Considering the large room for growth and development potential for midscale hotels in China, branded hotel groups are trying to seize China s midscale hotel market.

　　Against the backdrop of the declining profits of upscale and economy hotels, the midscale hotel market which has always been considered less important in China has begun to receive attention from many international and domestic hotel brands.

　　Considering the large room for growth and development potential for midscale hotels in China, branded hotel groups are adopting different strategies to develop and seize China's midscale hotel market.

　　'Dumbbell' Development Pattern

　　There is currently still no unified definition on the standard for midscale hotels in the market. This concept can be defined in terms of star rate, development cost per square meter, customer profile and etc. In this article, we consider midscale hotels to be the category between economy hotels and upscale hotels, targeting midmarket and high-end consumers and business travellers.

　　China's hotel market is generally characterised by a 'dumbbell' development pattern of strong growth in upscale and economy hotels and weak growth in midscale hotels. Between 2000 and 2010, the starrated hotel room inventory in China increased rapidly at a compound annual growth rate (CAGR) of 11%.

　　Room supply growth was the strongest within the fivestar segment, recording a CAGR of up to 18%. In addition, economy hotels have achieved rapid expansion by taking advantage of their low costs, chain management and easy attraction for investment.

　　For instance, renowned economy hotel brands like 7 Days Inn, Jin Jiang Hotels and Home Inns have already reached or will reach the milestone of having 1,000 hotels. However, the new upscale hotel supply experienced significantly slower growth due to the impact of factors such as the macroeconomy and tightening policies on spending from 2011 to 2013.

　　According to the latest Statistical Bulletin of National Star-rated Hotels in the Third Quarter of 2013, the five-star segment's CAGR decreased to 8%, with a total supply of 717. Meanwhile, new economy hotel supply continued to decline. Between 2011 and 2013, the onestar segment grew at a CAGR of only 1%, and the twostar segment was recorded at a CAGR of -2%.

　　STAR-RATED HOTEL SUPPLY, CHINA (2011-2013 Q3)

 

　　In recent years, occupancy levels and profits of the upscale and economy hotel markets have decreased significantly with the expanding polarisation of the two markets.

　　Due to the impact of factors such as the travel cost control and the implementation of the 'Eight Provisions' and ' Six Bans', average occupancy and ADR of the five-star segment recorded year-onyear decreases of 5.6% and 3.3%, respectively, which led to a sharp year-on-year decrease of 8.5% in terms of RevPAR, as shown in the latest data for the third quarter of 2013.

　　Due to the central government's anticorruption measures, a large number of upscale hotels, especially self-managed individual hotels, have had to launch online group buying services or make mediumand long-term promotional efforts to attract guests, and five-star hotels in some second-tier cities have carried out price-off promotions to compensate for their declining occupancy.

　　Meanwhile, economy hotels have also experienced decreasing room rates and occupancy levels as a result of increasing rental and human costs, which has given rise to a fall in industrial profits. In 2012, the total net profit of Home Inns, 7 Days Inn and Jin Jiang Hotels dropped by 45.12%, as compared to the previous year. Against the backdrop of the declining profits of upscale and economy hotels, the midscale hotel market, which has always been considered less important, began to receive attention from many international and domestic hotel brands.

　　Budding Midscale Hotels

　　Midscale hotels in China possess large room for growth and excellent development potential. First of all, the midscale hotel market itself is large enough in scale, capturing a big market share.

　　According to the latest data for the third quarter of 2013, the number of three-star hotels accounted for 48% of the total starrated room inventory. Next, midscale Commercial and Leisure demand is large in third- and fourth-tier cities, and midscale hotels are just in line with the positioning of third- and fourth-tier cities, so they are expected to hold great development potential in these cities.

　　According to data provided by the China Tourism Academy, 40% of international overnight visitor arrivals and 25% of domestic overnight visitor arrivals prefer to choose midscale hotels as their lodging products, based on which the midscale hotel market size is expected to exceed 100 million consumers and continue to grow.

　　Again, impacted by the travel cost control and guided by the national policy for the 'three public consumptions (overseas travel, receptions and official cars), more guests are expected to be diverted from the upscale hotel market to the midscale hotel market, which will lay a market foundation for the development of midscale hotels. In addition to tighter spending by the government and corporate guests, leisure guests have gradually returned to being rational and experience consumption from a pure pursuit of luxurious consumption.

　　Also, the increasing number of the middle class domestically is a large group of rational consumers, and midscale hotels with high value for money can typically better meet their demand, which is expected to promote the further development of midscale hotels.

　　Additionally, the costeffective return on investment (ROI) represents a favourable factor for the thriving development of midscale. In contrast to the high investment and long payback period of five-star hotels, as well as oversupply and low ROI of economy hotels, midscale hotels are characterised by moderate investment costs with a typical payback period of about three years and relatively high ROI. Comparatively, midscale hotels have better investment value and outlook.

　　Chart 1: STAR-RATED HOTEL SUPPLY MIX, 2013 Q3

　　'Downward Positioning' Strategy

　　Due to its huge development potential, the midscale hotel market has become a 'profit cake' which international and domestic hotel brands are competing for, and is anticipated to represent the main competing battlefield for all brands.

　　In recent years, a large number of internationally branded hotel groups have invariably shifted their business priorities towards the development and expansion of midscale brands.

　　Hilton Worldwide announced that it would introduce Hilton Garden Inn, a midscale brand under its portfolio, for the first time in China in 2014.

　　Positioned as a midscale brand, Hilton Garden Inn highlights its orientation towards business travellers and excludes unnecessary tedious facilities such as food and beverage outlets and grand ballrooms, with room rates set between that of upscale and economy hotels.

　　Compared with Hilton Worldwide, InterContinental Hotels and Resorts realised the development of midscale hotels earlier, and it has opened dozens of midscale Holiday Inn Express hotels in China. Accor Group has also strengthened its investment in the midscale hotel market. In June 2013, Mercure Chengdu North was opened in Chengdu, marking the debut of Mercure, a midscale brand under Accor, in China.

　　The development of Wyndham Hotel Group in China has always been focused on Ramada, a midscale brand under its portfolio, including a total of 55 hotels distributed in first-tier cities such as Beijing, Shanghai and Guangzhou, and most second- and third-tier cities across the country. In 2013, Wyndham Hotel Group announced its opening of eight new Ramada hotels in China, making Ramada its second largest brand in China (trailing only after Super 8).