Development of Budget Hotels

At first glance, the budget hotel sector1

looks

promising over the long term. It offers a

reliable value proposition: a clean, dependable,

inexpensive place to stay for business people and

tourists. These hotels offer better facilities than

most one to two star hotels or guesthouses in

many cities and districts where previously the

economy hotel experience could best be described

as uncomfortable ­­ –­­­all at a similar price level.

There is also the potential to attract three-star

hotel guests, as facilities are very similar and

budget hotel prices are often better value for

money. As a result, guests are likely to trade up

to or switch to budget hotels. Because of the

world economic turmoil of 2008 ­­ –­­­2009, there

are reports that some guests of four to five star

hotels are trading down to budget hotels in order

to cut their potential travel budgets (Exhibit 1). In

addition, the number of business travellers, the

main target group for budget hotels, is forecast to

resume growing.

Occupancy rates, at an average of 82% for 2007,

were also higher than other hotel categories.

In 2008, at the beginning of the economic

slowdown, the leading player, Home Inns & Hotel

Management, reported an average occupancy

rate of 85%, compared with 91.1% in 2007. 2

In a sign that the worst of the global slowdown

may be over for the Chinese budget hotel sector,

occupancy for Home Inns was 92.4% for the

Second Quarter of 2009, compared to 88.2% for

the same period in 2008, and to 82.6% in the

First Quarter of 2009 (Exhibit 2). 3 Budget hotel

chains feel more and more confident, the large

ones –­­­­­Home Inn, Hanting, 7 Days, Greentree

Inn, and Motel 168 ­­ –­­­have announced aggressive

expansion plans in adding over a hundred hotels

each in 2009, split between direct-operated and

franchise hotels.

The long-term industry