Chinese hotel brands expand overseas but face challenges on the wayby Stuart Pallister, EHL Hospitality Insights
As more and more Chinese tourists go abroad on holiday, China’s budget hotel chains are expanding overseas to serve the country’s growing numbers of international travelers.
According to a recent article in the Financial Times, low-cost hotels such as 7Days Inn and GreenTree Inn have already opened hotels in Austria, the U.S., Thailand and Vietnam, and are looking to expand further in Germany and Italy, following Anbang’s purchase of the high-end Waldorf Astoria in New York for nearly $2 billion in 2014.
The Huazhu Group has formed an alliance with French hotel chain Accor aimed at international expansion and the Shanghai Jin Jiang International Hotels Group became the fifth-largest hotel chain in the world last year after it purchased a majority stake in Plateno, which owns 7Days, and acquired the French chain Louvre Hotels.
We asked two EHL professors why Chinese hotel brands would be interested in expanding overseas right now. Yong Chen, an assistant professor at EHL, says the development is not surprising given that the industry is growing due to increased demand. Another assistant professor, Maggie Chen, adds that, given the growing demand from Chinese tourists overseas, it makes sense for Chinese hotel brands to expand to popular destinations such as Thailand.
In the 1980s, Yong Chen says, China’s hotel industry was mainly driven by inbound foreign tourists, who had far higher incomes than the Chinese. That led to a surge in luxury hotels and international chains entering the country whose economy was just starting to open up thanks to the policies of Deng Xiao Ping.
Then, over the past two decades or so, China witnessed the exponential growth of budget hotels across the country due to strong demand from domestic tourists who were either part of the new, emerging middle class or even relatively low-income consumers.
At the same time, as wealthy Chinese started to travel abroad, the supply of luxury hotels increasingly shifted to well-known overseas destinations, such as Southeast Asia, Australia, New Zealand, Europe and North America to meet growing demand. Yong Chen cites the example of the Shangri-La, a leading luxury hotel group in Asia with a major presence in greater China, which has expanded to Australia, Europe, and North America in recent years.
He says that as the social demographics of outbound Chinese tourists change, characterized by those who can afford to travel overseas but may not necessarily be able to afford luxury or international hotel services, it is inevitable that Chinese budget hotels will expand overseas to meet the growing demand of these Chinese travelers.
While in terms of supply there may be plenty of hotels at overseas destinations, including options provided by Airbnb and others, staying in a familiar, branded hotel could reduce the level of uncertainty involved in being suddenly exposed to a foreign environment or culture. This is especially true for independent travellers, Yong Chen says.
For Maggie Chen, there are two main reasons why Chinese brands may have a competitive advantage over their non-Chinese rivals.
First, Chinese hotel brands can leverage customer intelligence in terms of past purchase history and preferences to provide more relevant services to individuals and group travelers. For example, the FT quotes Plateno Europe’s vice president as saying that a lot of Chinese travelers want a hearty breakfast these days, not just congee. Another preference for Chinese tourists, says Maggie Chen, is a firm mattress.
By taking into account such preferences, hotel brands may become known as being more Chinese-friendly. Over time, Chinese travelers would choose to stay only with Chinese brands – either internationally or domestically – which are perceived to understand their needs better.
Second, the Chinese hotel brands are already well established within China itself, with robust distribution, promotion and payment systems. She points out that it is difficult for foreigners to get to grips with the dominance of WeChat and AliPay in Chinese daily life. In the travel industry, GuNar, CTrip, AliTrip and TravelSky are the major players. Plus – and this may be a major factor in the equation – many Chinese travelers prefer to join tour groups.
Although global airlines and hotel chains have the resources to advertise their services to Chinese tourists, individual hotels would not be able to. Hence, by entering the fragmented budget hotel segment, Chinese hotel brands provide travelers with more choices, while allowing hotel owners greater market access.
In the main, the challenges facing Chinese brands are similar to those experienced by international brands, Maggie Chen says. The question is though: can the Chinese hotel brands leverage their competitive advantages to deliver better revPar, revenue per available room. If they can score quick wins, she says, that would convince more Chinese hotel groups to jump on the bandwagon and eye expansion overseas.
For Yong Chen, however, Chinese budget hotels face more challenges than luxury hotel brands when going global, irrespective of whether they choose to invest in new hotels overseas or acquire local hotels. The challenges include how to better manage human resources and keep costs down.
In terms of HR, budget hotels may not have issues in hiring staff within China, but recruiting local employees overseas would not be so straightforward, nor setting up a professional management team that would be aligned with the corporate culture established in a Chinese context. By contrast, luxury hotels hire recruits who are more international in their outlook.
A further challenge for budget hotels, Yong Chen says, would be maintaining a low-cost structure, especially in Europe where costs would be substantially higher than those in China. While Chinese travelers would be more willing to pay to be pampered at a luxury hotel, they would be unwilling to do so at a budget hotel which would be struggling to meet escalating operating costs.
Chinese budget hotel brands which can successfully tackle these challenges will, he says, see their global strategies pay off.
Dr Yong Chen is an assistant professor of tourism economics and marketing at Ecole hôteliere de Lausanne (EHL) and a fellow of the Lausanne Hospitality Research Center (LHRC).
Dr Meng-Mei Maggie Chen is an assistant professor of marketing at EHL.
Stuart Pallister is the editor-in-chief of EHL Hospitality Insights.