The key word is " Transition" in 2014
Triggered by the overall slowdown of the China’s economy and the implementation of the “Eight Provisions” by the Central Government, China's hotel industry has gradually entered into a “New Normal” era. Undoubtedly, the new Government policy is part of the contributing factors to the “New Normal”; nevertheless, we believe the uncertainty of the Chinese economy that resulted in slow growth in hotel demand and the serious oversupply in major markets across China are the fundamental reasons for the decline in hotel performance over the last two years.
Last year, we predicted 2014 will be a major year of “Transition”. We stated that the fundamental shift of the economic situation and the profile of the customers will influence our industry in five different aspects namely, “Demand Source”, “Product", "Partnership", "Program Mix" and "Assets". For "Demand Source", we expected hotels, which used to rely primarily on upper-end market, will expand into mass market leisure and private consumption demand. Hotels will no longer be exclusive to the rich, but instead, drive more families and mass consumer demand. As for "Product", emerging consumers’ needs will continue to encourage products to be innovative. Interesting themed hotels, with unique characteristics, that target niche market segments will be the future norm. For "Partnership", the emergence of the sharing economy and the “Internet Plus” phenomenon will initiate companies in our industry to pursue cross-industry cooperation. With "Program Mix", we will witness the continuous effective use of hotel space; and for "Assets", we anticipated that large listed companies in China will pay more attention to the diversification of their assets. Through mergers and acquisitions, these companies will integrate and share resources and bring the industry to the new next level.
- 2015, An Unprecedented Year in Mergers and Acquisitions
When we reviewed the major events in our industry over the past 12 months, it is easy to conclude that what we predicted have pretty much materialized. Among them, the number of merger and acquisition activities is of unprecedented level. Starting from September last year, Alibaba Group invested RMB 2.81 billion in the hotel information service provider Shiji, in return for a 15 percent stake of the company. This strategic investment has indicated the ambition and confidence of the e-commerce giant, Alibaba, in the tourism industry. Such an agreement will allow Alibaba Group’s Ali Trip website to be supported by Shiji’s hotel booking networks and back-end infrastructure. And this will lay a good foundation for Ali Trip to launch its "Credit stay" and "Future hotel" services. For the industry as a whole, the cooperation of the two companies reveals the fact that the application of “big data” analysis is becoming increasingly important. “Big Data” is no longer just another new word, instead, its application is revolutionizing our industry and closely integrated with our lives.
Jinjiang has been very active in the past 12 months. At the beginning of this year, Jinjiang International acquired the French Louvre Hotel Group, which marks one of the first key expansions of local Chinese operators into the international market. It also indicates Chinese hotel operators are actively preparing for the booming outbound Chinese travel market abroad. At the same time, Jinjiang has also entered into a strategic investment agreement with Plateno Group, which allows the two companies to share membership loyalty program, information system, procurement platform and other resources; in addition, Jinjiang also acquired 80% stake of the Shenzhen-based Vienna Hotel Group and its affiliated restaurant business in the second half of this year. This M&A arrangement will enable Jinjiang to consolidate the market share of its mid-tier hotel brands in China. These three major M&A activities in 2015 will create a hotel conglomerate, including Jinjiang, Plateno and Vienna, to have more than 5,000 hotels, 535,000 rooms in the network in China. The scale of this new conglomerate is two times of that of the original market leader, Home-Inn. Internationally, this new conglomerate has over 6,500 hotels, a scale that is on par with the world's second largest hotel group, the Choice Hotels.
In addition, Ctrip partnered with Plateno and Tencent to acquire China’s second largest OTA, eLong held by Expedia. As the competition in the OTA market has become more fierce nowadays in China, it is fairly easy to understand Ctrip’s intension to acquire eLong; and it will be an fascinating story to follow Plateno’s future moves on leveraging elong’s platform to enrich its value-chain.
Mr Zong from Home Inn Group commented yesterday on why Home Inn accepted the privatization offer led by the BTG Group. As this may imply, domestic brands listed overseas might not be the only road leading to capital maximization. As for BTG, the portfolio of Home Inn Group is a perfect complementary filling BTG’s budget hotel segment gap. Ultimately, the corporation of the two companies is a meeting of strategic development for both groups.
The mergers and acquisitions continued to be robust in 2015. In August, China's HK CTS Metropark Hotels Corporation acquired the UK-based Kew Green Hotels. This move continues the legacy of Chinese hotel enterprises acquiring overseas entities and showing their confidence in the Chinese outbound travel market.
Among the emerging market of sharing economy, we also witness the traditional serviced apartments operator, Ascott, led a consortium to invest in Tujia, an online apartment sharing platform equivalent to US home-rental website Airbnb. The joint venture will operate and franchise serviced apartments in China under a new brand. At the same time, Ascott’s products will also be marketed and sold via Tujia’s platform. From a broader perspective, the collaboration of the two companies indicates that sharing economy will play an increasingly important role in the tourism industry.
- The Power of Online Apartment Sharing Platforms Cannot be Ignored
Including Tujia, the five key players of the online apartment sharing platforms in China have all secured their new round of financing in 2015. In 2014, the total online sales of the short-term rental market reached RMB 4.05 billion, and is expected to exceed RMB 5 billion in 2015. As indicated, the characteristics of being high value-for-money, having ample choices of products and efficient booking process are the true competitive advantages of sharing economy in the lodging industry. As we can easily predict, these platforms will revolutionize the traditional hotel industry by providing alternative options and create new niche demand segments. For instance, one can rent a luxury private penthouse or villa for home party organized by professional service provider, this could be a potential threat to hotel’s traditional event and catering services. Therefore, the force of online apartment sharing platforms cannot be ignored.
- The Era of Hotel Asset Securitization
Over the past year, Jin Mao Investment Group spun off from Franshion Properties, and Wanda’s Commercial Real Estate was listed in Hong Kong. Country Garden Group also intends to separately list its hotel management business unit in Mainland China. The strategic move of the three companies will not only release the undermined values of the hotel assets through the securitization, in fact, these plans can further relieve the financial pressure of their respective real estate developments in China. From another perspective, the restructuring of these hotel assets have marked the first few cases of domestic hotel assets entering into the international securities markets, which will definitely serve as very important future reference for hotel assets planning and management, assessment and exit strategy.
- Strategic Alliance and Cross-Industry Cooperation Have Become Popular Trends
In addition to major merger and acquisition events, we see a line-up of many strategic alliances or even cross-industry alliances in 2015. From China Lodging Group’s alliance with Accor, to China Lodging Group’s launch of the "H World" platform and to the six Chinese hotel groups lead by New Century and Guangdong Hotel Management joining forces, etc., hotel companies are thinking of new strategic moves under the changing operating environment. Their strategy shares one thing in common, establishing cross-company platforms to facilitate resources sharing and localization. In the new era, hotel companies who can find the most effective and efficient way to serve the largest number of target audience will stand out from the competition. And we believe no single company can win the game alone; likewise, companies which are not embracing new changes will eventually be left out. Through strategic alliance, a practice that promotes win-win situation shall be a “new normal” way for hotel enterprises.
New Trends in the “New Normal” Era
The fact that many major events occurred in the hotel industry in 2015 with rooted and long-term implications to our industry is rare in the recent decade. Facing the decline in profit margins and contraction of market share, the industry is open-minded to explore new directions. So what will be the future development trends under the “New Normal” era in our industry?
- Rethinking on Branding and Management Models
First, we believe future owners and hotel management companies will rethink the implication of hotel branding and current management models. Over the past decade when hotels in China were developing rapidly, Chinese hotel owners’ only concern with hotel management company is which hotel brand to be flagged on the hotel property. They paid most attention to brand values such as “image” and “recognition” with very little deviation from the full-management model. But in the future, we believe that owners will be more concerned with whether the hotel brands can truly maximize value for the business, as well as if the brand and its DNA match their own companies’ corporate culture, project positioning and return on investment.
Partnership will evolve from full-management model to somewhat more diversified and innovative. Diversity will be witnessed with increasing franchise agreement, limited management (man-chise) and third-party management. Innovation will be seen with both parties exploring new business models. For example, some owners may consider introducing timeshare (vacation ownership) element in the projects using resort product exchange platforms. Or they will try to align their hotels with affiliated hotel alliance in order to open up new market channels. We foresee that the terms and conditions, the service scope of the traditional full-management hotel management agreement will evolve to meet the new request from owners.
- Redefining Product Boundaries
Secondly, under the impact of the “share economy” and “Internet Plus” phenomenon, we believe that products offered by hotels and their corresponding revenue sources will be redefined. Will hotels in the future only be sustained by room revenue? Is it possible for hotels to rent out guestrooms to furniture companies so these rooms become the venue to showcase their new products and design? Can hotels’ in-house mobile applications be linked to online platforms that specialize in home-decoration and refurbishment so that hotel guests can directly order furniture that they come across in the hotels? As long as there is a bar code, any single item, any art piece, any set of cutlery, sofa, etc., can potential become a source of income for the hotel. Can in-room dining be serviced by online takeaway-ordering platform? Should dining space in hotels be limited to food and beverage offerings? Can the dining space be combined with other products? Can Didi Travel or Uber, private car or ridesharing application be utilized in the concierge to provide alternative service for our hotel guests?
Under the “Internet Plus” phenomenon, cross-industry cooperation allows the best practice of specialization. In the future, any product or service provided behind the internet bar code will be provided and operated by the most professional service team. Therefore, under the diversification and the blurring the product boundaries, having a seamless user experience will continue to be the core criteria for the future product delivery and design process. The success of Internet companies in the future will rely on their off-line integration.
The platforms of sharing economy that are triggered by the rise of internet will ultimately lead to the disappearance of the boundaries amongst products and services, shortened the time of product delivery. However, at the same time, that also implies customers will have higher expectation on each product and service delivered which will result in a need for an increasing level of specialization.
- Restructuring Booking Channel
In the past, information is powerful due to its scarcity. Online travel agencies, thus, were able to gain advantage as it collects more abundant information.
However, with the rising burden from the commission paid by the hotel, hotels are gradually reducing their interest and dependence of securing bookings through third-party platforms. While we expect that hotels will continue to encourage direct bookings by establishing their own hotel booking applications or even by establishing cross-company loyalty programs, major search engines and e-commerce giants such as Ali Trip by Alibaba will continue to tap into the hotel booking industry leveraging on its massive customer base and resources; together with the travel experience-sharing sites and reviews networks, such as Trip Advisors, the four different forces will intensify the competition of the traditional hotel booking channels and revolutionize the entire industry.
In the future, mobile devices will become the most important communication tool between hotels and their guests as well as the booking channels. The key to success will no longer be determined by the quantity of information that the system can provide or by the number of valid members the channels have secured. When each booking channel all possesses large amount of information and customers’ behavioral data, channels will be differentiated by their respective capability to analyze these big data, accurately predict customer demand and provide the most personal recommendations that maximize booking experience and values. Thus, transferring browsing frequency into effective bookings.
- Reconfiguring Space Use within the Hotel and its Supporting Facilities
In terms of space planning during the hotel development process, we expect hotel owners and their hotel design team to reconfigure the space use of the hotels as well as the supporting facilities. We believe that the primary focus will be shifted from “space use maximization” to the attention of incorporating “programming” within a “physical space”. Will the facilities be able to offer interesting contents? Will the different components form a sustainable ecosystem to satisfy consumer needs and stimulate demand? For example, can an urban mix-use development, with hotel being the major component, integrate different experience-based retail components and become an urban lifestyle destination that is attractive to travellers and locals? In the future, the capability of delivering content and experience within a building will be the differentiating factor for hotels.
- Re-evaluating the “Value” of Hotel Assets
We foresee that our industry will re-evaluate and recognize the “true values” of hotel assets. Most hotel development projects in the past were passive or conditioned, in some cases, the development of the hotel component was treated as a cost centre instead of being a revenue generating centre. We believe this mind-set will evolve when the liquidity of hotel assets are enhanced, specialized asset management practices are employed and hotel asset securitization opportunities are realized. The hotel owners will also recognize the importance of professional asset management practices, therefore, enhancing the value of hotel assets in China as a whole.
The Core Values
Since our gathering in CHAT Shanghai last year, we have witnessed a dramatic year in our industry. Regardless if we were actively evolving or passively integrating, we have entered into a new era of hotel development in China. After all these major events in the year 2015, what shall we embrace and where do we go? Ultimately, what are our core values? What was our initial business objective(s) when we first started? What is / are our ultimate goal(s)? How can we sustain our business in this very competitive environment? How can we enhance our values through our innovations around our core values and secure a sustainable profit?
There will be high demand for a stabilized and well-balanced mind and body in the future society of hustle and bustle. We will be willing to afford, at all costs, to identify places, products and services that can revitalize our souls. Tourist destination, resort hotels, health-centric products, leisure and entertainment activities and other services, will inevitably lead the market into the next wave of development.
Charting our own path is the future. The hotel industry will experience further localization. In response to the recent China Dream movement, we should continue to strength ourselves with leading localized advantages, finding and identifying our ways that lead to the success of promoting mutually beneficial business models and value creation.
Horwath HTL has created a new brand identity – CHAT, tailored for China’s hotel and tourism industry! CHAT, the abbreviation for China Hotels And Tourism, encourages industry people to gather, create dialogue and network through the platform, as well as exchange and share experience and knowledge. CHAT Beijing is an enhancement of the “China Hotel Development and Financing Conference”, which has been held for eleven years in Beijing. We further focus the conference specifically on hotel and tourism development and investment issues. There are 650 delegates attended 2015 CHAT Beijing with the largest segment being domestic hotel and tourism developers and owners. CHAT Shanghai is an upgrade of our annual “China Hotel Market Review and Outlook Seminar”, which has been held over the past six years. CHAT Shanghai focus on hotel asset management and operations. 510 delegates attended CHAT Shanghai in September 2015. CHAT Beijing and CHAT Shanghai held in Spring and Autumn respectively cover the full hotel and tourism business cycle from development and investment to asset management and operations. CHAT will enable you to achieve successful business development through its various powerful platforms!
About Horwath HTL
Horwath HTL is the management consulting of Crowe Horwath International that specializes in hotel, leisure and tourism industries. Established in Asia in 1987, Horwath HTL has consulted about 4,000 hotel and tourism related projects throughout the region (including over 1,200 projects in China) for clients ranging from individually held businesses to the world’s most prominent operators, developers, lenders, investors and industrial corporations. Horwath HTL now operates offices in several key cities throughout the Asia Pacific region, including Auckland, Beijing, Hong Kong, Jakarta, Kuala Lumpur, Mumbai, Shanghai, Singapore, Sydney and Tokyo. Our offices work closely together to ensure that our clients receive a multi-skilled international perspective for their projects. Horwath HTL is also supported by the Horwath database, the largest and most complete hotel and tourism related database in the world. No other firm is better positioned to meet today’s and tomorrow’s industry challenges than Horwath HTL – Experts in the hotel, tourism and leisure industries.