TRAVEL: Homeinns Chases Mid-Market Hotels With New Brands
Bottom line: A new push into mid-range hotels could provide a boost for Homeinns and other operators, but the relief is likely to be short lived as that part of the market also quickly becomes saturated.
Hotel operators are rushing to fill a relative void in the middle of China’s market, with word that leading budget chain Homeinns (Nasdaq: HMIN) has launched new brands aimed at consumers willing to spend a bit more during their travels. The move looks relatively smart, as growth slows at the top and bottom ends of the market due to overbuilding and a slowing economy that is putting a damper on domestic travel. But Homeinns isn’t the only one to notice this void, and recent similar moves by others could see this middle part of the market also quickly become saturated and oversupplied.
China’s hotel market has been well served at both the high and low ends of the market. Domestic names like Homeinns, Jin Jiang (Shanghai: 600754; HKEx: 2006) and China Lodging Group (Nasdaq: HTHT) now dominate in the budget category, offering a wide range of quality rooms in good locations at low prices. The upper end is also well served by most of the international brands like Marriott (NYSE: MAR) and Intercontinental (London: IHG), which have also built up massive new supply over the last 5 years.
That leaves the middle, which was traditionally underdeveloped due to relative lack of demand. In a nod to that fact, Homeinns said it has recently launched a new brand, whose name roughly translates to Home Inns Choice Hotels. (Chinese article) At the same time, the company is also dipping its toe into the category of higher end hotels for business travelers, with the roll out of another brand called Yihe, whose name is the same as one of the old imperial summer palaces in Beijing.
A Homeinns executive said the company plans to open 80-100 of the new higher end hotels this year, with 30-40 percent of those coming as conversion of existing properties. The rest would come from new properties. He pointed out that per-room investment in the higher-end rooms typically costs about 85,000 yuan ($14,000) to 90,000 yuan, which is about 40 percent more than the typical investment for a budget room. Thus one can assume that room rates for these higher end hotels will probably be about 40 percent more than current budget properties, with a night probably costing 400-600 yuan.
The fact that Homeinnns is converting existing properties hints that the budget segment of the market is currently saturated, and operators are looking for ways to get better productivity from these properties. The rapid slowdown facing the broader market was evident in Homeinns’ latest earnings report, which saw revenue rise a scant 1.6 percent in the fourth quarter, even as it added a net 113 hotels during that period.
Other operators are also looking for ways to tap the mid-range part of the market, with most of the big global operators rolling out their middle-range brands in China over the last 2 years. In a related move, global operator Accor (Paris: AC) in December formed a major strategic tie-up with China Lodging, operator of the budget Hanting brand, in a move that also looked aimed at tapping the middle part of the market. (previous post)
I personally prefer the China Lodging approach of using partnerships to tap the market versus Homeinns, which is trying to do the same thing by itself. That’s because a company like Accor brings a wealth of experience and other connections that China Lodging can tap to move more efficiently into the segment. Investors also seem to agree, with China Lodging shares outperforming Homeinns over the last 52 weeks. But it’s also worth noting that shares of both companies are down more than 10 percent over that period, reflecting the broader challenges the industry is facing due to oversupply and a business slowdown from the slowing Chinese economy.
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