Orange Hotel's Story Ends Abruptly. What Did a Company That Could Have Been a Star Miss?

It missed the best window for expanding its brand, and it never had the grip to run a chain. At bottom it had no real competitive edge, and in the end it became a story to regret.

Just as midscale hotels were becoming a consumer trend, with more and more people pulling out of the money-losing budget hotel business to get into this market, Orange — the brand that spotted the opening first — suddenly sold itself.

On the evening of February 27, Huazhu Group, which owns Hanting, Ji Hotel and several other hotel brands, announced that it had bought 100% of Crystal Orange Hotel Group from its existing shareholders, Carlyle among them, for 3.65 billion yuan. The more than 200 Orange hotels now open or in preparation will keep running as a separate business.

Soon after, Wu Hai, founder of Crystal Orange Hotel Group, confirmed the deal in a post on his WeChat official account. In it he called the brand a child he had carried at the cost of "almost his whole life, his whole youth." He also said that in front of the early investors and the final buyer he was only a "surrogate mother," obliged to respect their wishes.

At first glance this is one more sad story about a startup that began well, wanted to stay true to itself, and could not keep going. But look back and it doesn't fit: Wu Hai was among the first to see the demand for "consumption upgrading" in the hotel business, and the market behind it. His story, and Orange Hotel's, should not have stopped this easily, this abruptly.

What exactly did they miss? And why did they miss it?

Orange Hotel first stood out on design — and design is the easiest thing to copy

At Hanting, Home Inn or 7 Days Inn, the same faint, mild unpleasantness hung in every budget hotel room. Anyone staying at an Orange Hotel for the first time probably felt something else: a dark palette built out of stone and glass; a lighting system whose switches gave no clue which lamps they controlled; a sound system said to sound good; plus electric curtains, a bathtub. In short, all these room features were crammed into a single room.

In today's language, what Orange Hotel caught with this design and this experience was a slice of guests' demand for "consumption upgrading." Budget hotels were convenient and cheap enough, and you could get a night's sleep, but every other detail and service was missing. Whoever could seize on those weaknesses and fix them hard had a real opening.

Even now, speaking to QDaily two days ago, Wu Hai still treats "a sense of design" as his product's core advantage —

"People used to say that once you're fed and comfortable, you want to experience something different, not something mass-produced and all alike. These days, when people go to a restaurant, it's not necessarily about how good the food is — maybe they're going for the view. The psychological need for beauty never goes away, and our design is different from everyone else's."

To that end he kept a team of more than 100 people inside the company, handling every piece of design work from converting a building to the details of a guest room.

None of this raised the bar that "design" sets in the hotel business. If anything, the midscale brands that came later wore that bar down with a new vocabulary of simplicity, nature and "less is more." That is before counting W, Hotel Indigo, St. Regis and the other high-end chains that arrived in China with foreign hotel groups in recent years, or the "small and beautiful" design hotels and guesthouses.

"The feel of a design has to change as the times change. There's no end to it." Wu Hai knew it himself: even the best and most classic design would struggle to stay fresh to customers for more than a decade, let alone keep up with young people whose tastes shift fast.

That is the paradox facing the "sense of design" he valued so much. In the hotel business it can never become a core advantage; it becomes instead the element easiest to imitate and borrow. Add too few chances to improve and renew it, and it falls behind faster and gets dropped by the market.

Compared with a personality that keeps slipping away, Orange should have taken the steadier, healthier road: back to what the chain hotel business actually is, and build a standardized system for managing and expanding. That is the kind of thing that becomes a barrier — the way McDonald's became a giant not on hamburgers but on standardized chain operation.

But ten years in, Orange still looked like "a hotel," not "a hotel chain"

In Huazhu's release on the acquisition, the three Orange product lines — Crystal Orange, Orange Select and Orange Hotel — came to more than 200 properties. But over 150 of those had opened across the country in the past two years, with help from partners.

That pace was anything but slow. Yet for the first eight years, every Orange product line stuck to company-owned hotels and did not chase expansion speed. Add a personalized design fitted to each site, and by the time Carlyle took a stake in 2012 Orange still had only 25 hotels. It still looked like one hotel after another, with nothing about it that suggested scale.

In those same years, the budget chains led by Hanting, Home Inn and 7 Days Inn were riding franchising and licensing to their peak in China. Take Hanting: in 2010, the year it listed in the U.S., it opened 202 hotels nationwide, nearly doubling its count. A steady flow of franchise fees pushed average annual profit growth at China's budget hotel brands to an extremely high 30-40%.

"On scale and volume Orange really can't compare with Huazhu, and probably not on back-end management either. Ji Qi came out of IT and is very strong on technology. The platform model he built for Huazhu needs a highly systematized infrastructure behind it — the membership system, hotel operations, talent management, a lot of pieces. Once that central support system is working, individual hotels open faster too. Orange's scale and its relatively personalized way of operating couldn't get to that level," Dai Xueying, a director at the hotel consultancy Horwath HTL, told QDaily.

Only at the end of 2014, at Orange Hotel Group's first partner conference, did Wu Hai announce that the company would license out its brand and its management.

"At the time we felt our size and our brand's voice were still fairly small, and that if the brand got bigger, expanding afterwards would be a bit easier. I hadn't really thought about it myself back then. It was only after Carlyle came in that they told us to hurry up and start. Looking back, they were right."

And that is exactly why Orange lost its best chance to expand at scale

Wu Hai's slowness cost him. The buildings in upper-tier cities and prime locations suited to hotels had been taken years earlier by budget hotel brands in a hurry to expand.

By the end of 2012, according to figures from the industry research firm Yingdie Consulting, 29.18% of the nearly 10,000 budget chain hotels in China sat in six cities: Shanghai, Beijing, Hangzhou, Shenzhen, Guangzhou and Nanjing. Hotel density in second-tier cities kept climbing too, and the industry was already talking about moving "down into third- and fourth-tier cities."

In 2014, with a solid footing in first-tier cities, Orange considered pushing its own hotels into second-tier cities. In the attempt it found it did not know the people or the ground, and knew too little about which buildings were good. It ended up leaning on partners with local connections instead.

Had it gritted its teeth and fought the budget brands and the big franchisees for prime buildings, Orange did have a chance. The midscale market then had almost no brand with a clear personality and a well-known name. Next to budget hotels, which were already sagging, Orange had higher room rates and higher gross margins, and because the brand supplied the entire day-to-day operating and management team, it was an investment that could better guarantee a franchisee's return.

Even now, having worked all this out, Wu Hai does not think he would have rolled the model out sooner: "Because on the direction of the product and the design, and the personalized parts, my own ideas only matured after five years."

Meanwhile a group of managers who had grown up in budget hotels — Huazhu founder Ji Qi, 7 Days Inn founder Zheng Nanyan, and Wang Haijun, formerly of Home Inn and Hanting, among them — were thinking about brand upgrades, niche demand and a sense of design too.

At first they may have glimpsed Wu Hai's new market only dimly, through numbers like higher room revenue and occupancy. But they hatched a whole crop of midscale brands — Ji Hotel, Yitel, Lavande, Atour and others — that hit the balance of demand exactly right.

So Orange's costs never came down

When he launched the high-end line Crystal Orange, Wu Hai was startled that fitting out a single room could cost as much as 200,000 yuan, close to what international four- and five-star brands spend.

Then he went through 7 Days Inn's room fit-out line items and ended up accepting the quote: "One more decoration, one more system, and the price goes up." In his interview with QDaily, Wu Hai confirmed that since Crystal Orange was founded, that 200,000 yuan per room has never come down.

Most midscale brands in the industry agree on a benchmark of 100,000 yuan. With custom mattresses and linens, prefabricated bathroom modules, and smaller amenity sizes matched to what guests actually use, many midscale brands have carried their experience from the chain-hotel years into the harder job of running midscale hotels.

Ji Hotel, which controls tightly and counts every item, gets a room down to 90,000 yuan. Atour, roomier and a little more refined, spends about 110,000 yuan.

After all these years in hotels, Wu Hai still does not believe in "economies of scale." He thinks that if you begrudge the money, it is hard to show the innovation and personality he has in mind.

"How much cheaper is it for one hotel to buy 100 TVs than for three hotels to buy 1,000 together? Push it further, to 100 hotels buying at once, and the price is about the same — 10 or 20 yuan a set at most. Wages are the same. You can't open several stores at once and get a discount on wages."

He does admit, though, that many Orange customers can't tell, at first, the difference between a midscale room fitted out for a little over 100,000 yuan and his own Crystal Orange room, which cost 200,000.

Selling at the hottest moment in the market may still be a decent ending

Before Orange put itself on the block, the midscale hotel market was already anything but quiet.

Wang Haijun and his Atour Hotel Group, which had likewise leaned early on direct operation and mid-to-high-end products, closed a $100 million Series C at the end of 2016; in two years its valuation had climbed toward 3 billion yuan.

And in mid-2016, Jinjiang moved fast and paid a low 1.75 billion yuan for 80% of Vienna Hotels, which claimed the largest share of the midscale market with more than 560 properties, lifting the group's room count to fifth in the world.

"Including BTG's purchase of Home Inn and Jinjiang's purchase of Plateno last year, the premiums in the industry's recent deals have been very big, which sets something of a benchmark. This midscale market needs a leader too, and next to the state-owned backing that Jinjiang and BTG have, Huazhu can only use capital to get big and strong as fast as possible," Dai Xueying of Horwath HTL told QDaily.

On one side, valuation bubbles were being squeezed out of brands that had not performed. On the other, capital was chasing new brands that had built real influence. Either way the picture looked bad for Orange, which after ten years had still not gained much ground or much of a voice. Selling itself at the peak of the boom may still have been a good choice.

What's more, Huazhu's fast-expanding platform, and a market slicing itself ever finer, may in fact be a better opening for Orange now that it is a set of product lines inside it.

"Because everyone wants a more personalized experience, the whole midscale brand market will keep getting cut finer. On top of one platform's management, each brand only has to serve a small group of users to survive. Orange's thematic concept is still fairly strong, and joining Huazhu fills out their brand lineup nicely," Dai said.

Wu Hai could have kept Orange in a more dignified way, instead of selling his startup to a bigger company in the same industry for the third time. Back in a 2014 interview with Beijing Business Today he had said Orange's revenue already met the bar for an IPO.

"But if I'd listed the company abroad the way Ji Qi and Zheng Nanyan did, the valuation would have been too low to make any money. List at home, and — by the time I saw how urgent this was, that Carlyle fund had only three years left in its life. A domestic IPO takes two years just to get through the queue, and the major shareholders are locked up for more than a year after that. It would have been hard on them too, so in the end we sold."

The "surrogate mother" line may also mean that through the earlier funding rounds the founding team had already lost most of its equity and its votes — that is, control of the company, the thing that matters most.

Wu Hai doesn't much care what the world makes of the sale, and he doesn't think selling a company is shameful. He was just a little moved this time. "My own character probably did hold the company back a bit. There are advantages to being conservative, and advantages to being aggressive."

But Orange Hotel had landed on a gap in the midscale market and had the chance to grow into a star company. Instead, hesitating and mistiming its moves, it became a story that stops in the middle. Which is a shame, when you think about it.

Cover image from Public Domain Pictures