Budget hotels' expansion 'roomy'

They are also looking to enter different market sectors in the hunt for profits

China's budget hotels are subdividing into different sectors during a rapid expansion that has been ongoing around the country since 2009.

"The segment markets will be the direction for China's budget hotel business in the future," said Ye Bingxi, the senior public relations manager at Home Inns and Hotels Management Inc, which is China's largest budget hotel company by the number of properties.

The middle and high-end business hotel is Home Inns' market position. The company has run its high-end brand, Yitel, since 2008. Yitel, where average prices are about 600 to 700 yuan ($110.04) a day, has four hotels in three cities now.

Yitel will have about 50 hotels by 2015, Home Inns said.

Another significant budget hotel company, 7 Days Group Holding Ltd, is also expanding its business to middle-end hotels. Zheng Nanyan, board chairman of the company, said his first middle-range hotel will be launched this year. Some companies are going downmarket while some are expanding into the upper market.

Jinjiang Inn Co, the fourth largest budget hotel company in China by the number of hotels, has a brand name Bestay Hotel Express targeting the lower end of the market with prices from 100 yuan a night. Bestay Hotel Express has had about 60 hotels around China since 2009.

Smaller players are also trying to find development opportunities from the segment market.

"Pod Inns' position is fashion and the younger group," said Zhu Hui, founder and chief executive officer of Pod Inns.

The company's consumer database also reflects its position.

The main customers are young people aged between 18 and 35 years with 2,000 to 6,000 yuan monthly incomes, he added.

In order to match its position, rooms in Pod's 200 hotels are smaller than other budget hotels. The company pays more attention to other facilities, such as Wi-Fi, Apple Inc computers and Skype to lure its target audience.

Pod's operation was appreciated by venture capitalists with the company receiving $55 million in investment in June. The money will be used for future expansion, Zhu said.

"Pod will expand to more than 500 hotels from its current 200 in the next three years," said Zhu.

Unlike the main industry players, which are working on entering the smaller cities, big cities will be the ambitious small company's main target in the future.

The number of Pod hotels in Beijing will increase from the current 12 to more than 100 by 2015, Zhu said.

While Zhu is working on his ambition for 500 hotels, most of the industry giants can already boast more than 1,000.

Some problems occurred during the big players' rapid expansion and their profits started to shrink from early 2012.

Home Inns suffered a loss in net profits in the first quarter of 2012 because of an operating loss by Motel 168, according to its financial report.

In the second quarter, although the net profit was positive, it still decreased by 85.69 million yuan compared with the same period of 2011.

Home Inns' second quarter financial report shows that the hotel company's occupancy rate decreased by about 5 percentage points in the second quarter of 2012 compared with the same period in 2011.

The company attributed the decline to the lower occupancy rate of the Motel 168 brand, which was purchased by Home Inn in 2011 and is still being integrated.

However, the difficulty of integrating the different products will not stop the budget hotel companies' ambitions to expand.

"We are confident about China's hotel market and Motel 168's performance will improve, after we finish the integration," said Sun Jian, chief executive officer at Home Inns, which plans to increase the number of its hotels from 1,600 and 190,000 rooms to 5,000 hotels in the next decade, a growth rate 2.5 times the speed of the last decade.

"Over the next three to five years, the industry will remain in the fast-expanding stage because budget hotels only account for a very small share in the whole market," said Ye.

7 Days, which is the second largest budget hotel company in China, has similar view on expansion to its rival.

"We will pay more attention to the business development of franchise stores in order to expand faster in the industry," said Lin Yunzhou, CEO of 7 Days.

The company adjusted its 2012 plan from 360 new hotels to 400 in June. In the new plan, the number of new franchises was up to 320 from an original 240 and the plans for directly managed hotels was decreased from 120 to 80.

Franchises are a business model with lower risk, lower investment but higher profit, Lin said.