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Hoteliers Head for the Far East

The Asia-Pacific region has become the new land of opportunity for hotel companies. And China, with its explosive economic growth, burgeoning tourism market and bustling business centers, is experiencing the biggest surge in development as international brands jostle for a share of the world's largest hotel market. Just how bullish are hotel operators on China? Best Western International, which now operates 11 hotels in the country, plans to open 50 more properties in China over the next two years.

“It's a statement of confidence in that country,” says David Kong, senior vice president of global strategy and development at Phoenix-based Best Western. “The opportunities are gigantic there.” Marriott International Inc., Accor and Carlson Hotels Worldwide are among the other hotel companies that are pursuing aggressive growth strategies in China.

The major hotel brands aren't focusing all of their attention on China. They also are expanding in Japan, Vietnam, Thailand and India. But China, with its population of 1.2 billion, coupled with economic reforms that followed its acceptance into the World Trade Organization (WTO) in 2001 — presents the greatest opportunity for brand expansion and revenue growth.

Entrepreneurial Obstacles

Despite the tremendous enthusiasm for China, there are risks to developing in the region. The SARS (Severe Acute Respiratory Syndrome) outbreak in early 2003 caused occupancy rates to plummet to less than 20% over a three-month stretch in some markets.

However, that dramatic setback proved to be shortlived. Occupancy rates rebounded to more than 70% in markets such as Shanghai in the third quarter of 2003 as the country adopted measures to contain the spread of the virus and prevent future outbreaks. Consequently, hotel companies have not scaled back their expansion plans.

“There was a huge and dramatic rebound unlike anything we've ever seen,” says Richard Miller, executive vice president at the London-based World Travel and Tourism Council, which is comprised of top-level executives from 100 international companies. “The demand is so enormous; it's hard to hold it back.”

The country's complicated land-use regulations and tax laws also create challenges. U.S. hotel companies typically partner with local investors and owners who can help them through the maze of regulations. Land is state-owned in China, but the country allows investors to own buildings. To grow their brands in China, hotel companies are joining forces with both private developers and government investors, including state and municipally owned entities.

“A large number of state-run enterprises are diversifying their businesses with Western companies like ours,” says Paul Kirwin, president and managing director for Carlson Hotels Asia Pacific, a regional division established in 2001 by Minneapolis-based Carlson Hotels Worldwide. “You have to work with a broad range of developers across all sectors in order to maximize opportunities.”

According to “Focus on China,” a research report by Sydney-based Jones Lang LaSalle Hotels, additional economic reforms are expected as the Chinese government implements a series of economic reforms to meet the requirements of the WTO agreement.

The country is considering the adoption of a unified tax rate to standardize rates that vary widely in different economic zones. In addition, China now allows foreign investors to own 100% of a building instead of requiring them to form a joint venture with a local investor.

“Right now is the time to establish a brand and to lock up good geography,” notes Miller. “Everything is moving in the right direction.”

Impressive Fundamentals

International hotel companies are achieving revenue growth in China mainly through franchising and management contracts that provide a percentage of room revenues. By targeting China, these companies are responding to extremely favorable demographics.

The country's expanding middle class and steady job growth — a byproduct of a gross domestic product (GDP) that has been rising by about 7% per year — is generating strong domestic demand for hotels. And demand from international business travelers continues to build as more Fortune 500 companies set up headquarters in the international gateway cities of Shanghai and Beijing.

In addition, Beijing is preparing for an influx of visitors when it hosts the 2008 Summer Olympics. It appears the increase in tourism won't end with the Olympics, either. China has become an increasingly popular destination for international visitors. In fact, the WTO in Madrid predicts that China will become the world's top tourist stop by 2020, attracting 130 million international visitors per year and surpassing the United States, Italy and France as the most popular destination.

And because only about 10% of hotels in China are branded, versus about 80% of properties in the U.S., hotel companies have a great opportunity to grow their brands in China through either new construction or conversions of non-branded properties.

“It's fundamental for all the international operators to have a presence in China,” says Scott Hetherington, managing director, Asia Pacific, in the Singapore office of Jones Lang LaSalle Hotels.

Hotel operators are devising strategies to meet demand from every type of customer. Accor, which has its international headquarters in Paris and North American headquarters in Dallas, is aggressively expanding its luxury Sofitel and upscale Novotel brands throughout China, and just recently began opening its economy Ibis brand. Carlson Hotels and Bethesda, Md.-based Marriott International also are expanding a full complement of brands in China.

“China is just a booming market that is creating both domestic and international demand, which is fueling development of all kinds of hotels,” says Kirwin.

International properties are a growing revenue source for Carlson Hotels, and now account for more than 30% of the company's total profits. “We will increase that further,” says Jay Witzel, president of the company. Within five years, he says, international profits may represent as much as 50% of the company's total profits.

The company, which franchised and managed 10 properties in Europe in 1994, now operates 234 international properties, including 50 in the Asia Pacific and 184 in Europe, the Middle East and Africa. In China, the company is opening hotels under its Regent International, Radisson and Park Plaza flags.

Courting the Middle Class

Domestic travel within China is surging due to the thriving economy and the elimination of travel restrictions that had prevented residents from visiting districts such as Macao, where several developers are building casino hotels. In particular, the country's expanding middle class has created a big demand for economy and midscale hotels.

“A lot of luxury properties are already in place in the big cities,” says Miller. “Now it's a matter of trying to put into place the products for domestic travel, for Chinese residents who want to see their country but don't have $250 or $300 per night budgets.”

To capture that market, Accor launched its Ibis economy brand in China with the opening of the 154-room Ibis Tianjin in late January. Accor also plans to open the Ibis Chengdu in the fourth quarter of 2004 and Ibis Qingdao in 2005. The company, which operates 22 hotels in China, has 209 properties in the Asia Pacific, 1,200 in the Americas and 2,100 in Europe.

“We feel that the midmarket business traveler is an emerging market in China, so we're targeting that with our Ibis brand,” says Michael Issenberg, managing director of the Asia Pacific region for Accor, which previously concentrated on its luxury Sofitel and upscale Novotel brands in China. The company also will open five more Sofitel hotels in 2004 to boost the number of its luxury properties in China to 13.

Marriott International, which has established a presence in China with properties such as the JW Marriott Tomorrow Plaza in Shanghai, also has the midmarket segment covered with its Courtyard by Marriott brand.

One amenity typically offered at economy properties in China that isn't a part of the plans at comparable U.S. hotels is one or more restaurants. Accor's economy brands in the U.S. such as Motel 6 don't include restaurants, but the company's comparable brand in China — Ibis — will feature an on-site restaurant. Chinese residents typically prefer dining out at hotel restaurants when they go out to dinner, says Issenberg. Upscale hotels, even those with less than 200 rooms, usually feature several restaurants. For instance, the 190-room Radisson Plaza Xing Guo Hotel Shanghai, has no less than five restaurants.

“If you have a special occasion or want to entertain an important business client, hotels are where you want to go. Hotels are prestigious,” says Issenberg. The higher cost of building a budget hotel with a restaurant on the premises is offset by the lower cost of constructing hotels in China, notes Kong of Best Western.

Demand Holds Up

Hotel companies are confident that demand will continue to remain strong throughout China despite the steady growth in supply. In addition to the growing prominence of Shanghai and Beijing as international business and tourist destinations, there are many other cities with populations of 2 to 3 million that offer prime opportunities for growth, says Issenberg.

“There are a lot of cities in China that have the potential to support high-quality hotels,” he says, including Tianjin (4.8 million people), Wuhan (3.9 million), Shenyang (3.8 million) and Guangzhou (3.3 million).

Markets in China have a dramatically smaller supply of hotels than comparable cities in the United States, so there is definitely more room for growth, explains Hetherington. “Supply is going into these cities, but they have a relatively small base of hotels,” he says.

For instance, Shanghai, which has a population of 8.9 million people, boasted 52,040 hotel rooms at the end of 2002. By contrast, metro Atlanta has a population of 3.7 million people and 90,000 hotels rooms.

“Fortunately, in almost all cases, demand in China has continued to keep up with supply in the primary and secondary markets,” says Kong of Best Western. “The market environment is healthy today.”

Steve Webb is a Jacksonville, Fla.-based writer.

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