Homogeneous Competition In China's Budget Hotel Industry

Homogeneous Competition in China's Budget Hotel2005 to 208 yuan/day in 2006, and occupancy rate
Industryalso down from 89% to 82.4%.
China's budget hotel industry, which has less than 10"On one hand it is the increase in hotel numbers, on
years' history, has again come under the limelight.Visitthe other hand these hotels share the same market
Here Nowpositioning, hence the inevitable price war between
 On one hand, it is the domestic giant Home Inn onbudget hotels." said Mr Hu. He explained that the early
an acquisition spree; on the other hand it is the rapidtype of budget hotels in China was simply a copy of
expansion of international predators. In less then 4the budget hotel models from Western countries.
years, the number of budget hotels in China hadOnce a pilot hotel was proved successful, the same
grown from 166 in 2004 to 1476 in October 2007,model would be duplicated in other cities by the
almost a 1000% growth. As the industry becomescompany. Other new comes would also the proven
more mature, many problems previously swept undermodel, therefore resulting in the problem of
the carpet are now surfacing.homogeneous competition across the budget hotel
Cost challengeindustry. When the industry was at an early stage,
Compared to ordinary hotels, cheap rent is the majorthis homogeneity problem could be covered by the
feature of budget hotels, as well as the main reasonstrong market demand. But as the industry saturates,
for the industry's fast expansion. But as the numberconsumers can now have more choice. Hotel
of budget hotel surges in China, budget has becomeoperators thus have to reduce their prices to attract
the biggest issue faced by budget hotels currently.customers.
"Cost increase is a dire problem for budget hotels.But Mr Cheng disagreed, saying that the key reason
Apart from general cost inflation, costs associatedfor homogeneity is rather due to unsophistication of
with expansion activities have been the chief reasonthe industry. He pointed out that budget hotels are
for cost increases in most budget hotel chains." saidalso called "limited service hotels". In developed
Mr Hu Shengyang, CEO of Shanghai Inntie Hotelcountries, based on differentiated demand from
Management Consulting. Hu suggested that thedifferent target groups, the meaning of "limited
concentration of location selection by budget hotelsservices" can be very different. Many multinational
and their exponential growth in numbers havehotel chains have thousands of hotels, which would
resulted in a reduction of potential sites. Thisbe classified into 8-12 grades according to different
intensifies the competition for high grade propertiescustomer demands, such as tourism and business
between hotel brands, directly pushing up sitetravel.
acquisition costs. Meanwhile, other costs such as"As the market matures, hotel chains will inevitably
personnel, building and management are also going up.become homogeneous." said Mr Cui Tao, an
"The situation of cost increase can help the budgetintegrated marketing expert. "The competition
hotel industry become more rational." said Mr Chengbetween budget hotels in the future will no longer be
Jun, vice-CEO of Hanting Hotel Management Group.on a shop-to-shop basis, but on a collective basis. In
Compared to a payback period of 1-2 years in thethis rivalry process, all aspects of a business, such as
past, Cheng thought that the current payback periodbranding, culture, business model and cost control,
of 3-5 years for budget hotels is more reasonable inwould need to be combined together to achieve a
a normal market.core competitiveness that cannot be replicated
Mr Hu also agreed that cost increase should makeeasily."
the whole industry more concentrated. While someManagement difficulty
small chains may have to exit due to cost pressure,"There will be only two types of hotels that can
large budget hotel brands could accelerate theirsurvive in China: individualized hotels and systemic
strategic progress, in order to secure a first-moverhotel chains." Mr Cheng forecast. He reckoned that
position in the future.individualized hotels can survive on their uncopyable,
The withdrawal of Top Star Hotel, now acquired byunique features, while the advantage of hotel chains
Home Inn, has proved the point. Industry insiderswill be their scale and uniform quality.
commented that in order to quickly list the companyHowever, Mr Cui thought that the there is a
on stock exchange, Top Star were furiouslycontradictory relationship between quality control and
expanding its hotel numbers, at an unsustainable costscale, "Larger scale may mean increasing brand risk,
of 15% higher than the industry average. The failurebut the formation of a brand requires scale." In this
of Top Star should give the Chinese budget hotelsense, the standardisation of budget hotels is not
industry a warning signal.only an issue of individual breakthrough, but a process
Homogeneous competitionof structural superiority. "From managing a few hotels
Not only costs are increasing, budget hotels in Chinato managing scores of hotels, the methods for
are also facing the problem of "decreasing income".standardised management would be quite different."
According to a survey report in 2007, the averagesaid Mr Cui, who has a profound background in
price per room had decreased from 328 yuan/day infranchise business management.