China’s budget inns geared for market shakeup

Home Inns takeover of rival budget hotel chain Top Star was the first of its kind in the embryonic industry. In China Today, Cao Qian asks whether the deal has paved the way for further M&A activity

The first major acquisition deal in China’s embryonic budget hotel industry took place last week when Home Inns & Hotels Management Inc, China’s largest budget hotel chain operator, announced it had purchased the Top Star hotel chain for US$45.39 million (RMB340 million).

The acquisition – the first of its kind in China – could signal the beginning of mergers and acquisitions among domestic budget hotel operators, according to Zhang Minhou, an official with the China Hotel Association (CHA), which represents as many as 9,000 hotels across the country, from budget inns to luxury hotels.

“The acquisition may ‘encourage’ more mergers and acquisitions in the future,” he said. “However, we will still have to see how Home Inns & Hotels Management intermingles the two corporate cultures if the deal is to serve as a successful example for future mergers and acquisitions.”

“The deal, which is aimed at further consolidating Home Inns’ leadership status in China, will help increase its China portfolio to a targeted 330 hotels in over 80 cities,” said Mr Sun, CEO of Home Inns & Hotels, although he declined to say when he expected the target to be met.

According to the deal, Home Inns & Hotels Management will take over Top Star’s 26 hotels in 18 cities in November, keeping the Top Star brand but incorporating the Home Inns & Hotels logo. The acquirer is expected to use its own customer network and managerial expertise to shore up Top Star's operating activities, such as logistics management, cost control, customer services and administration.

Founded in 2002, Home Inns & Hotels Management currently operates 201 hotels with nearly 24,000 rooms across the country, outnumbering its biggest competitor Shanghai Jinjiang Inn Co Ltd, according to the latest statistics released on the website of the China Hotel Association. It raised US$110 million through a NASDAQ IPO in October 2006 and raised another US$120 million by issuing additional shares in May.

China’s budget inn businesses kicked off a decade ago when Shanghai-based Jinjiang Inn Co Ltd opened its first budget inn in the city. Nationwide, there are more than 1,000 budget hotels operating under more than 100 brands. Jinjiang Inn, Home Inns, Motel 168, and 7 Days Inn are the dominant Chinese brands rivaling overseas competitors. As the competition becomes fiercer, major players are all planning to expand their respective businesses to jockey for a better market position.

Take Guangzhou-based 7 Days Inn Group, for example. It is planning to almost double its operations to 150 hotels by the end of the year after receiving an investment of US$95 million from powerful foreign financial institutions such as Merrill Lynch and Deutsche Bank, according to Zheng Nanyan, CEO of the group. Founded in March 2005, 7 Days Inn has opened 62 hotels in more than 20 cities across China as at the end of August.

Building a vast customer base and adopting a diversified strategy is the key to a successful budget hotel operator.

“Hotels like Motel and Hanting have both developed different sub-brands targeted at different customers, which can help them work out a better positioning of their products,” CHA's Zhang said. “At the moment, Motel runs cheap hotels with a string of sub-brands like Motel 168, Motel 268, and QQ, as compared to Hanting’s Hanting Business and Hanting Express.”

A guideline for the development of China’s budget hotel industry to be drafted by the China Hotel Association will probably stipulate specific requirements to help categorize budget hotels into three kinds by the end of the year.

This article was first published in Chinese in China Today on October 31, 2007. The China Perspective accepts no responsibility for the accuracy of the original article.