s investment is not a very big one but its confidence is big. We both see huge potential in the economy hotel sector,” Mr Zheng says. Warburg Pincus was not available for comment.

According to the 2006 China economy hotel survey by the Ministry of Commerce, the number of rooms operated by the country’s top 10 budget hotel groups grew by an average of 74 per cent last year.

In spite of the high growth rate, economy hotels are estimated to account for just 2-3 per cent of all hotels in China. But the business is very profitable. Home Inns, founded in 2002, reported a small profit in 2003, which grew to Rmb20.9m last year.

Mr Zheng says that 7 Days’ pre-tax profit margin is as high as 30 per cent because of its 95 per cent occupancy rate.

7 Days says it has done small things to drive down costs. Using smaller windows, for example, allows the company to save on
both building costs and air-conditioning expenses. “A lot of guests like to have the window open and the air-conditioner on at the same time. It’s a waste of energy. But we manage to waste less by giving them a smaller window,” Mr Zheng says.

International hotel chains have also been stepping up their presence in the budget segment.

Accor, the French hotel operator, opened its first economy grade Ibis hotel in Tianjin in northern China in 2004. It now has three in China – all of which are more than 90 per cent full every day. The company plans to have 100 Ibis hotels in China by 2010.

Gilles Larrive, senior vice-president for Ibis, says: “We have more than 20 hotels under construction. From mid-2007, we will add two Ibis hotels a month. We actually think we can meet our goal in 2009.”

InterContinental Hotels is also planning to tap the Chinese economy market. It opened its first Express by Holiday Inn in Shanghai last month and has a pipeline of 10 across China.

A. Patrick Imbardelli, chief executive for InterContinental Asia Pacific says: “InterContinental is keen to develop Express by Holiday Inn into a leading national brand, providing value-
conscious travellers with a network of properties across China. We anticipate strong demand for this brand in China.”

All these plans for expansion are subject, however, to the availability of suitable land, which is in short supply. “If you look at occupancy levels, it is clear that there is still a lot of room to grow. What is less clear is whether the operators can get the land. It is very very competitive,” says 7 Days’ Mr Zheng.

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