Refuelling China growth

With the effects of the global pandemic on the wane, global hotel groups will be turning their attention once more to the major growth markets for hotels, and notably where they should take their Chinese business next.  

The hotel market has substantially rebounded, driven by domestic demand as international travel remains compromised, for now. Leisure demand, and demand at resorts, has been strong with some properties trading above 2019 levels, providing confidence in the future continued growth of the market.  

Lodging Econometrics collates figures on openings and the pipeline in the Chinese market. It reported that the first quarter of 2021 saw 113 hotels open, out of a total 843 expected for full year 2021, and 984 expected to open in 2022.  

Hilton has just announced the launch of a large-scale franchise model in China, aiming to build traction with its Garden Inn brand. The company called the move “part of a new holistic business model in China”.  

The company is playing catch up in China, where it has just over 400 hotels open, leaving it behind other big brand rivals.  

“Providing opportunities for franchised partnerships with Hilton Garden Inn — one of the strongest focused service brands in the market — is a great step towards winning the hearts and minds of strong, savvy independent hotel owners in China,” said the company’s Asia Pacific president, Alan Watts. “We are confident that the new model will serve as a great opportunity for our owners to access one of Hilton’s iconic brands and bring an exciting new entrant to their respective destinations.” The push will feature a local-oriented brand prototype, originally developed in 2019. So far, Hilton has more than 100 signed Garden Inn deals, and has 35 hotels open in the country.  

The company has picked off a range of partners in previous years, to grow key brands. It moved early to develop the Hampton brand in the country, collaborating with local group Plateno. The agreement has delivered and has survived Jin Jiang’s takeover of Plateno, with the management agreement re-signed at the beginning of 2021. At that point, there were 155 Hamptons open, a further 350 signed, and the aspiration is to take the brand network to 600 hotels by 2034.  

In mid-2020, Hilton announced another partnership, this time to grow its Home2 Suites extended stay brand in the country. An exclusive management license agreement with Funyard, a subsidiary of Country Garden, aims to hit a target of 1,000 Home2 sites across the country. The pair are already established partners, after signing an agreement in 2018 to see Hilton managing Country Garden owned hotels under its Doubletree and Garden Inn brands – to date, six properties are in progress or open.  

Hilton is at a similar scale to Marriott in China, but racing to catch up with IHG. The company was early into the Chinese market, opening its first hotel there in 1984. In the last decade the company developed its own upscale Chinese-only brand, Hualuxe, which currently has 14 hotels open and a further 24 in the pipeline; of the latter, five were signed in the first half of 2021. 

In April 2019, IHG celebrated opening its 400th hotel in China, after adding 100 in less than two years. It launched a “franchise plus” model for Holiday Inn Express in 2016, and started franchising Holiday Inn and Crowne Plaza in 2017.  

As of today, it has 551 hotels open in Greater China, with a further 469 signed to the pipeline. Net rooms growth was up 8.6% on 2020, and 19.4% up on 2019 figures.  

In March 2021, Marriott revealed in a media briefing that it had over 400 hotels open in China, with 24 of the group’s brands represented in the country. It claims more upscale and luxury hotels in first-tier cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong and Hainan than any other hotel group – and in Shanghai alone, has 50 hotels.  

Of the total, it said 70% were midscale, upscale or luxury – and there are plans to move into growing the presence of select-service brands too. During 2020, 75 hotels with over 18,000 rooms were added to the pipeline, with an expectation that more than 60 properties would open during 2021. 

Henry Lee, president of Greater China at Marriott said there would be a push on lifestyle brands including Moxy and AC, with seven Moxys due to open in 2021 in cities including Shenzhen and Nanjing. The company is also keen to expand its resorts presence, and is investigating both urban and countryside locations.  

Marriott has also been keen to exploit dual branded sites, acknowledging the benefits of scale economies in such large city markets. It has close to 30 such hotels already across the country.  

These numbers pale into insignificance, when set against national champions. Leading hotel group Jin Jiang reported most recently for the first half of 2021, that it had 8,645 hotels in China, with 880,000 rooms; these figures exclude its many international interests in Radisson, Louvre and others.  

Also a significant Chinese player is Huazhu, which continues to grow at a substantial pace and had 7,126 hotels with 692,000 rooms in mid-2021, mostly under its own brands. Having bought Deutsche Hospitality in 2019, it is now also working to grow DH brands in the Chinese market.  

French group Accor has a complex set of partnerships with Chinese hotel groups, as it bids to grow its presence in the country. Jin Jiang currently owns 13% of Accor shares, a holding that has flexed up and down over recent years, but remained below 20% – though the pair are not actively working together on growing Accor brands in the country.   

Also holding Accor stock is US-listed Chinese operator Huazhu, with 4.2% – though there is also a cross shareholding with Accor owning a 3.3% stake in Huazhu. The pair started working together in 2015, with Huazhu tasked with developing Ibis, Novotel and Mercure properties in China. At the time, Accor backed the partnership by acquiring around 10% of Huazhu stock; it subsequently sold half in 2019, and in February 2021 disposed of a further 1.5%, returning it EUR239m.  

To date, Huazhu has launched 211 Ibis, 78 Ibis Styles, 117 Mercure, 13 Novotel, and 7 Grand Mercure hotels in the Chinese market, with more in its substantial pipeline.  

Looking at the pipeline for the major franchise groups, Hilton holds the lead with 601 hotels, or 116,466 rooms on their way in China – according to Lodging Econometrics data. Behind Hilton is IHG with 439 projects, and Marriott with 388 hotels. Jin Jiang is listed fourth, with 234 hotels and 23,060 rooms, ahead of Accor with 189 hotels in the pipeline.  

Of the Hilton pipeline, more than half, 347 projects, are under the Hampton flag, while for IHG the leading brand is Holiday Inn Express, at 198 sites. Jin Jiang’s leading growth prospect is 7 Days Inn, with 106 projects, while Accor’s Ibis has 74 sites listed. Behind that is Marriott’s self named brand, with 62 projects.  

HA Perspective [by Chris Bown]: China’s economy has not been immune from the pandemic, reacting fastest to covid-19 thanks to its origin, and the nature of state population management in the country. As a result, it has been the first market to recover, and is already substantially back to normal for many. With international travel constrained, it will be the higher end properties, reliant on international business travel, that are still feeling the pinch – and those are branded by the likes of Marriott, Hilton and IHG.  

The economic growth plans have all had to be rewritten, thanks to the pandemic – but what is clear, is that China’s economic growth is still set on a strong trajectory, outpacing Western markets, unless another far more uneven shock comes over the hill.  

Hilton has been quite clear on its strategy in China – it’s looking to attract the massive, growing middle class. Hence CEO Chris Nassetta has been pushing its Hampton and Garden Inn brands – and now its mid-market long stay product, Home2, as well.  

For Accor, the worry must be its relationship with Huazhu, where the senior leadership has just changed. On the one hand, the company’s breathtaking expansion in China means Accor has been able to ride alongside, picking up a good number of properties. On the other, Huazhu – via its acquisition of Deutsche Hospitality – now has its own western brands to grow in China, as well as an interest in challenging Accor in key European markets. Maybe time to unravel the arrangement?  

Additional comment [by Andrew Sangster]: There is a lot of hype about China as the world’s biggest market. This may be true for some products but for hospitality, the much lower level of income means it remains a significant way behind the US and Europe. 

Last year, per capita disposable income in the PRC was RMB32,189 (USD4,828 at current rates). In the US, the figure in 2019 was USD47,673. In other words, the average American has 10 times as much disposable income as the average Chinese. 

There is no doubt that the Chinese economy has been growing at an impressive pace and the World Bank now describes it as an upper middle-income country. But the amount of people that are in a position to be a significant consumer of hospitality industry products, particularly hotels, is likely below that of the US. 

Middle class or above households who are able to spend money on travelling are growing rapidly in China, but the actual number depends, of course, on the definition of middle class. China’s national statistics office estimate that households “with the means to buy a car, a flat or go travelling” number around 140 million. This is a big market but, as said earlier, smaller than the US and Europe. 

China bulls argue that this number is increasing fast and will likely accelerate as the economy shifts focus from investment spending to consumer spending. Sceptics point to the bubble risks in the economy as demonstrated by the Evergrande and other property company woes. 

In addition to bubble fears, there are worries that China’s leader Xi Jinping is seeking to clamp down on “capitalist excess” and that this will dampen growth prospects. 

Evergrande alone has debts of USD300bn and taken as a whole, Chinese property debt hits USD2.8 trillion. These are eyewatering numbers and will, at the very least, cause a slowdown in the economy if they unwind too quickly. Few commentators are currently expecting a crash but the same was said in 2007 when the first signs of the Global Financial Crisis began appearing. 

The medium to long term picture depends as much on politics as economics. And the range of potential outcomes is wide. Not surprisingly, global hotel companies have pursued expansion in China via asset light routes and often with local partners. 

A decade ago, there was much talk about what China could represent for global hotel brand companies. In a remarkable U-turn on conventional practice, companies that did not have a long-term strategy were marked down by investors. This is not the case today. 

Two years ago, IHG gave a presentation on China. This showed that although the country represented 15% of open rooms, it was delivering 8% of operating profit. Fee business operating profit saw 16% CAGR between 2010 and 2018 in China as both revenue and margin grew. This suggests that the China strategy was on course to pay off if it continued on the same trajectory. But it is by no means a given, particularly with a more assertively anti-capitalist and anti-Western Government. 

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