ISHC member Alan Benjamin, president of Benjamin West, and his partners from their global offices will review the topic of "FF&E Project Delivery Around the World" in a four-part series. The hospitality industry is ramping up with a large increase in renovations in Europe and North America, along with continuing strong new-build developments in Asia and Latin America. All the major brands have stated at a minimum 70% of their new construction will be in Asia in the coming years. Therefore, it is time to focus on the key elements of what it takes to be successful in terms of furniture, fixtures and equipment projects—both renovations and new builds—around the world. Let's take a tour around the world, starting with China, by Bill Cheung, managing director and partner of Benjamin West Hong Kong; then moving west to Turkey, by Daniel Englender, ISHC, managing director and partner of Benjamin West London; then further west to the United States, by Alan Benjamin, ISHC, ISHP, president and founder of Benjamin West; and finally heading south to Brazil with a logistics focus, by Darlene Henke, ISHC, president and partner of Audit Logistics.
While speaking at a real-estate industry conference in Shenzhen, China, recently, I had the opportunity to interact with many Chinese real-estate developers who showed much enthusiasm about the prospects of hotel development in China. Over a networking luncheon, I got a closer glimpse at some of the drivers behind hotel development in China, which I found rather interesting and quite different from what we are used to in the West—and how these China-specific items affect the FF&E decisions in China hotel projects.
Historical perspective in China hotel development
Almost 30 years ago during the early 1980s, the White Swan Hotel, the first 5-star hotel in China, was developed in Guangzhou by a Hong Kong real-estate developer at a time when large scale luxury hotels did not exist. China was still a sleeping socialist giant with practically no tourism or business travel to speak of in the region. Although the hotel was designed by a well-known international hospitality design firm, its FF&E was procured by the developer's own internal teams.
Over the years, small homegrown Chinese hotels were developed by various state-owned enterprises primarily as venues these enterprises could use to entertain their associates and customers. This would increase the "face value" of the enterprises in the eyes of their customers. These hotels were typically operated and managed by subsidiary companies and their objectives had very little to do with profit generation and more to do with providing employment opportunities for local people under the communist regime. During the mid-80s, the early pioneers of international hotel brands began to open their first hotels in Beijing or Shanghai by establishing joint ventures with state-owned enterprises to develop these hotels, and Western-style professional hotel management began to take shape in China.
Drivers behind the recent hotel development cycle
With China's gradual ascension into economic power during the past 15 years, state-owned or private real-estate development companies (rather than state-owned enterprises that might have their primary business outside the real-estate industry) have grown to become the driving forces behind China's real-estate development. Traditionally, these real-estate developers focused on residential, retail and commercial projects, but during the past five years in particular, hotel development has become a newer asset class for these developers. Local government policies encourage the development of mixed-use projects (residential, commercial, retail and hotel) as a way to develop the city in a more balanced fashion.
For these mixed-use projects, the ability of the developer to bring in international retail brands as retail tenants and well-known 5-star brands as hotel operators are a major competitive advantage for the developer to secure a prime location, as well as negotiate preferential land deals and loan arrangements. In practice, the more well known the retail brands/5-star hotel brands are, the higher the loan amount developers are able to secure; this helps with the cash position when developing these projects. As a result, it is not uncommon to see well-known, 5-star hotels being developed in a second- or third-tier Chinese city where conventional economic wisdom (or a professional feasibility study) would rule out the development of such a hotel. These 5-star operators, however, are quite willing to put their flags up in these not-so ideal locales because they are under tremendous pressure to compete and meet the growth strategy set by their top management. More importantly, in such mixed-use projects, the residential development is often the large profit-making component for the developer, whereas the hotel component is often used as a "loss leader" to lower the tax impact on the overall profit picture of the project. Hence, the long-term viability or profitability of the 5-star hotel in such mixed-use projects was never an important consideration for the developer because the profit they make from the residential component upfront far outweighs the potential hotel losses down the road because of low average daily rate or low occupancy.
Impact on FF&E procurement decisions
Understanding some of the drivers behind developing 5-star hotels for Chinese developers, one can begin to recognize how FF&E procurement decisions also are different. China is the world's FF&E factory, and it has a relatively low cost of labor; real-estate/hotel developers often have large internal procurement departments to procure such things as cement, elevators and HVAC within their own backyard. However, FF&E operating strategy, and effectiveness are significantly different. Most real-estate developers have not procured before until recently, and they often lack the product knowledge to understand the various technical nuances and quality differences. FF&E/operating supplies and equipment procurement activities tend to be internally driven and the focus is on "lowest possible price" rather than value, quality, guest experience, brand standards or total cost over the product life cycle.
The propensity to achieve the absolute "lowest (initial) possible price" mentality by the developer also is observed when it comes to the interior design of hotel development. Well-known international hospitality interior design firms often are brought in to conjure up unique interior design concepts, but sometimes lower-cost local-design institutes also are hired to provide the detail design and documentation work in an effort to lower the overall project design cost. In other situations, the international interior design firm is retained through the end of the design process, but the final project outcome may be quite different from the original designs as fit-out finishes and FF&E/OS&E products often are substituted for lower cost alternatives without honoring the overall integrity of the original design intent.
Working with Chinese hotel developers
As I interacted with these Chinese real-estate developers over the networking luncheon, some of them were quite straightforward and questioned the value of using a FF&E procurement consultant in hotel projects. After sharing with them some of the benefits of using a professional procurement consultant (such as strong product/brand standard knowledge, substantial project experience, volume purchase discounts, 100% transparency, etc.), I could "hear" the voices in their heads, and some of them began to see some of the benefits in engaging a procurement consultant for their hotel projects.
I must admit, however, conveying and convincing Chinese hotel developers the value of using a procurement consultant rather than their internal procurement department isn’t easy, especially because their resolve to stick to the status quo is strong. It is more of a cultural change scenario and as hospitality consultants, we must have the patience and ability to educate, explain and demonstrate the value we can bring to the overall project team and ultimately to the owner in our corresponding area of expertise. Bear in mind many Chinese hotel developers are still quite "new" at developing hotels and as they get more sophisticated and experienced, they will begin to understand that "lowest possible price" mentality might not always serve them well in the long term as some of them have learned the hard way cheap products (without paying attention to the quality aspect) tend to break prematurely and room revenue loss/replacement cost far exceeds the initial savings upfront.
As hospitality consultants, we cannot ignore the fact Asia will continue to be the major market for new hotel development work in the foreseeable future and China will be the locomotive in driving this hotel development train. As long as we always remember the golden "PRC's" in working with the People's Republic of China: remain patient, relationship-focused and client oriented. If we do that, we will be successful in the long run in helping Chinese developers produce truly world class hotels.
Bill Cheung is managing firector and partner in Benjamin West Hong Kong, handling the company’s projects throughout Asia. Benjamin West is the leading FF&E and OS&E procurement firm in the world, with offices in Boulder, Colorado, Chicago, Dallas, Miami, Hong Kong and London, with projects in over 20 countries, deploying more than $1.5 million per day as the procurement agent for its clients. www.benjaminwest.com<http://www.benjaminwest.com
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