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Homogeneous competition in China’s budget hotel industry

China’s budget hotel industry with a history of less than 10 years has once again become the focus of attention. On the one hand, it is the acquisition frenzy of the domestic giant Home Inn. On the other hand, this is the rapid expansion of international predators. In less than four years, the number of budget hotels in China has increased from 166 in 2004 to 1,476 in October 2007, an increase of nearly 1,000%. As the industry matures, many of the problems that previously swept carpets are now emerging.

Cost challenge

Compared with ordinary hotels, cheap rent is the main feature of budget hotels and the main reason for the rapid development of the industry. However, with the rapid increase in the number of budget hotels in China, budget hotels have become the biggest problem facing current budget hotels.

“For budget hotels, cost growth is a serious problem. In addition to general cost increases, the costs associated with expansion activities have been the main reason for the cost growth of most budget hotel chain companies.” Shanghai Inti Hotel Management Said Hu Shengyang, CEO of Consulting Co., Ltd. Hu believes that the concentration of budget hotels and the exponential growth in the number have led to a decrease in potential locations. This has intensified competition among hotel brands in high-end properties, directly driving up the cost of website purchases. At the same time, other costs such as personnel, construction and management are also rising.

“The increase in costs can help the economy hotel industry become more rational.” said Cheng Jun, vice president of Hanting Hotel Management Group. Compared with the investment payback period of 1-2 years in the past, Cheng believes that in the normal market, the current payback period of 3-5 years for budget hotels is more reasonable.

Hu Jintao also agreed that increased costs should make the entire industry more concentrated. Although some small chains may have to withdraw due to cost pressures, large budget hotel brands can speed up their strategic progress to ensure that they have a first-mover advantage in the future.

The exit of Top Star Hotel, now acquired by Home Inn, proves this. Industry insiders commented that, in order to quickly list on the stock exchange, Top Star frantically expanded the number of hotels, and its unsustainable cost was 15% higher than the industry average. The failure of Top Star should give China’s budget hotel industry a warning signal.

Competition

Not only are costs increasing, but China’s budget hotels are also facing the problem of “revenue reduction”. According to the survey report in 2007, the average price per room dropped from 328 yuan/day in 2005 to 208 yuan/day in 2006, and the occupancy rate also dropped from 89% to 82.4%.

“On the one hand, there is an increase in the number of hotels, on the other hand, these hotels have the same market positioning, so there is an inevitable price war between budget hotels.” Mr. Hu said. He explained that the early budget hotels in China were just a replica of the budget hotels in Western countries. Once a pilot hotel is proven successful, the company will replicate the same model in other cities. Other new products will also be effective models, which will lead to homogeneous competition in the entire budget hotel industry. When the industry is in its infancy, this homogeneity issue may be covered by strong market demand. But with the saturation of the industry, consumers now have more choices. Therefore, hoteliers must lower prices to attract customers.

But Zheng Chengji disagrees with this, saying that the main reason for homogeneity is the immaturity of the industry. He pointed out that budget hotels are also called “limited service hotels.” In developed countries, the meaning of “limited services” may be very different depending on the needs of different target groups. Many multinational hotel chains have thousands of hotels, and hotels are divided into 8 to 12 levels according to different customer needs such as tourism and business travel.

“As the market matures, hotel chains will inevitably become homogeneous.” said Cui Tao, a comprehensive marketing expert. “In the future, the competition between budget hotels will no longer be store-by-store competition, but collective competition. In this competition process, all aspects of the company, such as brand, culture, business model and cost control, need to be merged together To achieve core competitiveness that cannot be easily replicated.”

Management difficulty

“In China, only two types of hotels can survive: personalized hotels and systematic hotel chains.” Mr. Zheng predicted. He believes that personalized hotels can survive by virtue of their unrepeatable unique functions, and the advantage of chain hotels will be their scale and uniform quality.

However, Mr. Cui believes that there is a contradictory relationship between quality control and scale. “The larger the scale, the greater the brand risk, but the formation of a brand requires scale.” In this sense, the standardization of budget hotels is not only a personal breakthrough. The problem, but also the process of structural advantage. “From managing a few hotels to managing dozens of hotels, standardized management methods will be very different.” Mr. Cui said, he has a deep background in franchise management.

Hanting Hotel Group is a relatively new industry in this industry, and it has shown more caution. It is understood that in addition to improving the management of the standardization system, Hanting also strictly controls the number of franchisees. Currently, only 10% of Hanting hotels are franchised hotels. Mr. Zheng admitted: “It is more difficult to communicate with franchised hotels in terms of standardized management. Therefore, it will be safer to control the number of franchisees before our management capabilities are substantially improved.”

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