Wyndham Execs Bullish on Hotels in China
05/20/08 - 06:59 AM EDT
Knowledge @Wharton
The economy hotel sector in China is now undergoing a stage of consolidation. Two years ago, the ready availability of money in the sector -- from initial public offerings, venture capital and bank loans -- caused asset prices to soar. Land and property prices surged and costs rose sharply, reducing the profit margins 
of economy hotels. It was a classic bubble scenario, but the worst is over, according to speakers at the China Hotel Investment Summit, held in Shanghai in late April. The strongest hotel chains are still expanding fast, although more cautiously than before, while some unbranded local hotels are beginning to fail.
and concentrating on enhancing revenue, controlling costs and raising service standards to distinguish themselves from their non-branded competitors. "With the increases in the cost of land and labor, we have to do everything we can to increase revenue," said Mitchell A. Presnick, CEO of Tian Rui, the master franchisor of Super 8 hotels in China, Hong Kong and Macau.
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is hardly in short supply in the economy hotel sector. Jinjiang, Han Ting and Super 8 have all received recent cash infusions, and all the major budget hotel chains in China are adding new hotels. In doing so, the chains have some key advantages over their local, unbranded competitors: They have more money for expansion and brands that, they hope, can deliver loyalty programs, consistent service and reliable room quality. And the sector still has a lot of room to grow. "In the U.S., 60% of all hotels are economy hotels, but in China, only 5% are economy hotels," said Zhang Tuo, COO of Han Ting Inn.
Some companies, including Green Tree Inn Hotels and Jinjiang, take equity in some of their properties, but for the most part, especially on the budget end of the spectrum, the chains prefer to expand by franchising: Someone else owns the property, outfits it and manages it according to the specifications and guidelines of the parent hotel chain. This is the fastest way to expand, although it does bring its own set of risks because the parent company has less control over service and property standards than if it manages the hotel itself.
Lured by the obvious potential of the economy hotel market -- China has 1.3 billion people who are traveling in ever-greater numbers -- many foreign hospitality companies are joining the great expansion race. China Knowledge@Wharton recently interviewed Steven A. Rudnitsky, president and CEO of Wyndham Hotel Group, and Stephen Young, senior vice president of international development of Wyndham Hotel Group for China, East Asia and Indochina, about why the Parsippany, N.J.-based company decided to enter China and what their strategy is going forward.
Wyndham Hotel Group, a business unit of Wyndham Worldwide Corp. (WYN Quote - Cramer on WYN - Stock Picks) -- which reported revenues of $4.36 billion in 2007 -- is one of the largest integrated hotel franchise and management companies in the world, representing more than 6,500 hotels and 550,000 rooms in 59 countries under 10 brands. The group sold approximately 86 million room-nights in 2007.
Wyndham oversees the Howard Johnson, Ramada, Days Inn and Super 8 brands in China, and will soon open an upscale Wyndham Hotel in Xiamen. It has appointed Tian Rui as master franchisee to oversee Super 8, its economy brand's expansion in China. Tian Rui, which received a $50 million cash infusion from Aetos Capital last August, franchises some Super 8 hotels while it directly manages other Super 8s. This year, said Presnick, CEO of Tian Rui, the company plans to open 48 new hotels, which it will manage, while at the same time opening new franchise hotels. "Franchising is the fastest mode of expansion," said Presnick.
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