China’s middle market going upscale

For many years, the growth of business and budget brands was the big story of the hotel market. The new narrative is the rise of boutique hotels. The fact that boutique brands are attracting more and more investment says a lot about the current boom in domestic travel in China and the increasing sophistication of hotel guests in major markets there.

A 10-month study by the China-based Hotel Property Network Research Center looked into the middle of the hotel market in China’s biggest cities to determine which boutique brands are performing best. After considering 212 hotels in cities nationwide including in major cities like Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing and Chengdu, the survey ranked Atour Hotels highest in terms of franchise valuation and—most importantly—return on investment at 26.8 percent.

Next on the list of ROI among mid-range brands was JI Hotels (24.4 percent), followed by Crystal Orange Hotels (24.1 percent), Lavande Hotels (23.6 percent), Jinjiang Metropolo Hotels (23.4 percent), Vienna Hotels (22.9 percent), Yitel Hotels (21.2 percent) and Starway Hotels (19.7 percent).

The slight difference in ROI between the top performer Atour and eighth-placed Starway suggests that the market is poised to change and it is still very early days to tell the winners and the losers apart.

“Right now, how things are going to work out in the boutique segment is really unclear – we’re really not sure at this point,” said one Beijing-based analyst who asked not to be named. “It’s going to take some time before things become clearer.”

The study found that the key driver behind the boutique boom is margins. The investment required to set up a boutique hotel in China is roughly 30 percent more than the cost of setting up a budget hotel, but boutiques can charge upwards of 50 percent more per key.

Among the top three brands, the study said, Atour is known for its performance in guest experience, style and high levels of standardization. JI Hotels has a large member base and also enjoys high market visibility. Crystal Orange gets good marks for its product experience and strong technological feeling it offers guests.

Investors are jumping on the space. Boutique hotels are now attracting greater levels of investment than their budget peers, although this might be related to higher initial costs. Boutique hotels have larger guest rooms, lobbies and experience zones as well, all of which send costs up. At present, investment in a single boutique hotel runs between RMB10 and RMB15 million ($1.6 and $2.4 million), according to the study.

There are other factors that come into play. Boutique hotels tend to be focused on larger cities and younger guests seeking tasteful surroundings, while budget hotels caters to travelers in need of quick accommodation, with an emphasis on cleanliness and safety.

In wealthier cities, boutique hotels are replacing budget hotels but in third- and fourth-tier markets, budget hotels are still dominant. Higher costs are pushing many budget hotels out of the bigger cities, or at least the core areas with guests preferring to pay less even at the expense of location.

And yet, it is not budget hotels that are getting squeezed but rather three- and four-star offerings without any obvious competitive advantages. The study suggests that hotels in this category will have to be redefined or loose relevance.

So where is this all headed? The study says the battle for the middle of the Chinese hotel market will not be fought in the rooms or restaurants, but in the management systems that maximize ROI and guest experience.