This article is adapted from a presentation made in Mandarin on a GLG Asia-Pacific teleconference. As a result of translation, it may not reflect some of the nuances of the original content.
While accounting for only about 8% of the Chinese hotel market, the luxury segment is vibrant and growing. By way of comparison, medium- and medium-to-high-end hotels account for 27%, with economy and low-end hotels representing 65% of the market. That’s far different from developed markets, where the breakdown is typically 20% high end, 50% middle, and 30% economy, including motels. Overall, China has about 2,000 chain hotel brands, providing 4.52 million rooms. Hotel chains account for 26% of the hotel market in China, as compared with 71.8% in the U.S.
COVID-19 and the Chinese Hotel Business
COVID-19 dealt a strong blow to the hotel business overall in 2020, and the industry is still suffering. While Tier I and Tier II city markets are recovering, even generating good growth in some cases, the pandemic still weighs heavily. Last spring, for example, as a result of a sudden outburst of cases in Guangzhou, many exhibitions and other commercial events had to be canceled, dealing a serious blow to local hotels. And while the May Day holiday produced better hotel business than in the pre-pandemic year of 2019, business didn’t reach 2019 levels for the June Dragon Boat Festival holiday. Overall, in 2021, the hotel business in China’s top cities fared about as well as it did in 2019, or just somewhat worse.
Regional Growth for Chinese Luxury Hotels
Unlike top-tier cities where the number of new luxury hotels being built is on the decline, growth is quite strong in Tier III and Tier IV cities, up to 44%. Most of that growth is occurring in the Yangtze River delta area, where 122 new high-end hotels opened. There were another 86 openings in the Bohai Bay area and somewhat more than 80 in the southwest areas of Chengdu and Xi’an. Most of the openings were small hotels — 150 rooms or less — signed up by hotel management companies. Most guests find rates of 300 RMB per room night acceptable and even accept rates of 500 RMB per room night if the quality of service is better and the hotel carries a better-recognized brand. Unlike the time before when price was the only relevant factor, increasingly Chinese travelers are demanding high-quality services.
Differences Between Mid- and High-End Hotels
Differences between mid-end and high-end hotels are becoming increasingly fuzzy. Mid-end hotels are adding more services, such as a tearoom, afternoon tea service, coffee, small meeting rooms, and laundry service, while high-end hotels are trimming services and doing away with amenities like swimming pools and hair and beauty salons to boost their margins. At all levels, many hotels are positioning themselves into very specific niches, such as those that cater to holiday travelers or to families with kids. Some are targeting travelers with pets and others are hosting e-sports events.
At the very highest level, nothing much has changed. If anything, the top-end hotels have become even more luxurious. High-end and super-high-end hotels have been barely impacted by the pandemic because their guests have been largely untouched by the disease. Many younger, wealthier people are willing to spend money on things that live up to their expectations.
Chinese Luxury Hotels Going Forward
Are current market conditions in China conducive to the development of high-end hotels? Over the next 10 years, we are likely to see middle- and mid-to-high-end hotels shift toward the high-end based on increasing consumer spending power and the upward trend in middle-class income.
An interesting fact about the economics of luxury hotels is that many were built as part of large commercial land deals with local governments. Property developers were required to have a five-star hotel built on the land as part of their agreement with the local government. As a result, many hotels sprang up without regard to market demand. Once open, the economics aren’t favorable for many of these hotels, which may not even be able to cover their expenses. But the value of land on which the hotel sits may be appreciating. So, while the hotel’s book doesn’t show much of a profit, its value is rising, making the venture worthwhile.
This hospitality industry article is adapted from the GLG Remote Roundtable “Update on Luxury Hotels in China,” which was conducted in Mandarin. If you would like access to events like this or would like to speak with hospitality industry experts, or any of our approximately 1 million industry experts, please contact us.
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