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China's Hotel Boom Catches A Second Wind

Tuesday, 17 May 2011 | 9:52 AM ET

If there's one U.S. industry that's found a home in China, it's the lodging business.

The 2008 Beijing Olympics and the 2010 Shanghai World Expo offered obvious, one-time incentives for expansion in marquee destinations.

Now the growth is especially visible in so-called second- and third-tier cities most Americans have never head of, but where more Chinese are joining the middle class and staying overnight for business or pleasure — some for the very first time.

"As China's economy develops fast, even in some county towns, we believe this is the real potential market over here," says William Dong, president and CEO of Best Western China, which has 31 properties in the country with plans for 41 more in the pipeline.

Not only are the Chinese touring their own country with pit stops in Hong Kong and Macau, a gaming and resort destination, they're packing for international destinations. By 2020, the volume of China's outbound trips will rival the U.S., and its domestic travel market will be worth about 3.9 trillion renminbi or $590 billion, according to research compiled by the Boston Consulting Group.

"Demand for travel will take off in the next five years," says Vincent Lui, a Hong Kong-based partner at the consultant group, and author of a recent report on China's emerging travel sector.

The Players

China has been a market for western hotel companies for more than two decades. Among the first to break ground was Starwood Hotels & Resorts Worldwide , with its Great Wall Sheraton property in Beijing.

Today Starwood boasts 75 hotels in China with plans to add 25 more for a total of 100 by year's end, says Simon Turner, president of global development for Starwood. China is now Starwood’s second largest hotel market in the world, behind the United States.

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Wyndham has 324 hotels in China including 206 Super 8 hotels, 42 Ramadas, 37 Days Inn properties, and 33 Howard Johnson hotels. Of the approximate 70 new properties that opened in Asia last year, many of them were in China, notes Christine Da Silva, a spokeswoman for Wyndham.

Marriott Internationalhas 130 hotels in Asia including its Renaissance and Ritz-Carlton brands, with plans to develop 70 more.

Half of its new properties will be in China. "We're opening a hotel almost every month," said Arne Sorenson, president and COO for Marriott International,in a recent CNBC interview. Marriott recently opened a Ritz-Carlton in Hong Kong.

InterContinental Hotels Group , whose brands include Holiday Inn and Crowne Plaza brands had 145 hotels open in China, as of February 2011, with an additional 147 properties in the development pipeline.

Ilya Terentyev | Digital Vision | Getty Images

Another big hotel player in the region is Shangri-La , Asia's giant hotel property chain. Shangri-La operates 34 properties in China with plans for about 25 to 30 more, says Kent Zhu, Shangri-La's group director of sales and marketing. "China is a hot market and domestic travel is very big," Zhu adds.

The Stakes

A key factor driving the lodging boom is the growing number of Chinese entering the middle class with discretionary income to enjoy leisure travel.

"They're first timers who have just become middle class and they are traveling in groups," says Zhu of Shangri-La.

Traveling first within China and Asia, like any traveler, the Chinese are gaining experience and then graduating to more far-flung destinations. At Shangri-La's Maldives property southwest of Sri Lanka, about 30 percent of the guests are from China, Zhu said.

Boston Consulting Group forecasts about 100 million Chinese households will enter the middle class during the next decade, earning 5,000 renminbi or roughly $800 U.S. dollars a month. Travelers in this lower middle-class category explore the mainland. Once they hit 10,000 renminbi or $1600 a month, Chinese travelers head for Hong Kong and Macau. Once they earn 20,000 renminbi or $3200 a month, they begin venturing outside China.

Travel Dollars - A CNBC Special Report
Travel Dollars - A CNBC Special Report

"To stay overnight at a hotel, that's something that's still quite new for people who are moving into the middle class in China," says Lui of the consultant group.

The Market

While China's hotel guest mix today is generally is split between business and leisure guests, the ranks of Chinese leisure travelers in China and beyond is expected to grow, reflecting China's broader economy.

More young professionals in their 20s and 30s are traveling with colleagues and ex-classmates on group tours, an easy one-stop entry point for beginners, says Zhu of Shangri-La. Many of China's newly-minted millionaires are in their 30s and 40s, reflecting China's young demographic, notes Lui of the Boston consultancy.

Congee and Mahjong On The Menu

So what are Chinese looking for? Comfort and good food, like every weary traveler. Lui of the Boston consultancy recently flew an American airline between China and Chicago. More than half the passengers were Chinese business travelers, yet there was no Chinese food on the menu and no Chinese films or subtitles on the entertainment menu.

"An authentic bowl of noodles would go a long way to connect with the Chinese traveler," Lui says. InterContinental's Holiday Inn Express in China serves congee, a rice porridge often eaten for breakfast.

Travel Dollars - A CNBC Special Report
Travel Dollars - A CNBC Special Report

And just a hint of Chinese signage makes an impression with travelers.

Starwood and Best Western are among the western hotel chains whose booking websites are available in Chinese.

Another key to China's hotel boom is growth beyond the gateway destinations of Beijing and Shanghai. About 180 Chinese cities have more than one million residents. As urban infrastructure (highways and airports) has developed, so too has the demand for accommodation.

"In these cities, there's a big demand for hotel accommodation," says Dong of Best Western China.

Best Western aims to add about two to three new Chinese hotels a month. If the city offers a local tourist attraction, the guest mix is split between leisure and business. If there's no attraction in the city, about 80 percent of the hotel guests are business travelers, Dong notes.

The Outlook

Of course, all this building activity prompts concern about an overheating China hotel sector. Dong of Best Western says he's seeing hotel occupancy declining among deluxe hotels because of oversupply.

Others in China's hotel market remain cautiously optimistic, with a long-term growth strategy. "It will take a couple of years to absorb supply," Starwood's Turner says. But most of Starwood China hotel owners "are heavily equity capitalized. They don't borrow a lot of debt to do projects. ... They're more likely to sustain the down draft if the bloom comes off the rose a little bit," says Turner. "China will be the market where we have the most rooms coming on line."

Adds Zhu of Shangri-La, China's hotels have "managed a relatively healthy occupancy" despite the large number of hotels that were constructed leading up the Olympics and World Expo. Zhu sees demand outpacing supply in the next two to three years.

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"China is a decades-long growth story ahead of us," Sorenson told CNBC May 2. "So the short-term issues around inflation and the rest of it are things that we take a look at but long term should not have a significant impact," he said.

No matter what the short-term outlook for China's hotels, it's clear the Chinese traveler has arrived.

By 2015, China will have 100 million outbound travelers, the largest in the world, according to Starwood figures. That's more than the number of annual visitors to France, the No. 1 international tourist destination.

And the appetite for leisure travel doesn't apply solely to international borders.

"It's even surprised me. We have business from local residents," notes Dong of Best Western China. Turns out Chinese officials are cracking down on drinking and driving. So socializing and not having to drive home is appealing. "They live in the city but during the holiday, they come to the hotel and stay for one, two nights. ... It's a change of atmosphere and you can chat with friends and play mahjong," a popular table game using small tiles.

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