Chapter 4 – Hospitality services

[Note: below is Chapter 4 from Great Wall of Numbers]

What I should have done when I first flew into Shanghai four years ago was take the high-speed maglev from the airport into the city.  Instead I was sweet-talked by a suave salesman outside the arrival gate’s entrance into taking a luxury sedan.  500 RMB?  No problem, no way is that expensive – after all it is the same rate that other companies nearby were charging.  The shiny new black Buick was driven by a young college graduate who had studied international trade in Australia.  Throughout the nearly hour long drive along one of the many highways that bisect the metro, Johnny, as he called himself explained what there was to do in each district we were passing through.  In crisp English he answered all of my questions and delivered me at the foot of the hotel my travel agent had previously booked.  And during my stay, the bellhop and front desk staff greeted me in pleasant hellos and how-do-you-dos.  My image of China – my first impression was immediately biased because despite the 300 million English learners in China (see Chapter 9), the stark reality is outside of large metros, English dissipates into the wind.

And this presents an opportunity to any number of educational providers (discussed in Chapter 9) and hospitality training firms.  For example, according to the World Tourism Organization, in 2011 there were 57.58 million inbound overnight tourists that spent $48.5 billion on the mainland.1 Since 2000, the number of foreign visitors to the country has increased 10 percent annually.2 Five out of the top six source countries for inbound tourism in China speak native English at home.3 And in my own anecdotal experience, while cities like Guangzhou and Shanghai are relatively easy to navigate – with their helter skelter smattering of English on highway signs and subway stations – I am still accosted by bewildered tourists wanting to know how to get to Jing’an Temple in Changning, Shanghai.  In fact, China is now globally the third largest inbound tourist destination (after France and the US) and as I note later in Chapter 11, it is one of the largest outbound as well (in 2012, 82 million Chinese traveled overseas).

In February 2013 I spoke with Shaun Rein, the author of “The End of Cheap China” and an expert on Chinese consumer behavior.4 According to Rein, “a lot of commentary has been made regarding retail sales, which only grew 14.7% last month [January 2013].5 This is not to say that Chinese consumption has stopped, rather consumers are moving away from status items.  Instead of buying Louis Vuitton bags to show off, they are now buying lifestyle experiences such as trips overseas.  In short, they are changing habits which is bad for certain segments such as footwear and apparel brands.”

This kind of lifestyle experience and “genre tourism” caters to those wanting to have first-hand exposure to authentic conditions (e.g., ruggedness, safari) and as The Wall Street Journal recently pointed out, is increasingly popular with affluent Chinese in particular.  For example, more than 60,000 Chinese nationals visited South Africa in the first half of 2012, “a 68% jump from the same period a year earlier.”6 And those that visit these locales are “more likely to get private tours and embrace the safari opportunities.”  Consequently, traveling in general is no longer relegated to the top outlier either.  For instance, according to Li Yianqin a professor at Minzu University in China, in terms of tourism economic theory, “when a nation’s per capita gross domestic product exceeds $5,000, foreign travel grows rapidly.”7 And by one estimate from the World Bank, China’s gross national income per capita reached $4,940 in 2011.

Where do these tourists stay?  How can you and your company capitalize on either of these growth trends?

According to the China National Tourism Association in 2009 there were roughly 300,000 hotels on the mainland.8 The 21st Century Business Herald estimates that in 2011 there were 2 million hotel rooms on the mainland, a number that is expected to increase to 5 million by 2016.9 In fact, according to the Boston Consulting Group, “China’s combined domestic and international tourism revenue is expected to increase 14% annually for the next nine years.”10 This would create an estimated $838 billion tourism market.  For comparison, as of 2011 there were more than 4.8 million guest rooms at hotels in the US that generated $137.5 billion in sales.1112

While you may think you could squeeze the margins at the low-end in hospitality with relatively cheaper labor, there are already several domestic hostel and motel chains such as Motel168, Home Inn and 7 Days Inn (all three of which I have stayed in and I recommend) that create a highly competitive environment.13 Rather it is at the top end that has larger margins to work with and is currently comprised of the usual coterie of global hotel chains including Hyatt, Hilton, Marriott and Howard Johnson.14

Howard Johnson is a luxury brand

As I note later in Chapter 11, the management team at Coach handbags has repositioned their products – typically considered mid-level in the US – and through market perception campaigns has moved the handbags towards the higher-end market segment in China.  Their efforts have resulted in large sales growth, which in Q1 2012 increased 40% on the mainland.15 Similarly, Howard Johnson which is considered a mid-level hotel experience in the US is also now repositioned at the top-end of the hotel experience in China (in Chapter 16 I discuss KFC which has benefited from perception marketing as well).  Howard Johnson entered the Chinese market in 1999 and has since expanded across the mainland where it now operates 46 hotels in 29 cities.

Is it too late to enter the market?  Probably not.  In fact, in March 2012, Intercontinental (the biggest hotel company in the world) announced that it would begin rolling out a new brand of hotels in China called Hualuxe to cater to the top-end of the domestic market.  And by establishing a Chinese-focused luxury hotel chain on the mainland, Intercontinental hopes to later roll out similar chains in other countries that are popular destinations for Chinese tourists.  Their plan, which could certainly be emulated in a variety of service industries (e.g., restaurants in Chapter 6), is to build a reputable, trusted brand at home and use a loyalty program to bring back repeat visitors when they are abroad.1617 Furthermore the new Peninsula Shanghai hotel was named the top 5 global hotel for business in 2012 illustrating that there is still room for potential new entrants in this segment.1819

Visa changes and HR challenges

Beginning on January 1, 2013 both Beijing and Shanghai now allow for 72-hour visa free access to their metropolises by tourists connecting to other countries.20 Beijing usually receives 5 million foreign tourists a year and its international airport (北京首都国际机场) was the 2nd busiest globally in 2012 (behind Atlanta’s).  Thus because foreigners typically spend twice as much as local at tourist destinations ($1,000), it is thought that the amount of tourists that are estimated to pass through on this new program will double over the next three years.  Yet expectations should be tempered as previous visa free stays (such as Shanghai’s 48-hour policy) only netted an additional 3,000 visits in 2010.21

With these large tourist numbers, what are the potential issues in moving into the hospitality industry?  What are some of the challenges in setting up a hotel chain?

As I noted above and discuss later in Chapter 15, staffing sticks out towards the top of issues.  For instance, according to a 2008 report by Emmanuel Hemmerle, “there are less than 40 local professionals with proven experience in the Development function within the hotel industry in the whole of China, of which only 10 have over five years experience in the field.”22

You might be thinking that your hospitality company can merely start small and build up slowly from their footholds.  This might be possible but could be problematic in this specific industry.  For example, while those low numbers – 40 local professionals – have probably changed considerably since the Beijing Olympics another concern that Hemmerle’s report touches on is retention.  What happens to competent productive managers in the hospitality industry in China?  According to Rene Schmitt, president of Kempinski Hotels, “[m]y one greatest, and constant, challenge of operating over the past 15 years in China has been to attract and retain staff. We are constantly building and rebuilding our leadership across all the cities in which we operate. You train them, and then you lose them to other hotels or airlines.”23  Kempinksi is a German-based luxury hotel company that operates 14 five-star hotels on the mainland.

Yet with these challenges come opportunities to foreign firms that specialize in training hospitality-related services.  For example, Les Roches is a Swiss-based hotel management school (one of the largest in the world) that teaches all of its courses exclusively in English.  It has teamed up with a local college called Jin Jiang in Shanghai to create a joint international hospitality management training program.  Together they are already partnered with many of the hotel chains – both foreign and domestic – across China.  Can your company provide similar training services?

Hotels Rising

In January 2013 I spoke with Fred Xu, a native of Shenyang who is completing his MBA at a university in Switzerland.  He previously worked for the luxury hotelier, Shangri-La, based in its flagship Shanghai location.24 According to him, “the hospitality industry on the mainland still has large swings in seasonal volatility and a lot of traffic actually depends on the location of the hotel.  For example, China has two “Golden Weeks for Tourism” (黄金周) – May 1st and October 1st.  These peak seasons unsurprisingly bring a large amount of travelers and tourists from across the country which dramatically affects the occupancy of hotels.  In recent years, the gap between slack seasons and peak seasons has diminished.  This is largely because China itself has attracted more and more international travelers throughout the year.  And as a long term consequence, due to the process of ‘reform and opening up’ and globalization in general, the hospitality industry continues to develop and the trend is now towards catering to both business travelers and tourists alike.”

One of the HR challenges for all hotel management according to Xu is that, “traditionally speaking, Chinese people typically do not think the hospitality industry is an ideal career.  Simultaneously, because of the intense competition between graduates and non-graduates alike, people who choose hospitality usually receive a lower salary [e.g., limited supply of positions, large supply of potential employees].  And as a consequence, individuals with less educational background actually prefer to have this job due to its upward promotion mobility despite its initial low salary.  The dilemma facing managers however is that they prefer skilled people, especially those with language skills irrespective of educational attainment.  In their mind, they think it is a waste of resources to cultivate highly educated yet unskilled employees yet in the long-run this has caused a serious outflow of talent as skilled workers can easily move to competing chains.”

In January 2013 I also spoke with Xuerong Su, a native of Sichuan and six-year veteran who is a manager at Mind Group, a real estate company that builds hotels and luxury apartments.25 Her most recent project is developing the new Mandarin Oriental Hotel in Chengdu.  According to Su, “in my opinion, Chengdu is one of the best locations for projects because of its winding mountainous scenery, home of the panda, its incredibly long [2000 years of] history, famous rivers nearby and a well-known culinary culture.  And despite the recent governmental policies that place pressure on housing prices [see Chapter 10] many large luxury projects have been largely unaffected thus far, especially those catering to an affluent demographic.  As a consequence I think there are continued opportunities to build and manage five-star facilities across the mainland, especially in larger cities inland such as Chengdu.”

One of the challenges that Su thinks others should be cognizant of is that “acquiring the necessary technology to build luxury hotels and apartments can be quite cost prohibitive.  Because when you build the tallest building in a city like Chengdu, it will ultimately become a landmark and in fact, most of our projects are landmarks.  Thus to maintain our brand and image we buy the best technology from around the world, hire the most experienced consultants around the world (all of them are from some of the most famous companies in the world) and as a consequence this can be very expensive.  Yet this is a cost of doing business in our industry and something that customers have come to expect.  They want the best and demand it.”  However one challenge that should be acknowledged, although perhaps temporary, is the crackdown on government-financed “extravagant” galas and banquets that have taken place at hotels over the past decade.  As a consequence many hotels have faced a rash of cancelations due to the austerity and “anti-corruption” policies currently being implemented.26

Real estate and marriage

As I mention later in several other chapters, following the 4 trillion RMB stimulus (扩大内需十项措施) enacted in 2008 by the Central People’s Government, there was subsequently a large real-estate bubble that grew across the entire country (fáng dìchǎn pàomò).  As a consequence policy makers have attempted to cool it down, to create a soft landing.27  While the efficacies of these efforts are debatable, there are still opportunities and demand for firms that specialize in high-end condos and townhouses.

In fact, while I touch on it in Chapter 15, the relatively expensive property is one area that is sometimes ignored when recruiting talent from abroad (e.g., paying for expat lodging).  For example, while the residential real-estate bubble is largely considered “plateaued” relative to 2-3 years ago, the most expensive property ever sold in China was recently acquired in Shanghai at a price ($8,000/ m²) that most locals and expats alike typically could not afford (the average salary in Shanghai is roughly $9,000 a year).  Yet there is still continual demand for domestic investment opportunities due to a close capital account (see Chapter 5).28 Furthermore, land sales in Shanghai and Beijing continue to reach new highs due to this issue.  For example, at a recent auction in November 2012, one parcel of land sold for $5,431/m² in Beijing.29 And this phenomenon is not relegated to houses and apartments on the mainland as Hong Kong is now home to the most expensive parking spot globally which costs $82,600.30

One of the reasons that these prices may continue to stay at these relatively high levels in larger Tier 1 cities is that migration to these cities continues from around the country side (roughly 48% of the population still lives in rural areas).  And in order to get married, many would-be brides (and their families) require that the groom provide fully paid for apartments and homes to live in.  As a consequence, the groom and his family pool their savings together to purchase these homes, all in the hopes of marketing their sons as attractive mates (over 60% of home purchases are made with “significant backing from the parents”).3132 One reason why this is important is that due to the gender imbalance (approximately 117 males are born for every 100 females) over the coming decade, there will be 40 million men who will be unable to find a mate.33 Thus women (and their families) are increasingly picky and unsurprisingly demanding when it comes to finding life partners.

With the largest population is it unsurprising that China is the largest wedding market.  According to one estimate 13 million couples got married in 2012 and the wedding industry has grown 10-12% a year over the past three years.34 At $9 billion in purchases during 2011, China became the 2nd largest consumer of diamonds (behind the US, overtaking India) and 4 out of 5 couples in Beijing and Shanghai bought engagement rings in 2012.35 Simultaneously 200 million RMB ($32 million) was spent on wedding dresses (4.77 million sets) in 2011.36 As a consequence, as of 2010 the wedding industry was worth $57 billion and the average wedding now costs 200,000 RMB ($32,000).37 This relatively high price tag relative to annual salaries (the average salary in Tier 1 cities is less than $9,000 a year) is feasible due again to the pooling of family resources (e.g., since many families only have one child, the parents will only host one wedding and can therefore spend more on it).  And it provides opportunities for wedding planners and photographers, perhaps even your firm.

In addition, Christine Ng of Bartle Bogle Hegarty (BBH) recently noted that some of the new management offices in hotels are positions such as “director of wedding” primarily because nearly all weddings are held in hotels.38  This is one additional revenue stream that could be tapped into by the hospitality industry.  And with weddings often times comes babies.  And as a result there are business opportunities for those in the maternity industry.  For example, Gome, one of the largest appliance retailers in China is now investing $150 million in a new maternity-focused e-commerce site. 3940

Takeaway:  As China’s infrastructure and cities develop, more travelers – both domestic and international – will visit and tour regions of the mainland.  The hospitality industry, while filled with both local and foreign incumbents, still has potential room for growth and more competition especially at the top-end.


Endnotes:

  1. Tourism Development in China (2011) from the UN World Tourism Organization []
  2. Plan to reduce minimum stay for foreign workers from Shanghai Daily []
  3. The top 10 tourist source countries to China are: the US, Australia, Singapore, the UK, Malaysia, Canada, India, Germany, Indonesia and France. See China Tourism from TravelChinaGuide []
  4. Shaun Rein is the founder of China Market Research Group and the author of “The End of Cheap China.” []
  5. China Lunar New Year Festival Retail Sales Gain 14.7% from Bloomberg []
  6. For Affluent Asians, Africa’s Appeal from The Wall Street Journal []
  7. Chinese rush overseas for holiday from China Daily []
  8. Building boom in hotel industry from China Daily []
  9. Luxury hotel boom leads to oversupply in China from Want China Times []
  10. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  11. 2011 At-a-Glance Statistical figures from the American Hotel & Lodging Association []
  12. According to STR Global as of February 2012, globally there are 13.4 million hotel rooms.  See Reader quiz: 16% guess worldwide hotel room count correctly from USA Today []
  13. 7 Days Inn was recently acquired by Carlyle Group for $688 million.  See Carlyle-Led Group Buys China Hotel Chain for $688 Million from Bloomberg []
  14. Hilton is the parent company of DoubleTree and operates more than 30 hotels in China. Marriott is the parent company of Ritz-Carlton.  Marriott operates 56 hotels on the mainland and has another 44 being built.  See Marriott International Announces its 100th Hotel in China from Marriott []
  15. Strong overseas, US sales lift Coach 1Q profit from BusinessWeek []
  16. Meet Hualuxe, China’s Newest Upscale Hotel Brand from The Wall Street Journal []
  17. If your firm is looking to cater to Chinese tourists you may be interested in learning from the mistakes of previous companies that have used stereotypes and clichés to conduct business so as to avoid their pitfalls.  See The cultural cliches the travel industry uses for Chinese tourists from Skift []
  18. The Peninsula Shanghai is Acclaimed as the World’s Best Business Hotel by Travel + Leisure Magazine from PRNewswire []
  19. Another Shanghai hotel recently received an international award for its interior design and decoration.  See The Swatch Art Peach Hotel Shanghai wins prestigious prize for daring design at the Tatler Travel Awards 2013 from Travel Daily News []
  20. See Beijing to offer 72-hour visa-free stay for foreign visitors in 2013 from People’s Daily and 45 countries listed for 72-hour visa-free stay in Shanghai from Global Times []
  21. Coming Soon, Visa-Free Beijing Visits from The Wall Street Journal []
  22. Leadership in China’s Hopsitality Industry Begins at the Head Office from Heidrick & Struggles []
  23. Ibid []
  24. Shangri-La will open its 71st hotel this year.  Headquartered in Hong Kong, these are all high-end 5-star accommodations.  See Billionaire Kuok Says His Empire Can Last ’Generations’ from Bloomberg []
  25. Mind Group []
  26. Hotels feel the pinch as banquet business slumps from Xinhua []
  27. While a lot of focus from journalists (both foreign and domestic) has been on real estate prices in Tier 1 cities, bubbles formed in other tertiary cities as well, such as Yingkou in Liaoning province.  See Beijing issues new rules to limit house purchase from China Daily,王安顺:北京房地产调控决不动摇from Yicai and Real Estate Bubble Expands to Third and Fourth Tier Cities from The Economic Observer []
  28. This is not to say that these properties will lay dormant, especially as the middle class grows and rural migrants continue to move to Tier 1 cities.  See Who Says China is Building Too Much? from The Wall Street Journal Shanghai Sells Year’s Most Expensive Land as Market Recovers from Bloomberg []
  29. See Shanghai property sold for US$35,000 per square meter from Want China Times, Average salaries rise by 10.9% from Shanghai Daily, Land price at record high in Beijing, Shanghai from China Daily and Four Land Parcels in Beijing Sold for CNY 3 Bn from ChinaScope Financial []
  30. The $640,000 parking space from CNNMoney and Hong Kong Parking Costs $387,000 as Cash Moves From Homes from Bloomberg []
  31. In terms of average age for first-time home buyers, at 27 years old, Beijing actually has the lowest average in the world, due in part to parents and relatives pooling savings together.  See First-time house buyers are youngest in China: survey from Want China Times []
  32. China’s Hot Real Estate Market Takes Broad Toll from NPR []
  33. See China’s gender imbalance alleviates but still grave from China Daily, The Plight of China’s Favored Sons from The New York Times and Bride Shortage in China from Facts and Details []
  34. In 2009 there were 11.45 million marriages and increased to 13 million in 2012.  See China reports more divorces, marriages in 2009 from Confucius Institute and Loving China: Romance, Dating & Weddings from Thoughtful China []
  35. See China to overtake U.S. in diamond consumption from Xinhua and Diamond Demand Slows in China from The Wall Street Journal []
  36. Profound Evaluation and Development Trend Forecast of China’s Wedding Dress Market, 2011 to 2015 from Huidian Research []
  37. Loving China: Romance, Dating & Weddings from Thoughtful China []
  38. Ibid []
  39. China’s Gome Invests CNY1 Billion In Maternity E-commerce Website from China Tech News []
  40. Dating sites are also increasingly popular for a variety of reasons and by 2014 these sites are expected to generate an estimated $318 million in revenue.  The largest, Jiayun, has 68 million registered users.  Yet another area that may be relatively untapped is the divorce app market.  For example, more than 5,000 couples divorce each day in China.  Roughly 1.96 million couples got divorced in 2009; in 2011 2.9 million couples got divorced.  In fact, the divorce rate has doubled over the past decade in Beijing and Shanghai and is now nearly 40% (for comparison the national divorce rate is 2.29%).  To be even handed, some of these divorces may be related to avoiding regulations on buying 2nd or 3rd homes.  Yet just like in the West, when children are involved, the custody issues require communication between exes.  Thus online communication through apps may be a potential market.  See Ensuring a long marriage with insurance from China Daily, Joint Custody From A Distance from The New York Times, Divorce: Why the big breakup in China? from CNN, China’s Hot Real Estate Market Takes Broad Toll from NPR, China’s divorce rule dubbed ‘Law that makes men laugh and women cry’ from The Telegraph, Over 5,000 couples divorce each day in China during first quarter from People’s Daily, Divorce rate exceeds one third in Beijing and Shanghai from SINA, Shanghai has 2nd highest divorce rate in China from People’s Daily and Divorce app could help couples decide if their marriage has a future from The Guardian.  See also Why China’s Internet Dating Sites Are Booming from Worldcrunch and Dating in a Digital World: Trends in 21st Century China from Knowledge@Wharton []
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