Concrete Analysis

Hotel operators need to get China tourism market right

While outbound sector has been getting attention, a push for domestic travel means hospitality firms can play two-way bet with tie-up options

PUBLISHED : Wednesday, 17 June, 2015, 12:00am
UPDATED : Wednesday, 20 June, 2018, 5:46pm

Last month, sales company Infinitus China sent 12,700 employees on a six-day trip to Thailand, travelling in groups of up to 3,000 at a time. This was hot on the heels of Tiens Group celebrating its 20th anniversary by sending 6,400 employees on an all-expenses trip to France, booking up 140 hotels in Paris and 4,700 rooms on the Cote d'Azur.

Understandably, the story caught the eye of the world's media.

Outbound tourism from China is big business. The projections for the surge in Chinese tourism are huge - 174 million tourists spending US$264 billion overseas by 2019.

As a result, Chinese investment in overseas hotels is having its share of the limelight: just this month Jin Jiang International Holdings announced a memorandum of understanding with Prince Hotels of Japan, having acquired Groupe du Louvre last year; and Fosun followed its hard-won acquisition of the loss-making Club Med by acquiring a 5 per cent stake in Thomas Cook. Last but not least is Chinese insurer Anbang's trophy acquisition of the Waldorf Astoria Hotel in New York for US$1.95 billion.

Cross-border investment in the hotel sector continues to rise, with US$68 billion of global capital flows projected for this year - a rise of 15 per cent from last year. The hotel sector is well placed to attract its share of capital and in some markets hotels are viewed as outperforming traditional commercial real estate.

Historically, international tourism was the driver of growth for China's hotel market. Now there is a real push to promote domestic tourism. How to secure a piece of that spending is the challenge, but there are positive signs for those able to adapt in search of new opportunities.

Until recently, China's hospitality market was dominated by luxury hotels targeting only high-end customers. Governments and developers are now looking closely at where demand is coming from, reacting to the growing appetite from the middle class and increased business travel by a mid-management workforce.

Major hotel firms including the Hilton Group, JW Marriott and Sheraton have announced expansions plans. InterContinental alone is investing in over 100 hotels in the next three years.

Yet hotel groups and developers are also broadening their horizons to look beyond first-tier cities for opportunities in smaller cities such as Guiyang, Kunming, Wuxi and Foshan. New infrastructure links to western China, in particular, are opening up areas for investment.

Earlier this year, the "Beautiful China 2015 - Year of the Silk Road Tourism" campaign was launched to implement the One Belt, One Road strategy. The vision is to promote integrated tourism development along the Silk Road in China and strengthen cooperation between different countries along the route

Affordability is now key to the mass market in light of the crackdown on excessive spending by government officials; four-star "select service" hotels and mid-market chains are gaining traction with tourists and business travellers alike. Many hotels even requested a downgrade from a five to four-star rating to keep off the government's approved list.

Yet the market has been grappling with oversupply in certain areas (in the luxury end in particular), economic slowdown and anti-extravagance policies.

New challenges are also emerging: China's version of Airbnb, known as Tujia, launched two years ago, focusing on a relatively niche market for high-end accommodation. The potential for growth is great if Tujia gets this right.

When crediting his success for establishing the Savoy Hotel in London, Cesar Ritz famously saluted his "little army of hotel men for the conquest London", but it will take more than hoteliers fielding their troops to conquer the Chinese domestic market, which is already suffering from oversupply. International hotel companies in particular need to carefully evaluate and execute their strategy to adapt to this lucrative but difficult market.

China Lodging and Accor, owner of the economy Ibis brand, signed a strategic alliance at the end of last year which will see the French company's mid-scale brands expand in China.

The two companies will be hoping that linking their loyalty programmes, giving them combined access to 47 million members, will reap them rewards. The hope is that the Chinese domestic traveller will be persuaded by the perks of the loyalty programme to choose to stay in Accor hotels when travelling abroad and in Accor or China Lodging brands when travelling domestically. More companies will be looking to do this, capturing Chinese travellers wherever they go.

Given the projections for Chinese spending in tourism, there is a lot to play for if they can get this right.

Victoria Gardner is a partner and Matthew Nash is a senior associate at law firm Berwin Leighton Paisner