Mid-Range Hotels at 400-500 Yuan a Night Are the New Trend. What Are the Players Thinking?

Really, this is just the last wave of budget-hotel fever, upgraded.

After more than a decade of large-scale expansion, China's budget hotel chains are finally getting serious about telling a different story.

"Over the next ten years, mid-range hotels will sweep across China's hotel industry the way budget hotels once did — sweep across the whole mainland, reshuffle the industry, redistribute the market." That is what Ji Qi said at the 2016 Huazhu World Conference, the group's annual gathering for franchisees, partners and the press. Ji founded Huazhu Group, which runs 12 hotel brand lines and nearly 3,200 hotels. The thing he cares about most now — the only thing he will show up in person to promote — is anything involving Huazhu's own mid-range brand, Ji Hotel.

Since the first hotel to carry the Ji Hotel name opened in 2012, chain-hotel operators across China have kept their eyes on the brand. In four years it has been through three product iterations and grown to 256 locations; by the end of this year it expects to cover 80 cities. It is already the largest mid-range hotel brand in the country.

Home Inns, the old giant of budget hotels, has moved slowly into the mid-range market, but it has made clear how much it now values its Home Inn Selected line. It launched a mid-range brand of its own, Yitel, back in 2008, but poor operations, plus one public scandal, devalued that brand fast. Home Inn Selected began as a modest upgrade of the budget Home Inn Express line; now it looks more like a brand aimed straight at Ji Hotel. Together the two have more than 130 locations open.

As for 7 Days Inn — the first of these chains to list in the US, and the first to delist — it became the multi-brand Plateno Hotels Group, and last year was bought by Jin Jiang, a company that had failed to build mid- and high-end formats of its own. Jin Jiang has produced no real breakthroughs in product development, but it is good at buying its way into a market, and that counts as a method. This April it paid 1.75 billion yuan for an 80% stake in the mid-range brand Vienna Hotel. Add the earlier purchase of Louvre Hotels in France, and its say in the market suddenly carries much further.

In a report last year, QDaily argued that mid-range hotels were already seen as the most promising segment of the hotel business — the place where high-star hotels and budget hotels were starting to "meet." This year we feel that even more strongly.

Growth across the whole budget-hotel industry began to slow around 2010, when a handful of brands — Huazhu, 7 Days Inn, Home Inns — had all but "monopolized" the market. By the first quarter of 2012, Home Inns posted the first loss in its history, and the worry about what came next grew sharper. Expanding into lower-tier cities, working more closely with online travel agencies, upgrading brands: all of those answers were put on the table around then.

But a business built on franchising and licensing to add stores made those answers hard to execute quickly or well. Over the next few years the big budget brands saw revenue, profit, occupancy and average room rate all fall, year after year. Room rates that had sat around 200 yuan for years could no longer carry the weight of property depreciation and rising labor costs.

The change, or the turn, came in 2015, when Huazhu — one of the first to build a mid-range brand — saw room to make money. That year the average rate at mature Ji Hotels, those open more than 18 months, rose 5.5% to 290 yuan. At the strongest location, Ji Hotel Beijing Chaoyangmen, monthly RevPAR (how much money a hotel actually takes in per available room per day, one of the industry's key measures of how a brand is running) peaked at 500 yuan. While the budget brands slid, the mid-range brands were pulling growth along.

"In the early days, budget hotels stood for a kind of style, a trend. Investors stayed in them, senior white-collar workers stayed in them. Today those people are gone, or there are fewer of them," Ji Qi said. But budget hotels once "upgraded" the small inns and guesthouses that came before them by standardizing service, and grew an enormous market in under ten years. The current upgrade from budget to mid-range is meant to do the same thing for new demand — the thing everyone keeps calling "consumption upgrading."

Look only at the timeline: the white-collar workers born in the 1980s and the young people born in the 1990s who now have money to spend — exactly the customers mid-range hotels most want — are the same people who stayed in budget hotels as students, as new hires, even as children on family trips. They lived through almost the entire arc of the industry's rise and decline. With more choices in front of them every year, no wonder they find the model dated.

Nobody with the money to spend passes up a better place to stay. If you had a 500-yuan budget and were picking a hotel in an app, wouldn't you filter out the budget chains (at least the cheapest tier) right away, then hesitate between Ji Hotel, Yitel, the new Hanting, Home Inn Selected, maybe Holiday Inn Express?

Huazhu will now even prompt you, once you have chosen a room, to think about the mattress, the pillows, the towels. Staying in a hotel is no longer a matter of finding somewhere to crash for the night; it is starting to be about comfort and pleasure.

"Young people have real spending power now. If a room is comfortable enough, they won't mind paying a few dozen yuan more, even 100 yuan more. But in the chain-hotel market these past few years, raising a room rate by ten or twenty yuan was a very big deal," Lu Wei, product director of Atour Light, told QDaily. Atour is a hotel startup that arrived on the market in 2012.

Young people want to enjoy themselves, and they want it now. So this round of mid-range expansion, and the excitement with which franchisees are chasing the idea, moves at roughly the speed of the budget-hotel building boom years ago. That owes something to the foundations the chains had already laid — not just brand reputation, but well-located older properties. Some early Ji Hotels were converted Hantings, and the sign out front read "Hanting · Ji Hotel." Of the more than 80 Home Inn Selected hotels opened in 2015, most were upgraded Home Inn Express locations.

New players have arrived too. In 2013, a small hotel called Atour opened beside the city wall at Xi'an's South Gate. Three years later the brand had three sub-lines — Atour Light, Atour Apartment and SLH — and 90 locations.

All of Atour's brands are positioned as standard mid-range hotels. Its guests average 33.5 years old. Co-founder Wang Haijun describes them this way: "They like beautiful things and have a lot of interests — music, painting, reading, photography — a humanistic and artistic streak. They don't believe cheap things are good; they believe good things cost a bit more than average. Most of them are probably employees at big companies, manager-level staff at mid-sized companies, owners of small companies, or freelancers and artists."

Wang picked niche themes like reading and photography for Atour, but before starting the company he spent nearly ten years in market development at two big chain groups, Home Inns and then Hanting. What stayed with him was something he felt in 2012:

"There's a phrase in our industry — addition and subtraction. Back then a lot of people said budget hotels plus a little addition equals Ji Hotel or Yitel, and star hotels minus a little equals a mid-range hotel... Some mid-range hotels weren't really much better than budget hotels, and their RevPAR was still far higher."

Then, once he was actually running Atour, he found his gross margin was 65%, well above the 50% typical of budget hotels. That told him there was a huge market for mid-range hotels around 500 yuan, and that the moment had come. At Ji Hotel, that figure reaches 70-75%.

But design a product by the industry's "addition and subtraction" and what you get is still the so-called standardized hotel, not the sharply themed brands with a point of view you see now. Which fits the other keyword Ji Qi has used for the industry these past two years: "de-standardization."

After several years of a price war that did real damage, nearly every hotel brand has come to see that differentiated service is the better way to win customers. So even though nobody has settled on a standard definition of "mid-range hotel," you will notice that on more and more of the soft-service details, the brands are all heading the same way.

Design and themed rooms, for instance. Heavy use of raw-wood veneer, sofas and carpets in near-natural shades of light gray and light green: that has become the default approach for most mid-range chains, and themed rooms — photography, humanities, tech, industrial — are common. Bringing in a well-known designer for a single hotel, or even a single room, is something budget hotels, which worked off one standard blueprint, never tried;

Then the use of space. In the room, that means the entryway nobody used to bother with, and a glass door in the bathroom to keep the wet and dry areas apart. In the lobby, it means a bigger space to sit with people, and more to read and do. They want you to stay in the hotel longer.

And the amenities, the ones known as the "six small items." Atour has tried L'Occitane toiletries and essential oils from the Chinese brand Afu. Choosing amenity brands for Atour Light, the development team went through more than 20 kinds of toothpaste;

Plenty of other details as well: more USB outlets, black tea upgraded from Lipton to Dilmah, several pillows with a choice of filling, a key-card system in the elevator that makes people feel safe. If the core function of a guest room is still a good night's sleep, these added comforts are what the brands believe consumers will pay a premium for.

But mid-range hotels that meet all of these demands are still few, set against the enormous stock of budget hotels. Ji Hotel has a ninth as many locations as Hanting; Home Inn Selected and Yitel together have a twentieth as many as Home Inn Express. Vienna Hotel, which moved early, has close to 500 locations, the most of any mid-range brand.

Without the scale a chain needs, all of this effort means nothing. Orange Hotel, known for its distinctive interiors and lighting, may have foundered on exactly that: running since 2006, its three brand lines have only 140 locations between them. It is also why the market long assumed that mid-priced independent hotels and small chains were poor value, their margins squeezed from both sides by budget hotels and high-star hotels.

There is also the cost of expanding, which is a subject in itself. For mid-range brands like Ji Hotel, Yitel and Atour, once the model matures and they can order fittings and furnishings through large-scale customization, the fit-out cost per room can be held to about 90,000-110,000 yuan. Budget hotels used to get it down to 50,000-80,000 yuan. Part of that gap is simply that budget hotels spent less on fittings to begin with, but scale is the bigger reason.

So opening more hotels in less time is once again the first priority. Ji Qi says 40% of the hotels Huazhu opens next year will be mid-range brands; Home Inns has set a 30% target of its own. Atour wants its smaller Atour Light line to open 60 locations next year in one push. Lu Wei explains that Atour's own properties, at two or three hundred rooms, demand more of a building, which slows expansion down; Atour Light, which mostly converts existing budget-hotel properties, does not carry that weight.

And if the market keeps paying for mid-range hotels for a few more years, expansion at that pace will certainly bring in more room revenue.

They are not giving up the money beyond the room either. The W Hotel is best known for its hidden front desk and the themed parties it throws in the lobby every night; food, coffee, drinks, even consignment-sold design goods and the performances and talks that partners organize can all become extra hotel revenue.

Lu Wei wants non-room revenue at Atour Light to reach 40% eventually. That means she and the managers at each hotel have to get local influencers, Weibo personalities, local brands, startups and young people who like a good time to drop by the lobby regularly. In the lobbies of Atour Light's first ten hotels she is trying different styles, cafés and small music bars among them, and the same goes for the rooms: "For now I don't want this product to settle into a final form."

Better-equipped rooms, a more interesting stay — either way the point is to keep you in the hotel longer, to make it part of the destination itself. That trend already shows in designer hotels and celebrity-backed guesthouse projects, which cannot compete on price.

Then there are the star-rated brands with long histories, deep brand portfolios and hotels all over the world. Among the models Wang Haijun looked at when he designed Atour, the W belongs to Starwood Hotels & Resorts and Indigo is InterContinental's high-end line. When it comes to serving business travelers at different levels of need, these foreign brands probably do know more.

Fortunately, China's market is big enough. At its peak it held nearly 4,000 budget hotels across different brands. A sizable share of that stock will inevitably be replaced by mid-range brands.

"The mid-range market is very promising over the next ten years, so we have to seize the chance and let our product ride the trend, instead of becoming the one consumers reject later because the product just isn't good enough."

That was Shen Yijun, CEO of the Ji Hotel brand, at the 2016 Huazhu World Conference. Zhang Min, CEO of Huazhu Hotels, said the group has to complete its shift from leading on numbers to leading on quality over the 2015-2019 cycle.

Which may mean that product lines still cleanly separated today will end up competing for the same customers. The new Hanting, whose upgrade is still being worked out, already looks in its rooms like little more than a shrunken Ji Hotel.

"I think the people running mid-range hotels today owe the most thanks to the people who ran budget hotels. They built up the talent, the customers, the properties — they just didn't keep pace with this upgrade." Wang Haijun now believes products have to be refreshed fast, or the big players could still catch up.

Though for now, no big player in this market has taken shape.

And the hotel industry's next round of competition has already begun. It could be more interesting than the budget-hotel wars — and more brutal.

Cover image from Atour's official site and Ji Hotel's official site