Why Is Econo Hotel Popular In China?

For many of the top executives of The Globe Hotel, China is on the increase.

For example, according to the statistics of the National Tourism Administration, during the eleven golden week this year, 254 million tourist trips were received in domestic scenic spots, an increase of 27% over the same period in 2009.

The tourism revenue generated by these tourists amounted to 116 billion 600 million yuan (US $175 million), up 32.4% over the same period last year.

The Home Inn group, which started in 2002, has witnessed a growing trend in the industry.

The company was founded by several individual investors and Ctrip.com, a domestic tourism service resource integrator, and pioneered the concept of Econo Hotel in China. The lowest price per night is around 100 yuan.

As the largest economic chain hotel in China, Home Inn group has operated 10 hotels in 4 cities from 2003 to 674 hotels in 126 cities.

Even during the financial crisis, sales revenue of the company grew rapidly, from 1 billion 900 million yuan in 2008 to 2 billion 600 million yuan in 2009.

In the past two years, the NASDAQ listed companies's profit and loss before tax and depreciation and amortization (EBITDA) almost doubled, from 323 million 900 thousand yuan to 614 million 500 thousand yuan.

Even before the "eleven" golden week, 2010 was another year of bumper harvest. In the second quarter, the income increased by 26% to 807 million yuan, and the occupancy rate of hotels rose from 92% to 96%.

Other companies are also eager to replicate the concept of the successful Econo Hotel.

The 7 Days Inn based in Guangzhou was founded in 2005 and listed on the NYSE in 2009. It is the second largest economy chain hotel in the country, with 399 hotels and 147 hotels under construction.

In the second quarter of this year, hotel revenue increased by 25% from 352 million yuan in the previous year, occupying 93.4%.

The third group is Shanghai based Hanting Hotels group.

The group was founded in 2005 and listed on NASDAQ in March this year. Hanting Express has 324 chain stores in 51 cities.

The group's revenue growth in the second quarter was nearly 40%, reaching 439 million yuan, and the hotel occupancy rate was 98%.

What's the reason for the growth? "It's not because our prices are cheap." when Sun Jian, David Sun, was asked why the chain hotels could win customers from traditional state owned hotels.

He believes that the key lies in

Industry experts pointed out that, such as home bright future economic chain hotel, its hotel facilities are relatively simple, standard rooms with a bed, air conditioning, television and toilet, but the hotel is clean and tidy, and thoughtful service, but these are the traditional hotel in China sometimes do not have.

"Those who want to stay in three-star and four star hotels prefer to choose hotels that are not ideal, but the services and facilities are relatively stable and reliable," said Paul Gian, director of investment research at Oppenheimer Investments Asia, Oppenheimer (Paul Keung).

Jiang pointed out that "Home Express, Hanting shortcut and 7 Days Inn fill the vacancy in this market segment. They are very attractive to tourists who plan to spend 300 yuan to 400 yuan a night in accommodation." however, the challenge now lies in how to make this segment market continue to develop.

The current market expansion has brought more room for growth for the three companies and their competitors, but analysts in the industry have seen warning signs ahead.

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Fertile soil for development

But so far, they have got rid of the fate of those high-end competitors.

The report of Horwath HTL, an international hospitality consulting firm, points out that the overcapacity of five star hotels has already affected profitability.

In a recent annual report on the domestic hotel industry, they pointed out that in 2009, the profits of the five star hotels in the mainland dropped to a new low of 8 years, and the profit per unit room decreased to 91752 yuan, which was nearly 40% less than that in the peak period in 2005.

"There are different reasons for overcapacity in high-end market."

Nick Summers, director of Hongkong business, Nigel Summers, said.

"The construction of a large number of five star hotels is not driven by economic factors.

In many cases, developers can get permission to land or develop large scale real estate projects, which contain a large number of residential projects. One of the conditions of local government is that the development project must include the construction of a five star hotel -- only to improve the status of the region by providing a five star hotel.

On the contrary, Econo Hotel has many advantages.

Increasing disposable income, massive public spending on pport infrastructure, and government policies have contributed significantly to the promotion of domestic tourism.

However, the most important condition is that China's previous planned economy has basically made no significant heavyweight competitors in the economic accommodation area, thus providing a fertile growth environment for these new chain hotels.

Oppenheimer's Ginger recalls that in a state-owned hotel, "you may have to wait for 10 minutes to get hot water in the bathroom, where the elevator can sometimes be used or sometimes under repair.

Ten years ago, the hotel industry was not a real business.

They were all local government level state-owned enterprises. "

Therefore, he said, "in this market, demand has not been solved at all, and [economic chain hotels] are taking away the market share of old hotels or inefficient state-run hotels."

Indigenous wisdom

The main occupation of this industry is a group of Chinese entrepreneurs.

The US Super 8 Hotel and France Ibis Jonkoping Hotel are two of the few foreign companies that have successfully entered the market.

Sun Jian of Home Inn believes that part of the reason is that the industry needs to be familiar with local conditions.

"The vast majority of market participants have to rent real estate locally, so you must have a wealth of local expertise to understand the market."

In addition, "about 99% of our customers come from home, so you also need local knowledge to understand customer needs.

For foreign companies, they know that their strengths are international customer base and high-end services, and their products and services are also targeted at those markets.

Chinese consumers gradually have more disposable income, which is also a favorable factor for the industry.

"When people earn more than 3000 dollars a month, it means they will have more time to travel and relax," Sun Jian said. "The Chinese economy is in a strong growth stage and is expected to maintain the same momentum in the next three to five years.

And when we pay attention to the development of SMEs and regional economic development, we see stronger and stronger trends.

He said, "this will stimulate a lot of commercial travel, especially now that China's economy is developing from the southeast coast to the central and northern parts of the country."

Oppenheimer's Jiang said that the development of the two or three tier cities in China has made the Econo Hotel industry an investment hotspot.

One of the ways to evaluate the prospects of the hotel industry is the per capita GDP of cities and regions.

At present, the per capita GDP of two or three line cities in China is reaching the level of 10 years ago in Beijing, Shanghai and other big cities, "he said." in the next ten years, the growth of these cities will be shown as the growth of disposable income.

This has two meanings to me. One is that the economic development in these areas is stronger than the rest of the world. The two is that the Chinese will also have more investment than they used to travel, whether it is because of the continuous development of the small city economy, or because people have the idle money to travel more, the result will be so. "

In addition, the Chinese government has also provided direct and indirect support for the tourism industry.

Alerted by the Asian financial crisis, the two golden week holidays (Spring Festival and eleven National Day holiday) launched by the State Council in 1999 have stimulated domestic consumption.

There are also many national holidays to encourage nationals to travel.

Some major infrastructure projects funded by the government have also Catalyed the revitalization of the tourism industry, such as many new or reformed airport projects.

Related reports quoted the CAAC as saying that compared with the same period last year, the number of tourists in the eleven golden week this year is higher than the increase in flights, 24% and 5.3% respectively, and the total number of passengers during the holiday period is 5 million 750 thousand.

In addition, the pace of development of China's high-speed rail is very dizzying.

In July, the Ministry of Railways announced that it will invest 120 billion US dollars to develop railways in the next two years, increase 6000 km of railway lines, and increase the total length of high-speed rail network to 13 thousand km by 2012.

"The high-speed rail network will boost tourism demand, especially for the two or three line cities.

This is a major positive project for the long term development of tourism. "

Wendy Huang, a Hongkong analyst at Royal Bank of Scotland (RBS), commented.

According to official media reports, during the eleven golden week this year, the number of railway passenger traffic reached a new high, exceeding 8 million passengers in a single day.

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Growing pains

Summers of Ho Wah management consultants also believes that the prospect of the industry is very good: "Econo Hotel area has a pivotal position in the housing industry, and the road of development is still very long."

However, the industry has both advantages and disadvantages, and the market competition will accelerate and intensify, because the threshold for entering the market is relatively low, and the start-up capital of the hotel is relatively small, because the hotel does not need to provide high-level restaurants and all kinds of concierge services, and the management cost is lower than that of high-end hotels.

On the other hand, in this industry, some enterprises are struggling for ultra-thin profits, or even bankrupt or annexed, resulting in the industry's reshuffle.

Summers said, "a large number of brands will continue to emerge, some of which may be self destructive, because the industry threshold is not high.

But the prospect of this industry is still very good.

Sun Jian said, "at present, we have not found such a problem as price war or limited market capacity, because market demand is still huge.

This market has grown very rapidly.

If we take a look at the performance of the major players in the Econo Hotel area, we will find that they have maintained a high level of occupancy in the past few years.

Despite the bright prospects, Oppenheimer's Jiang pointed out that Econo Hotel will be affected by the economic boom and cycle, and the astonishing revenue growth in the last two years is unlikely to happen again.

"From a cyclical point of view, the growth rate in the future may not be as satisfactory as this year.

In the past year, China has launched a large number of stimulus packages and many policies to boost domestic consumption. In addition, we have held [Shanghai] World Expo and many activities which have greatly promoted the vigorous development of tourism, "he said." in the short term, 2009 and 2010 are two special years of tourism. "

In addition, Jiang pointed out that the rapid expansion of the industry - all hotels are planning to expand the hotel network in the coming year - may bring pressure on the income of the unit room, which is an important indicator of hotel profitability.

In the second quarter of 2010, the income of apartment available rooms was 171 yuan, compared with 148 yuan in the same period in 2009, and 144 yuan in the previous quarter.

Like other markets in the industry, the important factor of China's Econo Hotel's operating income and net profit will remain their way of operating property, that is, through leasing and implementing the franchise strategy.

Sun Jian pointed out that although China's franchising is not new, it is not mature enough.

Therefore, we call the franchise mode of our company the "licensing and management mode".

That is to say, the franchise store is only responsible for finding real property and reinvesting it into a hotel.

Then, we will send our own staff as managers, responsible for recruitment, training and hotel management, so as to implement the standard management process and ensure the quality of the brand.

Faced with the challenge of maintaining brand in a rapidly growing but relatively immature market, Sun Jian said that how to recruit, train and retain high-quality employees is one of the biggest challenges facing families and other peers.

"The global service industry is facing a common problem, that is, how to acquire excellent talents, especially in China -- especially for an enterprise like ours.

If you open 200 new hotels every year, you need to add 10 thousand new employees every year. The management of talent is definitely a challenge. "

In the next few years, commentators believe that China's Econo Hotel will need to upgrade its brand to the top of the value chain and tap richer consumers, who will have higher expectations than their current customers.

"The wealth of the first tier cities is constantly accumulating, and there will be many new four star hotels soon," Jiang said. "I do see that some new brand hotels are exploring how to meet some new consumption needs.

This will require participants in the industry to provide well managed, more effective and reasonably priced products.

In any case, Sun Jian saw the potential of high-end market. Home Inn group has launched its own high-end brand "Harmony Hotel".

The first and Yee hotel opened in Shanghai at the end of 2008.

Although Sun Jian said that the four-star hotel has performed well, he also pointed out that this is a project focusing on the future, assuming that as the income grows, consumers will need more luxurious hotels.

"With the increase of people's income, they will be able to find better housing conditions.

Customers like the idea of home quick.

But within 4-5 years, their demand will be further improved. "