China's Hotel Boom Catches A Second Wind

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

Source: Super 8 Super 8 Xian Xidajie - Xidajie, China

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  

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[HOT  Loading...      ()   ], 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.

Wyndham

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[WYN  Loading...      ()   ] 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 International has 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  

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[IHG  Loading...      ()   ] , 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

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[IHG  Loading...      ()   ]  , 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.

"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.