hotel chains have their eyes on China's economy hotel business but it
looks like this much-hyped market is not the gold mine it once was.

France's Accor group today announced
it is gearing up for growth in AsiaPac where it wants its economy
brands like Ibis (shown left) to become as familiar to budget
travellers as they already are in western Europe.

Its AsiaPac headquarters will be moved to Singapore from Sydney by
the end of the year to be closer to the growth opportunities in the
region and it plans to build 70 three-star Ibis hotels, 40 of them in

As any visitor to China will testify, the country is awash with
home-grown budget hotel chains such as Jin Jiang Inns, which IPO'd in
HK and Shanghai earlier this year, 7Days Inns, GreenTree Inn Hotel and
Home Inns — the latter had an IPO on Nasdaq last year. All told, there
are over 140 economy hotel brands of different sizes in China, but they
are difficult to tell apart because they are run with undifferentiated

These domestic chains see big growth opportunities. Jin Jiang Inns,
for example, will increase its number of economy hotels from 165, the
number it had at the time of its IPO, to 600 across the country by the
year 2010.

But are there enough budget-minded travellers in China to keep those
extra beds filled? The US has around 60,000 economy hotels, accounting
for 75% of its entire hotel industry. Economy hotels in China account
for only 10% of the whole domestic market and, as the disposable income
of Chinese consumers rises, and more people travel for pleasure rather
than just business, that will lead to a growth in demand for affordable
hotels around the country.

At least, that is the bull case for budget hotels. But there are
signs are that the expansion boom may already have got ahead itself.

According to figures from the China Hotel Association, quoted in this
Knowledge@Wharton article, last year saw a fall of seven percentage
points in occupancy rates for China's economy hotels to just over 82%.
Meanwhile, the average room rate plummeted more than 36% from 328 yuan
in 2005 to RM yuan in 2006.

Home Inns' CEO Sun Jian admitted during a recent press conference
that there is a bubble in the market. He warned that, in spite of huge
market potential, the belief among many people that economy hotels mean
high profits is simply too optimistic. Nevertheless he argued that
there is still lots of room for latecomers in a market where demand is
great but fully integrated brands are scarce.

Accor, of course, has one of the best integrated brand strategies
around. Michael Issenberg, Accor's regional manager, argues that
economy hotels in Asia are either old four- or five-star hotels which
have fallen into disrepair, or “ill-conceived” economy hotels.

Accor's Formule 1 and Motel 6 chains are a ubiquitous sight on the
outskirts of European towns, while its Ibis chain is slightly more
upmarket and has better locations.

While the guest guest experience offered by these budget brands is
far removed from that of staying in a Sofitel or Novtel — Accor's
premium brands — they nevertheless offer a no-frills alternative to
travellers who do not need the trimmings and services of a traditional
hotel, but do not want to take a risk on no-name budget hotels.

If anyone can make a success of transforming the budget hotel experience in China, Accor can.

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