Earlier this year, STR Global, sister company of HotelNewsNow.com, published a market review on the secondary cities across China in one of their weekly press releases. I thought it would be interesting to return to these markets and review China’s hotel development growth—this time with a slightly different angle.
A couple of months ago while attending a strategy course for my MBA, one of my lecturers asked the class what would be the “correct development strategy” for a company to expand? To this, he stated there are only four possible answers applicable to this question in today’s environment: China, China, India, India.
These four words reminded me of some hotel projects I have been involved with in the past and what it means for hotel operators with regards to new opportunities to expand their brand in one of the largest and fastest growing markets in the world.
While numerous research studies and articles have been published on China’s hotel sector in total, I was more interested in which new cities have emerged on hotel brands’ radars during the past three years—and how they are expected to grow during the next three years.
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The graph above shows how select secondary cities in China (along with Beijing and Shanghai for sake of comparison) balanced supply growth with demand growth from 2009 to 2011. It also shows how new inventory (projected supply growth through 2014) will impact performance.
Supply growth from 2009 to 2011 is reflected by each city’s bubble size. The bigger the bubble, the larger the increase of new inventory added compared to the city’s existing supply. Looking at the graph, Wuhan, Dalian and Najin saw modest supply growth during the last three years. Wuxi and Sanya, on the other hand, saw fairly significant supply growth during the same period.
Wuhan is expected to make up for lost time by adding nearly 4,000 additional rooms by 2014, increasing the city’s total inventory by 20%. While I remain positive regarding the city’s potential, the risk of imminent oversupply is great considering the lackluster pace of demand compared to other markets during the past three years.
But predicting the future potential of each city in terms of branded hotel developments in an emerging market such as China remains a very delicate exercise. Double-digit growth numbers often have been synonymous at times of strong economic growth as either “normal” or “healthy.” I am confident that as demand growth continues to outpace supply growth, hotels will be able to benefit from these positive market conditions to increase both rate and occupancy.
When asking Chen Jie, sales and marketing director at BTG-Jianguo Hotels, one of the largest hotel operators in China with 78 hotels, she commented that “the economic climate in China remains positive, and whilst we anticipate to see similar performance levels in 2012 compared to 2011, we don’t expect to see major changes in terms of business performance, as one of the main priorities of the current government is economic stability in perspective of government change expected later in the year.”
She added, “As some real-estate projects may have slowed down in some of the markets, we anticipate seeing increased activities in business and (meeting, incentive, conference and events) segments.”
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Looking at the year-on-year performance in first quarter 2012, the trend in terms of the revenue per available room is quite clear. As mentioned earlier, Sanya had benefited from its “appeal” to travelers and has enjoyed the limited new supply, pushing first quarter 2012 RevPAR to 1,173 Chinese yuans ($186).
Whilst Beijing (421.59 Chinese yuans, or $66.76) and Shanghai (401.40 Chinese yuans, or $63.56) have often been used as a point of reference to determine the status of the hotel industry in China, provincial cities from Xiamen and Chengdu might now have reached almost similar levels in terms of RevPAR with Xiamen reaching 401.36 Chinese yuans ($63.55) and Chengdu 384.41 Chinese yuans ($60.87), respectively.
Overall, looking at the big picture of the hotel industry in China, it is clear the pace of new supply entering the market has short-term effects on the hotel performance. Markets that have managed to time supply growth with their overall economic development of their respective city have showed in the course of the last three years, and more recently in the last quarter, positive signals for long-term growth.
As more hotels are expected to enter the China market, one of the main challenges for hoteliers will be to capture the revenue opportunity based on the demand and to yield their room inventory wisely.
David can be contacted on dgrossniklaus@strglobal.com. Follow him on Twitter @dgrossniklaus.
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