REPORT FROM CHINA—A slowdown in China’s economy is not holding back China’s domestic economy brands from executing their rapid growth strategies in 2012.
7 Days Group Holdings Limited
7 Days Group Holdings Limited remains focused on the brand’s rapid growth strategy during the first quarter, but the company’s initiative to launch a second brand targeting the higher-end market segment will come to the forefront during the second quarter, executives said during the company’s first-quarter earnings call.
The higher-end market is still relatively segmented, which provides good opportunities for development, said Alex Nanyan Zheng, CEO of 7 Days.
The company will create an independent subsidiary with its own management team to operate the new brand.
The development of the new brand still is in its preliminary stages as executives continue to work with designers on the concept, said Eric Haibing Wu, the company’s CFO.
“We will incur some pre-opening expenses, but we will probably have to wait until the end of the second quarter to have a much better idea in terms of what the exact impact is going to be,” Wu said.
As for performance during the first quarter, occupancy for leased-and-operated as well as managed hotels took a dive. Total occupancy was 77.7%, down from 82.8% in the first quarter of 2011.
The year-over-year decrease in occupancy could be attributed to the higher number of new hotels in operation compared to the same period last year, Wu said.
7 Days added 100 hotels in the first quarter, six of which were leased-and-operated and 94 of which were managed. As of 31 March, the company had 1,044 hotels in operation, consisting of 417 leased-and-operated hotels and 627 managed hotels. The company still is on track to open 120 leased-and-operated hotels this year, most of which will open in the third and fourth quarters, Zheng said.
Executives decided to strategically increase rates to offset the lower occupancy levels experienced in the first quarter, Wu said. During this period, average daily rate increased approximately 3%, he said.
Revenue-per-available-room growth of the company’s mature hotels “is a more important operating metric,” Zheng said. During the first quarter, the hotels the company categorizes as “mature” delivered a 2% growth in RevPAR, he said.
China Lodging Group
China Lodging Group continues to shift its strategy toward growing the portfolio by way of franchise contracts, upping its 2012 target of new franchise contracts from 140 to 150.
The company has accelerated its franchise program by adding a marketing component that will target potential owners and developers, executives said Wednesday on China Lodging’s first-quarter earnings call.
“In the long run, we see ourselves as a hotel owner, a hotel operator and brand owners,” CFO Jenny Zhang said.
China Lodging will promote its main HanTing Express brand as a franchise vehicle while its two smaller brands—HanTing Seasons and HanTing Hi Inn—will remain in the lease model until they mature a bit more, Zhang said.
“We have set up a separate business unit to run the two smaller brands,” Zhang said. “They have a more specific strategy and position. We have seen very positive performance after those adjustments.”
Qi Ji, founder, executive chairman and CEO, said the company is offering franchise-fee discounts to “serial franchisees” and to franchisees in remote locations in attempts to broaden China Lodging’s reach.
“Franchisee demand is very strong,” he said. “In the past we had not done much marketing to franchisees; we just waited for them to come to us. Now we’ve started to be more proactive in marketing ourselves. We offer some unique advantages, such as the highest RevPAR and highest (internal rates of return) in the hotel market.”
China Lodging has 336 hotels in its pipeline, which is double the number it had last year. It will manage 229 of those properties. Seventy-four percent of the leased hotels in the pipeline are under conversion, while 65% of the franchised hotels are under conversion. The average conversion process takes seven months, Zhang said.
As it expands, the company will open more hotels in second- and third-tier cities across China. Currently, 46% of China Lodging hotels are in tier one cities; 34% are in tier two cities and 20% are in tier three cities.
While efforts were focused on expansion, the company’s portfolio performed exceptionally well during the first quarter, reporting a 9% increase in RevPAR when compared to the same quarter in 2011.
Home Inns & Hotels Management
A focus on third-tier-and-below cities is also underway at Home Inns & Hotels Management, executives of the Shanghai-based company said Friday.
Chief Strategy Officer May Wu said China’s economy is spreading inland from the coasts, and Home Inns sees opportunity in these inland cities that are expected to grow.
“The urbanization will continue for the next 10 to 15 years,” Wu said, citing an analysis by the Chinese government.
As of 31 March, Home Inns had 1,479 hotels in its portfolio, representing nearly 182,000 rooms. Of that total, 1,168 hotels are in third-tier and below cities, CEO David Sun said.
Home Inns had 218 hotels in its pipeline at the end of the first quarter. The company is on track to open between 330 hotels and 360 hotels during 2012, Wu said.
She acknowledged that third-tier cities, as well as the overall Chinese economy, is experiencing softness, but the outlook for economy chains remains good. “It is far from saturation,” she said.
Executives also provided an update on the performance of Motel 168, which Home Inns announced in May 2011 it was acquiring for $470 million.
The brand’s performance was trending more strongly in April than it showed during the first quarter, executives said. During the first quarter, the brand’s occupancy was at 70.4% (compared to a range of 65% to 70% a year ago, Wu said); average daily rate was 168 Chinese Yuan Renminbi ($26.59); and revenue per available room was 111 Chinese Yuan Renminbi ($17.57). During April, occupancy was down to 65%; ADR was 165 Chinese Yuan Renminbi ($26.11); and RevPAR was 140 Chinese Yuan Renminbi ($22.16).
Quarter-over-quarter comparisons are difficult for ADR and RevPAR, Wu said, because of the differing accounting methods of Home Inns and Motel 168.
“It is indeed our intention to adjust Motel 168 up (in rate) as we improve the occupancy rate,” Wu said. The goal is for Motel 168, of which there are 311 hotels, to achieve an occupancy level of 80% or higher.
