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Performance comparisons of hotels in China
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Hospitality Management 24 (2005) 57–73
Performance comparisons of hotels in China Ray Pinea, Paul Phillipsb,* a
School of Hotel and Tourism Management, The Hong Kong Polytechnic University, Kowloon, Hong Kong, SAR b Kent Business School, University of Kent, Canterbury, Kent CT2 7PE, UK
Abstract China’s hotel industry has only really existed since 1978. In that time, it has grown in size and complexity of ownership. Quality has been improved by the introduction of foreign management techniques and quality standards, for example the star-rating system of hotel classification. This paper compares performance of hotels using various hotel groupings according to ownership, size and star rating. The comparisons indicate that better performance occurs in hotels that have foreign ownership connections (especially those linked to Hong Kong, Macau and Taiwan partners), those that are bigger and those which have a higher star rating. According to the World Tourism Organization, China is forecast to become the world’s number one tourist destination by 2020. This paper also identifies the major issues facing the Chinese hotel industry and the government as they face this astounding prediction. r 2004 Elsevier Ltd. All rights reserved. Keywords: Hotels; China; Performance
1. Introduction China’s international tourism industry only got underway as a result of the Open Door Policy in 1978. By the year 2001, China had 33 million tourist arrivals spending US$17.8 billion China National Tourism Administration (CNTA, 2002). By 2020 China is forecast to become the world’s number one tourist destination, with annual arrivals of 130 million (WTO, 1999). In addition China’s own increasingly affluent
*Corresponding author. Tel.: +44-1227-824417; fax:+44-1227-761187. E-mail addresses: [email protected] (R. Pine), [email protected] (P. Phillips). 0278-4319/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijhm.2004.04.004
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population is creating a significant domestic tourism sector. There were 784 million domestic travellers in 2001 with revenues of around US$40 million (CNTA, 2001). This tourism activity has stimulated China’s hotel industry to grow from a base of only 137 hotels with 15,539 rooms in 1978 to a 2000 level of 10,481 hotels and 948,185 rooms (see Table 1). In that time, the number of hotels has grown at an annual average of 22.5%, with rooms and beds increasing annually by an average of 21.5% and 22.2%, respectively. Despite such spectacular growth, China will need considerably more hotels to satisfy the future demand from increases in both international and domestic tourists. The various elements to be considered in hotel development decisions include current and future market demand, location factors, tourism trends and so on. Another factor to be considered is the performance levels of existing properties in China. This paper uses available secondary data in an attempt to identify some overall performance comparisons between hotels in China. The secondary data used includes numbers of hotels and rooms and occupancy levels, along with revenue and fixed asset values. It should be noted that actual profit levels are not available for different hotel categories, thus comparisons are mainly based only on revenue and fixed asset values.
2. Comparisons by hotel ownership In order to ease China’s hotel shortage after the Open Door Policy, a diversification and decentralization policy of hotel investment was implemented in 1978. Diversification of investment did accelerate hotel development (Liu and Liu, 1993). However, decentralization resulted in a variety of different types of hotel ownership which until 1999 were listed as State-owned, collective, private, alliance, stock, foreign-invested and Hong Kong-, Macau-, and Taiwan-invested (CNTA, 2000, p. 92). The list became even longer in 2000 with the removal of ‘‘stock’’ and the addition of four more categories; share-holding co-operative, limited liability, limited liability shares and others (CNTA, 2001, p. 92). The complicated ownership pattern has resulted in a lack of coordination of decision-making in hotel construction (Tisdell and Wen, 1991). Available management systems are equally varied. This complexity of ownership and management creates unique problems for expansion and growth (Pine, 2002). State ownership (which might be national, provincial, regional or municipal) is still the dominant ownership type, accounting for more than 60% of all hotels and rooms (Table 2). State ownership can cause many problems, the main one being failure to separate hotel management and ownership (Tisdell, 1990) leading to poor monitoring of State assets. It might be assumed that State ownership could create some sort of grouping amongst hotels within a particular State entity. However, most State-owned properties exist as independent units, giving them the joint disadvantages of small operational size plus the bureaucratic restrictions attached to State ownership. An example of the difficulties of such a situation is the China Post & Telecom Tourism Group, a newly organized holding company under the Ministry
Table 1 China’s hotel statistics: 1978–2000 Year
Beds
Numbera
Annual increase (%)
Numbera
Annual increase (%)
Numbera
Annual increase (%)
137 150 203 296 362 371 505 710 974 1283 1496 1788 1987 2130 2354 2552 2995 3720 4418 5201 5782 7035 10,481
— 9.5 35.3 45.8 22.3 2.5 36.1 40.6 37.2 31.7 16.6 19.5 11.1 7.1 10.5 8.4 17.4 24.2 18.8 17.7 11.2 21.6 49.0
15,539 17,149 31,800 43,300 51,600 59,600 77,000 107,740 147,500 184,710 220,165 267,505 293,827 321,116 351,044 386,401 406,280 486,114 594,196 701,736 764,797 889,430 948,185
— 10.4 85.4 36.2 19.2 15.5 29.2 39.9 36.9 25.2 19.2 21.5 9.8 9.3 9.3 10.1 5.1 19.6 22.3 18.1 8.9 16.2 6.6
30,740 34,021 76,192 101,084 122,696 141,627 171,888 242,913 332,321 400,727 478,321 580,900 634,300 679,458 737,674 811,521 834,818 987,275 1,199,714 1,411,708 1,524,224 1,769,825 1,855,965
— 10.7 124.0 32.7 21.4 15.4 21.4 41.3 36.8 20.6 19.4 21.4 9.2 7.1 8.6 10.0 2.9 18.3 21.5 17.7 8.0 16.1 4.9
Occupancy (%)a
Av. no. rooms/hotel
Av. no. beds/hotel
Av. no. beds/room
— — — — — — — — — 66.3 67.9 57.2 59.4 62.5 67.0 67.7 62.2 58.1 55.3 53.8 51.7 53.4 55.9
113 114 157 146 143 161 153 152 151 144 147 150 148 151 149 151 136 131 135 135 132 126 90
224 227 375 342 339 382 340 342 341 312 320 325 319 319 313 318 278 265 272 271 264 252 177
2.0 2.0 2.4 2.3 2.4 2.4 2.2 2.3 2.3 2.2 2.2 2.2 2.2 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0 2.0 2.0
CNTA (1979–2002), Yearbook of China tourism statistics. Other figures calculated based on CNTA data.
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a
Rooms
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1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Hotels
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Table 2 Comparison of size of China hotel by ownership type in 2000 Hotel ownership State-owned Collective Share-holding co-operative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded Total a
No. of hotels
%a all hotels
No. of rooms
%a All rooms
Av. no. of rooms/hotela
6646 1280 69
63.4 12.2 0.7
593,361 79,218 10,766
62.6 8.4 1.1
89 62 156
176 383 395
1.7 3.7 3.8
27,711 31,016 37,440
2.9 3.3 3.9
157 81 95
324 375 414
3.1 3.6 4.0
12,872 24,185 73,659
1.4 2.6 7.8
40 64 178
419
4.0
57,957
6.1
138
10,481
100.0
948,185
100.0
90
Calculated.
of Information Industry (MII) with the specific purpose of bringing MII hotels together in one group. However, most of MII’s hotels are owned in the name of local bureaus that are unwilling to shift their assets to the holding company (Qi, 2001). Table 2 shows that the great majority, 63.4%, of hotels are State-owned with another 12.2% being owned by collective share-holding co-operatives. All of the other eight categories of ownership comprise of no more than 4% each. In terms of rooms, again State-owned and collective share-holding co-operatives hotels have the majority of rooms, 62.6% and 8.4%, respectively. However, despite their relatively very small number of hotels (less that 8% of all hotels), the two overseas-funded ownership categories, Hong Kong-, Macau-, Taiwan-funded (HMT-funded) and Foreign-funded, provide almost 14% of all rooms (7.8% and 6.1%, respectively), indicating that these categories of hotels are usually bigger in size or capacity. It can also be seen that the average size of State-owned properties is only 89 rooms, which is just below the overall average of 90 rooms. The two overseas-funded ownership categories average sizes of 178 and 138 rooms, which demonstrates the nature of overseas hotel investors (Table 3). In general, the proportion of total hotel revenue is somewhat similar to the proportion of total rooms for most ownership categories. However, there are three main exceptions to this observation. State-owned properties only take 53.9% of total revenue whilst having 62.6% of all rooms. The two overseas-funded ownership categories, HMT-funded and Foreign-funded hotels account for 16.1% and 9% of total revenue, but only have a room share of 7.8% and 6.1%, respectively. With regard to overall performance HMT-funded hotels achieve the highest level of
Hotel ownership
Total RMB 8.15 to US$1. a
Calculated.
RevPara (RMB)
RevPar (US$)
% occupancy
53.9 6.5 1.0 1.5 3.8 4.7 1.2 2.5 16.1
214.12 193.01 208.23 123.59 286.40 292.69 213.19 240.37 515.07
26.26 23.67 25.53 15.16 35.12 35.89 26.14 29.48 63.16
54.3 53.1 61.0 55.3 59.2 60.2 54.9 56.6 63.6
7,776,660,000
9.0
366.61
44.96
58.9
86,226,540,000
100.0
248.47
30.47
55.9
No. of rooms
Total revenue (RMB)
6646 1280 69 176 383 395 324 375 414
593,361 79,218 10,766 27,711 31,016 37,440 12,872 24,185 73,659
46,500,090,000 5,595,970,000 820,490,000 1,253,510,000 3,251,170,000 4,010,730,000 1,004,380,000 2,127,720,000 13,885,820,000
419
57,957
10,481
948,185
% of total revenue
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State-owned Collective Share-holding co-operative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded
No. of hotels
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 3 Comparative statistics of China hotels by ownership type in 2000
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RevPar US$ 63.16 and the highest level of occupancy at 63.64% against an overall average for all hotels of US$ 30.47 and 55.85% (Table 4). State-owned properties only account for 50.4% of fixed assets, which is a disproportionate share, if the percentage shares of hotels 63.4%, rooms 62.6% and revenue 53.9% are considered. Relatively low fixed assets may signal rather poor physical quality of properties, which could be one reason to explain lower revenue earning ability of State-owned properties. Conversely, using a similar argument to the one applied to State-owned hotels, it might be assumed that HMT-funded and Foreign-funded hotels are of a higher quality, as they account for 31.9% and 24.4% of fixed assets and therefore can demand higher rates. These higher rates translate into higher RevPar. Evidence of under performance is revealed by the fixed asset turnover (FAT), which assess the effectiveness of the use of fixed assets in generating revenue (Coltman and Jagels, 2001). Coltman and Jagels state that in the hotel industry the FAT could vary from as low as one-half to a high as two or more times per year. Foreign-funded hotels may be of a higher quality, but their FAT of 25% suggests that management should look closely at their deployment of fixed assets, which average US$65,958 per room. HMT-funded are performing better, but with a FAT of 34% and an average of US$67,685 per room, this is not a healthy sign. The under performance of all hotels is illustrated by the fact that the FAT is 34% for the entire population.
3. Comparisons by hotel size With reference to Table 1, it can be seen that the average size of hotels in China has varied over the years, but with no discernible chronological pattern. The average number of rooms per hotel is typically in a range between 110 and 160. However, in 2000 the average size dropped down to just 90 rooms. Closer examination of the statistics shows that from 1999 to 2000 the total number of hotels increased by 3446 whilst the number of rooms went up by 58,755. This averages only 17 rooms per hotel opened during that year. It is not known whether this means that very small hotels were built or that some bigger ones closed (or a combination of both factors). As shown in Table 5, the great majority (72.2%) of hotels in China are smaller than 100 rooms in size. Only 129 properties (1.2% of total) are bigger than 500 rooms with another 309 (2.9%) being in the 300–499 rooms size range. However, according to calculations based on the CNTA Yearbook statistics, the average size of those hotels which are in the largest size category is 1863, indicating that China has some very large properties. Comparing size of hotels to revenue (see Table 6), the proportion of total revenue is generally quite similar to the proportion of total rooms, with two main exceptions. First, hotels in the 300–499 rooms range account for 16.9% of total revenue whilst having only 11.8% of all rooms. Second, hotels in the 100–199 rooms range have 27.9% of rooms but only 21.8% of revenues. Bearing in mind that the average size of the two overseas-funded ownership categories is 178 and 138, a mixture of the
Hotel ownership
No. of hotels
50.4 13.1 1.5
36.5 33.4 44.1
214,924 211,266 172,676
26,354.87 25,906.36 21,174.25
4,752,090,000 8,537,140,000 13,820,200,000
3.7 6.7 10.8
26.4 38.1 29.0
171,487 275,250 369,129
21,028.51 33,752.24 45,264.17
1,004,380,000 2,127,720,000 13,885,820,000
2,739,380,000 5,371,880,000 40,657,480,000
2.1 4.2 31.9
36.7 39.6 34.2
212,817 222,116 551,969
26,096.50 27,236.81 67,684.73
57,957
7,776,660,000
31,174,140,000
24.4
24.9
537,884
65,957.57
948,185
86,226,540,000
253,174,930,000 100.0
34.1
267,010
32,741.88
6646 1280 69
593,361 79,218 10,766
46,500,090,000 5,595,970,000 820,490,000
127,527,490,000 16,736,100,000 1,859,030,000
176 383 395
27,711 31,016 37,440
1,253,510,000 3,251,170,000 4,010,730,000
324 375 414
12,872 24,185 73,659
419 10,481
% of total fixed assets
Calculated.
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Total fixed assets/room (US$)
Total fixed assets (RMB)
RMB 8.15 to US$1. a
Total fixed assets/room (RMB)
Total revenue (RMB)
State-owned Collective Share-holding cooperative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded Total
FATa (%)
No. of rooms
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 4 Comparative fixed assets turnover statistics of China hotels by ownership type in 2000
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Table 5 Comparison of hotel size of China hotels in 2000 Hotel size No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
No. of hotels
% of all hotels
No. of rooms
% of all rooms
Av. no. of rooms/hotela
129 309 547 1926 7570
1.2 2.9 5.2 18.4 72.2
240,301 12,285 131,403 64,528 199,668
25.3 11.8 13.9 27.9 21.1
1863 363 240 137 26
10,481
100.0
948,185
100.0
90
Calculated.
arguments put forward in the previous section may well apply to these two exceptions (i.e. they tend to get a relatively bigger proportion of revenues and higher occupancy rates). With regard to occupancy levels, it is clear that higher star-rated properties are larger, and these higher-rated hotels tend to get better occupancies. It also ties to ownership, as HMT-funded hotels are on average the bigger properties, and, as shown previously, that ownership category achieves the best occupancy rates. Table 7 shows that hotels in the 500 or more rooms range have 16.5% of total fixed assets, but this generates 25.1% of revenue. In contrast, hotels in the 300–499 rooms range have 20.3% of fixed assets, but this generates 16.9% of revenue. The problems of the hotels in the 300–499 room range are highlighted by at least three statistics. First, the total fixed assets per room of US$56,236 for hotels in the 300–499 room range is more than two and half times the corresponding figure of US$21,338 for hotels in the 500 room or more range. In addition, the FAT for hotels in the 300– 499 room range is only 28.3%, which is in comparison to 51.7% for hotels in the 500 room or more range. Also, the RevPar for hotels in the 300–499 room range is US$43.47, which despite being the highest return for all properties is insufficient to generate adequate returns to investors.
4. Comparisons by hotel star rating Whilst the quantity of hotels in China increased relatively quickly, quality standards of most hotels remained poor. Service problems were often attributed to the wide variation of hotel facilities and services, the lack of uniform hotel operation standards, inexperienced work-force (Tisdell and Wen, 1991), inadequate and unreliable information for marketing and planning (Liu and Liu, 1993) and lack of coordination in hotel administration owing to the complicated bureaucratic and financial structure (Zhao, 1989). In 1988 the CNTA established a star-rating system for hotels. This system, adapted from international standards, aimed to provide clear differentiation of
No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
129 309 547 1926 7570
240,301 112,285 131,403 264,528 199,668
21,605,990,000 14,567,170,000 13,454,170,000 18,756,010,000 17,843,190,000
10,481
948,185
86,226,530,000
RevPara
RevPara (US$)
% occupancy
25.1 16.9 15.6 21.8 20.7
245.66 354.46 279.75 193.73 244.16
30.12 43.47 34.30 23.76 29.94
63.8 61.2 58.2 55.2 51.5
100.0
248.47
30.47
55.9
% of total revenue
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Hotel size
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 6 Comparative statistics of China hotels by size in 2000
65
66
No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
129 309 547 1926 7570
240,301 112,285 131,403 264,528 199,668
21,605,990,000 14,567,170,000 13,454,170,000 18,756,010,000 17,843,190,000
41,815,770,000 51,494,620,000 4,739,250,000 59,149,640,000 55,975,650,000
10,481
948,185
86,226,530,000
253,174,930,000
FATa (%)
Total fixed assets/room (RMB)
Total fixed assets/room (US$)
16.5 20.3 17.7 23.4 22.1
51.7 28.3 30.1 31.7 31.9
174,014.13 458,606.40 340,473.58 223,604.46 280,343.62
21,338.34 56,236.22 41,750.29 27,419.31 34,376.90
100.0
34.1
267,010.06
32,741.88
Total fixed assets % of total (RMB) fixed assets
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Hotel size
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Table 7 Comparative fixed assets turnover statistics of China hotels by size in 2000
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hotels and improve facilities and services. Through the successful implementation of this system, a national hotel operation standard was established and the hotel administration process was streamlined (Wei, 1994; Liu and Liu, 1993). The Chinese hotel industry has gradually moved towards a greater degree of standardization and professionalism (Liu and Liu, 1993), which provided a base for uniformity and networking of hotels. In 1993 the star-rating system was adopted as a national standard across the country. At that time, star-rated hotels totalled 1186 representing 46.47% of all hotels and 60.04% of rooms. The system was further revised in 1998 according to industry practice, which included the rating of facilities, equipment, maintenance, cleaning, hygiene, service, quality and guest satisfaction. By 2000 star-rating had been applied to 6029 hotels, i.e. 57.52% of all hotels and 62.71% of rooms (CNTA, 2001). In 2001 this number had risen to 7358, but due to changes in the reporting of statistics no data is available for non-star-rated hotels (CNTA, 2002). As shown in Table 8, there are very few properties in the 5- and 4-star categories, only 1.1% and 3.4%, respectively. However, these properties are quite large within a China context, average size being 386 rooms for 5-star hotels (4.8% of total rooms) and 241 for 4-star hotels (9% of total rooms). The contrast of hotel performance can be illustrated by comparing the proportions of totals of hotels, rooms and revenue, where there are some quite large discrepancies. Five-star hotels, whilst having only 1.1% of hotels, 4.8% of all rooms, account for 15% of revenue (see Table 9). However, 2-star hotels have 29.2% of hotels, 21.6% of all rooms, but only account for 12.4% of revenue. The RevPar figures for 5-star hotels of US$95.67 and US$17.4 for 2-star highlight the discrepancy. The FAT for all star-ratings is less than 50%. If one considers the total fixed asset per room, which ranges from US$97,022 for 5-star hotels to US$9787 for 1-star, this is indicative of the performance problems of the entire population (see Table 10). Using the same argument as the one applied to HMT-funded hotels about ownership, it might be assumed that higher star-rated properties can achieve higher occupancy levels have a higher quality and therefore can demand higher rates. A similar, though not so marked situation, exists with 4-star hotels. This category has Table 8 Comparison of size of China hotel by star rating in 2000 Hotel star 5 4 3 2 1 0 Total a
Calculated.
No. of hotels
% of all hotels
No. of rooms
117 352 1899 3061 600 4452
1.1 3.4 18.1 29.2 5.7 42.5
45,208 84,890 231,244 205,110 28,226 353,507
10,481
100.0
948,185
% of all rooms 4.8 9.0 24.4 21.6 3.0 37.3 100
Av. no. of rooms/hotela 386 241 122 67 47 79 90
68
5 4 3 2 1 0 Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
117 352 1899 3061 600 4452
45,208 84,890 231,244 205,110 28,226 353,507
12,908,810,000 14,143,870,000 21,600,240,000 10,653,460,000 1,064,280,000 25,855,880,000
10,481
948,185
86,226,540,000
RevPara (RMB)
RevPara (US$)
% occupancy
15.0 16.4 25.1 12.4 1.2 30.0
780.17 455.23 255.22 141.91 103.02 199.84
95.67 55.82 31.30 17.40 12.63 24.51
65.0 63.1 58.7 53.3 47.0 53.0
100.0
248.47
30.47
55.9
% of total revenue
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Hotel star
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Table 9 Comparative statistics of China hotel by star rating in 2000
5 4 3 2 1 0 Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
Total fixed assets (RMB)
117 352 1899 3061 600 4452
45,208 84,890 231,244 205,110 28,226 353,507
12,908,810,000 14,143,870,000 21,600,240,000 10,653,460,000 1,064,280,000 25,855,880,000
35,769,300,000 44,606,120,000 62,712,240,000 26,367,440,000 2,252,830,000 81,467,000,000
10,481
948,185
86,226,540,000
253,174,930,000
FATa (%)
Total fixed assets/rooms
Total fixed assets/room (US$)
14.1 17.6 24.8 10.4 0.9 32.2
36.1 31.7 34.4 40.4 47.2 31.7
791,216.16 525,457.89 271,195.10 128,552.68 79,814.00 230,453.71
97,022.21 64,433.83 33,255.07 15,763.66 9,787.12 28,259.19
100.0
34.1
267,010.06
32,741.88
% of total fixed assets
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Hotel star
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Table 10 Comparative fixed assets turnover statistics of China hotels by star rating in 2000
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9% of rooms and accounts for 16.4% of revenue and 17.6% of fixed assets. Revenues are greater than the proportion of rooms, but fixed assets as a proportion is slightly bigger than revenue, whereas for 5-star hotels fixed assets proportion was slightly lower than revenue. The relative proportions of these same factors are quite equal for 3-star hotels, but the situation is reversed for 2-, 1- and 0-star-rated properties which all have a proportion of total rooms which is bigger than the revenue share and a low proportion of fixed assets.
5. Conclusions and managerial implications When considering hotels grouped by ownership, it would seem that the Hong Kong-, Macau-, Taiwan-funded properties produce the best performance levels. This is probably largely due to them applying international standard business and management techniques. However, they are probably also better connected within China and have a better understanding of the local environment. Anyone planning to do business in China must be attuned to the unique business practices that exist there. In terms of hotel size, the situation seems to be the bigger the better. There are obvious economies of scale to be gained from having a bigger property, especially when those properties are so big (average size of those hotels in the above 500 rooms group is almost 2000 rooms). In addition, these larger properties are more likely to be Hong Kong-, Macau-, Taiwan-funded properties, and as discussed in the previous paragraph, these hotels perform better. Furthermore, the bigger hotels are usually in the higher star categories, and, as will be argued below, these tend to be the better performers. With regard to star rating, it appears that overall the higher the star rating the better the performance. This is almost certainly related to the fact that the higherrated properties are associated with foreign partners and this brings in better, more experienced management techniques, modern technology and high spending (usually overseas) guests. More attention should be given to lower star-rated properties, where a very large volume of business exists and where most future volume growth is likely to occur. Non-star hotels which account for 42.5% of the hotels and 37.3% of rooms is an area that is in need of much more detailed analysis. Overall, the performance of the China hotel industry should be a concern for all stakeholders, especially those with a domestic-invested orientation. With regard to profit levels, it can be shown that overseas-invested properties continually outperform domestic-invested ones. Table 11 shows that since 1994 profit levels for all overseas-invested hotels have been higher than for domestic-invested hotels. Even in the latter 3 years when the industry as a whole made losses, the level of loss was smaller for overseas-invested hotels. Indeed, in 1997 although the whole industry recorded a positive profit rate of 1.0%, overseas-invested hotels had an overall profit of 5.67% whilst domestic-invested hotels recorded a loss of 2.56%. Again, this is assumed to be a function of the overseas-invested hotels employing international
Domestic revenue (RMB 00,000)
1994 1995 1996 1997 1998 1999 2000
2,761,585 3,205,737 4,1103,914 4,610,410 5,234,359 5,770,155 6,456,406
Invested profit (RMB 00,000) 231,220 121,630 63,439 117,814 307,023 371,233 254,825
Hotels profit (%) 8.37 3.79 1.55 2.56 5.87 6.43 3.95
Overseas revenue (RMB 00,000)
Invested profit (RMB 00,000)
Hotels profit (%)
2,721,462 3,155,025 3,209,776 3,513,182 2,733,953 2,687,334 2,166,247
307,372 292,2117 271,991 199,212 158,563 165,136 9465
11.29 9.26 8.47 5.67 5.8 6.14 0.44
Source: Yearbook of China tourism statistics-supplements (1995–2001). China National Tourism Administration, China Tourism Press, Beijing.
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Year
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Table 11 Comparisons of profit levels for domestic-invested and overseas-invested hotels from 1994 to 2000
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standard business and management techniques and having access to higher spending guests. The FAT clearly shows the ineffectiveness of the deployment of fixed assets. Hotel general managers should be enhancing the deployment of public space (lobbies, corridors) and customer facing areas such as guest rooms and restaurants. Moreover, the FAT may be understated, as the ratio can be effected by the use of old assets (low values), which being lower, tends to increase the FAT. Therefore, if hoteliers need to replace old assets this would reduce the FAT. Another relevant issue could be the fact that hotel industry financial executives are not optimizing the returns from new capital expenditure projects. For example, despite using a variety of capital-budgeting techniques such as payback, net present value and internal rate of return, the discount rate being used may be less than the cost of capital. This would lead to investors preceeding with projects that are giving a return less than the desired rate of return, which would exacerbate hotel performance at the individual, group and industry level. China, like many other countries starting to develop a hotel industry, has seen most effort of investment and higher-quality management targeted at the larger, more luxurious properties. The main impetus for this is usually to create a supply of good-quality hotels to satisfy international visitor demand. However, this market sector is limited in size, and although there is certainly still more room for development of such properties, especially in secondary cities and smaller towns, the bigger volume lower-price market of the future should be worth examination for new developments. As China’s own domestic tourism continues to grow, and the international demand from more low-price oriented travellers increases, there may be a strong need for budget level hotels. But not the ones typically available now in China, but rather ones that are more efficient in their building and planning, and which have high levels of operational capabilities. Hotel operators and investors in more developed hotel markets tend to rely on statistics such as occupancy, average daily rate and revenue per available room to assess performance. By analysing and interpreting these key indicators hoteliers can benchmark their performance. However, any statistic used must be an effective yardstick of the balance between hotel room supply and demand. Several assumptions had to be made with some of the calculated data. For example, in this paper RevPar was calculated without data for room nights actually sold. The provision of more detailed and credible data by hoteliers to enable better analysis would certainly be useful to allow more accurate reflections about the continued expansion of China’s hotel industry. Also, there are opportunities for practitioners and academics to draw conclusions and take actions from our findings.
References CNTA, 1979–2002. The Yearbook of China Tourism Statistics. China National Tourism Administration, China Travel and Tourism Press, Beijing. Coltman, M., Jagels, M.C., 2001. Hospitality Management Accounting 7th Edition. Wiley, New York.
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Liu, Z.Q., Liu, J.C., 1993. Assessment of the Hotel Rating System in China. Tourism Management 4 (6), 440–452. Pine, R., 2002. China’s hotel industry: serving a massive market. Cornell Hotel and Restaurant Administration Quarterly 43 (3), 61–70. Qi, P.S., 2001. Growth of China’s hotel chains and their future expansion. Unpublished Masters Thesis, The Hong Kong Polytechnic University, Hong Kong, SAR. Tisdell, C., 1990. Separation of ownership and management, markets, their failure and efficiency: possible implications for China’s economic reforms. Asian Economies, June, pp. 41–55. Tisdell, C., Wen, J., 1991. Foreign tourism as an element in PR China’s economic development strategy. Tourism Management 12 (1), 55–67. Wei, X.A., 1994. Road of China’s hotel management companies. Tourism Survey & Research 11, 9–12. WTO, 1999. Tourism 2020 Vision, Intraregional and Long Haul Flows, Vol. 3—East Asia/Pacific. World Tourism Organization, Madrid, April, p. 8. Zhao, J., 1989. Overprovision in Chinese Hotels. Tourism Management 10 (1), 63–66.
Hospitality Management 24 (2005) 57–73
Performance comparisons of hotels in China Ray Pinea, Paul Phillipsb,* a
School of Hotel and Tourism Management, The Hong Kong Polytechnic University, Kowloon, Hong Kong, SAR b Kent Business School, University of Kent, Canterbury, Kent CT2 7PE, UK
Abstract China’s hotel industry has only really existed since 1978. In that time, it has grown in size and complexity of ownership. Quality has been improved by the introduction of foreign management techniques and quality standards, for example the star-rating system of hotel classification. This paper compares performance of hotels using various hotel groupings according to ownership, size and star rating. The comparisons indicate that better performance occurs in hotels that have foreign ownership connections (especially those linked to Hong Kong, Macau and Taiwan partners), those that are bigger and those which have a higher star rating. According to the World Tourism Organization, China is forecast to become the world’s number one tourist destination by 2020. This paper also identifies the major issues facing the Chinese hotel industry and the government as they face this astounding prediction. r 2004 Elsevier Ltd. All rights reserved. Keywords: Hotels; China; Performance
1. Introduction China’s international tourism industry only got underway as a result of the Open Door Policy in 1978. By the year 2001, China had 33 million tourist arrivals spending US$17.8 billion China National Tourism Administration (CNTA, 2002). By 2020 China is forecast to become the world’s number one tourist destination, with annual arrivals of 130 million (WTO, 1999). In addition China’s own increasingly affluent
*Corresponding author. Tel.: +44-1227-824417; fax:+44-1227-761187. E-mail addresses: [email protected] (R. Pine), [email protected] (P. Phillips). 0278-4319/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijhm.2004.04.004
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population is creating a significant domestic tourism sector. There were 784 million domestic travellers in 2001 with revenues of around US$40 million (CNTA, 2001). This tourism activity has stimulated China’s hotel industry to grow from a base of only 137 hotels with 15,539 rooms in 1978 to a 2000 level of 10,481 hotels and 948,185 rooms (see Table 1). In that time, the number of hotels has grown at an annual average of 22.5%, with rooms and beds increasing annually by an average of 21.5% and 22.2%, respectively. Despite such spectacular growth, China will need considerably more hotels to satisfy the future demand from increases in both international and domestic tourists. The various elements to be considered in hotel development decisions include current and future market demand, location factors, tourism trends and so on. Another factor to be considered is the performance levels of existing properties in China. This paper uses available secondary data in an attempt to identify some overall performance comparisons between hotels in China. The secondary data used includes numbers of hotels and rooms and occupancy levels, along with revenue and fixed asset values. It should be noted that actual profit levels are not available for different hotel categories, thus comparisons are mainly based only on revenue and fixed asset values.
2. Comparisons by hotel ownership In order to ease China’s hotel shortage after the Open Door Policy, a diversification and decentralization policy of hotel investment was implemented in 1978. Diversification of investment did accelerate hotel development (Liu and Liu, 1993). However, decentralization resulted in a variety of different types of hotel ownership which until 1999 were listed as State-owned, collective, private, alliance, stock, foreign-invested and Hong Kong-, Macau-, and Taiwan-invested (CNTA, 2000, p. 92). The list became even longer in 2000 with the removal of ‘‘stock’’ and the addition of four more categories; share-holding co-operative, limited liability, limited liability shares and others (CNTA, 2001, p. 92). The complicated ownership pattern has resulted in a lack of coordination of decision-making in hotel construction (Tisdell and Wen, 1991). Available management systems are equally varied. This complexity of ownership and management creates unique problems for expansion and growth (Pine, 2002). State ownership (which might be national, provincial, regional or municipal) is still the dominant ownership type, accounting for more than 60% of all hotels and rooms (Table 2). State ownership can cause many problems, the main one being failure to separate hotel management and ownership (Tisdell, 1990) leading to poor monitoring of State assets. It might be assumed that State ownership could create some sort of grouping amongst hotels within a particular State entity. However, most State-owned properties exist as independent units, giving them the joint disadvantages of small operational size plus the bureaucratic restrictions attached to State ownership. An example of the difficulties of such a situation is the China Post & Telecom Tourism Group, a newly organized holding company under the Ministry
Table 1 China’s hotel statistics: 1978–2000 Year
Beds
Numbera
Annual increase (%)
Numbera
Annual increase (%)
Numbera
Annual increase (%)
137 150 203 296 362 371 505 710 974 1283 1496 1788 1987 2130 2354 2552 2995 3720 4418 5201 5782 7035 10,481
— 9.5 35.3 45.8 22.3 2.5 36.1 40.6 37.2 31.7 16.6 19.5 11.1 7.1 10.5 8.4 17.4 24.2 18.8 17.7 11.2 21.6 49.0
15,539 17,149 31,800 43,300 51,600 59,600 77,000 107,740 147,500 184,710 220,165 267,505 293,827 321,116 351,044 386,401 406,280 486,114 594,196 701,736 764,797 889,430 948,185
— 10.4 85.4 36.2 19.2 15.5 29.2 39.9 36.9 25.2 19.2 21.5 9.8 9.3 9.3 10.1 5.1 19.6 22.3 18.1 8.9 16.2 6.6
30,740 34,021 76,192 101,084 122,696 141,627 171,888 242,913 332,321 400,727 478,321 580,900 634,300 679,458 737,674 811,521 834,818 987,275 1,199,714 1,411,708 1,524,224 1,769,825 1,855,965
— 10.7 124.0 32.7 21.4 15.4 21.4 41.3 36.8 20.6 19.4 21.4 9.2 7.1 8.6 10.0 2.9 18.3 21.5 17.7 8.0 16.1 4.9
Occupancy (%)a
Av. no. rooms/hotel
Av. no. beds/hotel
Av. no. beds/room
— — — — — — — — — 66.3 67.9 57.2 59.4 62.5 67.0 67.7 62.2 58.1 55.3 53.8 51.7 53.4 55.9
113 114 157 146 143 161 153 152 151 144 147 150 148 151 149 151 136 131 135 135 132 126 90
224 227 375 342 339 382 340 342 341 312 320 325 319 319 313 318 278 265 272 271 264 252 177
2.0 2.0 2.4 2.3 2.4 2.4 2.2 2.3 2.3 2.2 2.2 2.2 2.2 2.1 2.1 2.1 2.1 2.0 2.0 2.0 2.0 2.0 2.0
CNTA (1979–2002), Yearbook of China tourism statistics. Other figures calculated based on CNTA data.
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a
Rooms
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1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Hotels
59
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Table 2 Comparison of size of China hotel by ownership type in 2000 Hotel ownership State-owned Collective Share-holding co-operative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded Total a
No. of hotels
%a all hotels
No. of rooms
%a All rooms
Av. no. of rooms/hotela
6646 1280 69
63.4 12.2 0.7
593,361 79,218 10,766
62.6 8.4 1.1
89 62 156
176 383 395
1.7 3.7 3.8
27,711 31,016 37,440
2.9 3.3 3.9
157 81 95
324 375 414
3.1 3.6 4.0
12,872 24,185 73,659
1.4 2.6 7.8
40 64 178
419
4.0
57,957
6.1
138
10,481
100.0
948,185
100.0
90
Calculated.
of Information Industry (MII) with the specific purpose of bringing MII hotels together in one group. However, most of MII’s hotels are owned in the name of local bureaus that are unwilling to shift their assets to the holding company (Qi, 2001). Table 2 shows that the great majority, 63.4%, of hotels are State-owned with another 12.2% being owned by collective share-holding co-operatives. All of the other eight categories of ownership comprise of no more than 4% each. In terms of rooms, again State-owned and collective share-holding co-operatives hotels have the majority of rooms, 62.6% and 8.4%, respectively. However, despite their relatively very small number of hotels (less that 8% of all hotels), the two overseas-funded ownership categories, Hong Kong-, Macau-, Taiwan-funded (HMT-funded) and Foreign-funded, provide almost 14% of all rooms (7.8% and 6.1%, respectively), indicating that these categories of hotels are usually bigger in size or capacity. It can also be seen that the average size of State-owned properties is only 89 rooms, which is just below the overall average of 90 rooms. The two overseas-funded ownership categories average sizes of 178 and 138 rooms, which demonstrates the nature of overseas hotel investors (Table 3). In general, the proportion of total hotel revenue is somewhat similar to the proportion of total rooms for most ownership categories. However, there are three main exceptions to this observation. State-owned properties only take 53.9% of total revenue whilst having 62.6% of all rooms. The two overseas-funded ownership categories, HMT-funded and Foreign-funded hotels account for 16.1% and 9% of total revenue, but only have a room share of 7.8% and 6.1%, respectively. With regard to overall performance HMT-funded hotels achieve the highest level of
Hotel ownership
Total RMB 8.15 to US$1. a
Calculated.
RevPara (RMB)
RevPar (US$)
% occupancy
53.9 6.5 1.0 1.5 3.8 4.7 1.2 2.5 16.1
214.12 193.01 208.23 123.59 286.40 292.69 213.19 240.37 515.07
26.26 23.67 25.53 15.16 35.12 35.89 26.14 29.48 63.16
54.3 53.1 61.0 55.3 59.2 60.2 54.9 56.6 63.6
7,776,660,000
9.0
366.61
44.96
58.9
86,226,540,000
100.0
248.47
30.47
55.9
No. of rooms
Total revenue (RMB)
6646 1280 69 176 383 395 324 375 414
593,361 79,218 10,766 27,711 31,016 37,440 12,872 24,185 73,659
46,500,090,000 5,595,970,000 820,490,000 1,253,510,000 3,251,170,000 4,010,730,000 1,004,380,000 2,127,720,000 13,885,820,000
419
57,957
10,481
948,185
% of total revenue
ARTICLE IN PRESS
State-owned Collective Share-holding co-operative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded
No. of hotels
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 3 Comparative statistics of China hotels by ownership type in 2000
61
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RevPar US$ 63.16 and the highest level of occupancy at 63.64% against an overall average for all hotels of US$ 30.47 and 55.85% (Table 4). State-owned properties only account for 50.4% of fixed assets, which is a disproportionate share, if the percentage shares of hotels 63.4%, rooms 62.6% and revenue 53.9% are considered. Relatively low fixed assets may signal rather poor physical quality of properties, which could be one reason to explain lower revenue earning ability of State-owned properties. Conversely, using a similar argument to the one applied to State-owned hotels, it might be assumed that HMT-funded and Foreign-funded hotels are of a higher quality, as they account for 31.9% and 24.4% of fixed assets and therefore can demand higher rates. These higher rates translate into higher RevPar. Evidence of under performance is revealed by the fixed asset turnover (FAT), which assess the effectiveness of the use of fixed assets in generating revenue (Coltman and Jagels, 2001). Coltman and Jagels state that in the hotel industry the FAT could vary from as low as one-half to a high as two or more times per year. Foreign-funded hotels may be of a higher quality, but their FAT of 25% suggests that management should look closely at their deployment of fixed assets, which average US$65,958 per room. HMT-funded are performing better, but with a FAT of 34% and an average of US$67,685 per room, this is not a healthy sign. The under performance of all hotels is illustrated by the fact that the FAT is 34% for the entire population.
3. Comparisons by hotel size With reference to Table 1, it can be seen that the average size of hotels in China has varied over the years, but with no discernible chronological pattern. The average number of rooms per hotel is typically in a range between 110 and 160. However, in 2000 the average size dropped down to just 90 rooms. Closer examination of the statistics shows that from 1999 to 2000 the total number of hotels increased by 3446 whilst the number of rooms went up by 58,755. This averages only 17 rooms per hotel opened during that year. It is not known whether this means that very small hotels were built or that some bigger ones closed (or a combination of both factors). As shown in Table 5, the great majority (72.2%) of hotels in China are smaller than 100 rooms in size. Only 129 properties (1.2% of total) are bigger than 500 rooms with another 309 (2.9%) being in the 300–499 rooms size range. However, according to calculations based on the CNTA Yearbook statistics, the average size of those hotels which are in the largest size category is 1863, indicating that China has some very large properties. Comparing size of hotels to revenue (see Table 6), the proportion of total revenue is generally quite similar to the proportion of total rooms, with two main exceptions. First, hotels in the 300–499 rooms range account for 16.9% of total revenue whilst having only 11.8% of all rooms. Second, hotels in the 100–199 rooms range have 27.9% of rooms but only 21.8% of revenues. Bearing in mind that the average size of the two overseas-funded ownership categories is 178 and 138, a mixture of the
Hotel ownership
No. of hotels
50.4 13.1 1.5
36.5 33.4 44.1
214,924 211,266 172,676
26,354.87 25,906.36 21,174.25
4,752,090,000 8,537,140,000 13,820,200,000
3.7 6.7 10.8
26.4 38.1 29.0
171,487 275,250 369,129
21,028.51 33,752.24 45,264.17
1,004,380,000 2,127,720,000 13,885,820,000
2,739,380,000 5,371,880,000 40,657,480,000
2.1 4.2 31.9
36.7 39.6 34.2
212,817 222,116 551,969
26,096.50 27,236.81 67,684.73
57,957
7,776,660,000
31,174,140,000
24.4
24.9
537,884
65,957.57
948,185
86,226,540,000
253,174,930,000 100.0
34.1
267,010
32,741.88
6646 1280 69
593,361 79,218 10,766
46,500,090,000 5,595,970,000 820,490,000
127,527,490,000 16,736,100,000 1,859,030,000
176 383 395
27,711 31,016 37,440
1,253,510,000 3,251,170,000 4,010,730,000
324 375 414
12,872 24,185 73,659
419 10,481
% of total fixed assets
Calculated.
ARTICLE IN PRESS
Total fixed assets/room (US$)
Total fixed assets (RMB)
RMB 8.15 to US$1. a
Total fixed assets/room (RMB)
Total revenue (RMB)
State-owned Collective Share-holding cooperative Alliance Limited liability Limited liability shares Private-owned Others Hong Kong, Macau, Taiwan funded Foreign funded Total
FATa (%)
No. of rooms
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 4 Comparative fixed assets turnover statistics of China hotels by ownership type in 2000
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Table 5 Comparison of hotel size of China hotels in 2000 Hotel size No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
No. of hotels
% of all hotels
No. of rooms
% of all rooms
Av. no. of rooms/hotela
129 309 547 1926 7570
1.2 2.9 5.2 18.4 72.2
240,301 12,285 131,403 64,528 199,668
25.3 11.8 13.9 27.9 21.1
1863 363 240 137 26
10,481
100.0
948,185
100.0
90
Calculated.
arguments put forward in the previous section may well apply to these two exceptions (i.e. they tend to get a relatively bigger proportion of revenues and higher occupancy rates). With regard to occupancy levels, it is clear that higher star-rated properties are larger, and these higher-rated hotels tend to get better occupancies. It also ties to ownership, as HMT-funded hotels are on average the bigger properties, and, as shown previously, that ownership category achieves the best occupancy rates. Table 7 shows that hotels in the 500 or more rooms range have 16.5% of total fixed assets, but this generates 25.1% of revenue. In contrast, hotels in the 300–499 rooms range have 20.3% of fixed assets, but this generates 16.9% of revenue. The problems of the hotels in the 300–499 room range are highlighted by at least three statistics. First, the total fixed assets per room of US$56,236 for hotels in the 300–499 room range is more than two and half times the corresponding figure of US$21,338 for hotels in the 500 room or more range. In addition, the FAT for hotels in the 300– 499 room range is only 28.3%, which is in comparison to 51.7% for hotels in the 500 room or more range. Also, the RevPar for hotels in the 300–499 room range is US$43.47, which despite being the highest return for all properties is insufficient to generate adequate returns to investors.
4. Comparisons by hotel star rating Whilst the quantity of hotels in China increased relatively quickly, quality standards of most hotels remained poor. Service problems were often attributed to the wide variation of hotel facilities and services, the lack of uniform hotel operation standards, inexperienced work-force (Tisdell and Wen, 1991), inadequate and unreliable information for marketing and planning (Liu and Liu, 1993) and lack of coordination in hotel administration owing to the complicated bureaucratic and financial structure (Zhao, 1989). In 1988 the CNTA established a star-rating system for hotels. This system, adapted from international standards, aimed to provide clear differentiation of
No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
129 309 547 1926 7570
240,301 112,285 131,403 264,528 199,668
21,605,990,000 14,567,170,000 13,454,170,000 18,756,010,000 17,843,190,000
10,481
948,185
86,226,530,000
RevPara
RevPara (US$)
% occupancy
25.1 16.9 15.6 21.8 20.7
245.66 354.46 279.75 193.73 244.16
30.12 43.47 34.30 23.76 29.94
63.8 61.2 58.2 55.2 51.5
100.0
248.47
30.47
55.9
% of total revenue
ARTICLE IN PRESS
Hotel size
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 6 Comparative statistics of China hotels by size in 2000
65
66
No. of rooms 500 or more 300–499 200–299 100–199 99 or less Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
129 309 547 1926 7570
240,301 112,285 131,403 264,528 199,668
21,605,990,000 14,567,170,000 13,454,170,000 18,756,010,000 17,843,190,000
41,815,770,000 51,494,620,000 4,739,250,000 59,149,640,000 55,975,650,000
10,481
948,185
86,226,530,000
253,174,930,000
FATa (%)
Total fixed assets/room (RMB)
Total fixed assets/room (US$)
16.5 20.3 17.7 23.4 22.1
51.7 28.3 30.1 31.7 31.9
174,014.13 458,606.40 340,473.58 223,604.46 280,343.62
21,338.34 56,236.22 41,750.29 27,419.31 34,376.90
100.0
34.1
267,010.06
32,741.88
Total fixed assets % of total (RMB) fixed assets
ARTICLE IN PRESS
Hotel size
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Table 7 Comparative fixed assets turnover statistics of China hotels by size in 2000
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hotels and improve facilities and services. Through the successful implementation of this system, a national hotel operation standard was established and the hotel administration process was streamlined (Wei, 1994; Liu and Liu, 1993). The Chinese hotel industry has gradually moved towards a greater degree of standardization and professionalism (Liu and Liu, 1993), which provided a base for uniformity and networking of hotels. In 1993 the star-rating system was adopted as a national standard across the country. At that time, star-rated hotels totalled 1186 representing 46.47% of all hotels and 60.04% of rooms. The system was further revised in 1998 according to industry practice, which included the rating of facilities, equipment, maintenance, cleaning, hygiene, service, quality and guest satisfaction. By 2000 star-rating had been applied to 6029 hotels, i.e. 57.52% of all hotels and 62.71% of rooms (CNTA, 2001). In 2001 this number had risen to 7358, but due to changes in the reporting of statistics no data is available for non-star-rated hotels (CNTA, 2002). As shown in Table 8, there are very few properties in the 5- and 4-star categories, only 1.1% and 3.4%, respectively. However, these properties are quite large within a China context, average size being 386 rooms for 5-star hotels (4.8% of total rooms) and 241 for 4-star hotels (9% of total rooms). The contrast of hotel performance can be illustrated by comparing the proportions of totals of hotels, rooms and revenue, where there are some quite large discrepancies. Five-star hotels, whilst having only 1.1% of hotels, 4.8% of all rooms, account for 15% of revenue (see Table 9). However, 2-star hotels have 29.2% of hotels, 21.6% of all rooms, but only account for 12.4% of revenue. The RevPar figures for 5-star hotels of US$95.67 and US$17.4 for 2-star highlight the discrepancy. The FAT for all star-ratings is less than 50%. If one considers the total fixed asset per room, which ranges from US$97,022 for 5-star hotels to US$9787 for 1-star, this is indicative of the performance problems of the entire population (see Table 10). Using the same argument as the one applied to HMT-funded hotels about ownership, it might be assumed that higher star-rated properties can achieve higher occupancy levels have a higher quality and therefore can demand higher rates. A similar, though not so marked situation, exists with 4-star hotels. This category has Table 8 Comparison of size of China hotel by star rating in 2000 Hotel star 5 4 3 2 1 0 Total a
Calculated.
No. of hotels
% of all hotels
No. of rooms
117 352 1899 3061 600 4452
1.1 3.4 18.1 29.2 5.7 42.5
45,208 84,890 231,244 205,110 28,226 353,507
10,481
100.0
948,185
% of all rooms 4.8 9.0 24.4 21.6 3.0 37.3 100
Av. no. of rooms/hotela 386 241 122 67 47 79 90
68
5 4 3 2 1 0 Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
117 352 1899 3061 600 4452
45,208 84,890 231,244 205,110 28,226 353,507
12,908,810,000 14,143,870,000 21,600,240,000 10,653,460,000 1,064,280,000 25,855,880,000
10,481
948,185
86,226,540,000
RevPara (RMB)
RevPara (US$)
% occupancy
15.0 16.4 25.1 12.4 1.2 30.0
780.17 455.23 255.22 141.91 103.02 199.84
95.67 55.82 31.30 17.40 12.63 24.51
65.0 63.1 58.7 53.3 47.0 53.0
100.0
248.47
30.47
55.9
% of total revenue
ARTICLE IN PRESS
Hotel star
R. Pine, P. Phillips / Hospitality Management 24 (2005) 57–73
Table 9 Comparative statistics of China hotel by star rating in 2000
5 4 3 2 1 0 Total a
Calculated.
No. of hotels
No. of rooms
Total revenue (RMB)
Total fixed assets (RMB)
117 352 1899 3061 600 4452
45,208 84,890 231,244 205,110 28,226 353,507
12,908,810,000 14,143,870,000 21,600,240,000 10,653,460,000 1,064,280,000 25,855,880,000
35,769,300,000 44,606,120,000 62,712,240,000 26,367,440,000 2,252,830,000 81,467,000,000
10,481
948,185
86,226,540,000
253,174,930,000
FATa (%)
Total fixed assets/rooms
Total fixed assets/room (US$)
14.1 17.6 24.8 10.4 0.9 32.2
36.1 31.7 34.4 40.4 47.2 31.7
791,216.16 525,457.89 271,195.10 128,552.68 79,814.00 230,453.71
97,022.21 64,433.83 33,255.07 15,763.66 9,787.12 28,259.19
100.0
34.1
267,010.06
32,741.88
% of total fixed assets
ARTICLE IN PRESS
Hotel star
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Table 10 Comparative fixed assets turnover statistics of China hotels by star rating in 2000
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9% of rooms and accounts for 16.4% of revenue and 17.6% of fixed assets. Revenues are greater than the proportion of rooms, but fixed assets as a proportion is slightly bigger than revenue, whereas for 5-star hotels fixed assets proportion was slightly lower than revenue. The relative proportions of these same factors are quite equal for 3-star hotels, but the situation is reversed for 2-, 1- and 0-star-rated properties which all have a proportion of total rooms which is bigger than the revenue share and a low proportion of fixed assets.
5. Conclusions and managerial implications When considering hotels grouped by ownership, it would seem that the Hong Kong-, Macau-, Taiwan-funded properties produce the best performance levels. This is probably largely due to them applying international standard business and management techniques. However, they are probably also better connected within China and have a better understanding of the local environment. Anyone planning to do business in China must be attuned to the unique business practices that exist there. In terms of hotel size, the situation seems to be the bigger the better. There are obvious economies of scale to be gained from having a bigger property, especially when those properties are so big (average size of those hotels in the above 500 rooms group is almost 2000 rooms). In addition, these larger properties are more likely to be Hong Kong-, Macau-, Taiwan-funded properties, and as discussed in the previous paragraph, these hotels perform better. Furthermore, the bigger hotels are usually in the higher star categories, and, as will be argued below, these tend to be the better performers. With regard to star rating, it appears that overall the higher the star rating the better the performance. This is almost certainly related to the fact that the higherrated properties are associated with foreign partners and this brings in better, more experienced management techniques, modern technology and high spending (usually overseas) guests. More attention should be given to lower star-rated properties, where a very large volume of business exists and where most future volume growth is likely to occur. Non-star hotels which account for 42.5% of the hotels and 37.3% of rooms is an area that is in need of much more detailed analysis. Overall, the performance of the China hotel industry should be a concern for all stakeholders, especially those with a domestic-invested orientation. With regard to profit levels, it can be shown that overseas-invested properties continually outperform domestic-invested ones. Table 11 shows that since 1994 profit levels for all overseas-invested hotels have been higher than for domestic-invested hotels. Even in the latter 3 years when the industry as a whole made losses, the level of loss was smaller for overseas-invested hotels. Indeed, in 1997 although the whole industry recorded a positive profit rate of 1.0%, overseas-invested hotels had an overall profit of 5.67% whilst domestic-invested hotels recorded a loss of 2.56%. Again, this is assumed to be a function of the overseas-invested hotels employing international
Domestic revenue (RMB 00,000)
1994 1995 1996 1997 1998 1999 2000
2,761,585 3,205,737 4,1103,914 4,610,410 5,234,359 5,770,155 6,456,406
Invested profit (RMB 00,000) 231,220 121,630 63,439 117,814 307,023 371,233 254,825
Hotels profit (%) 8.37 3.79 1.55 2.56 5.87 6.43 3.95
Overseas revenue (RMB 00,000)
Invested profit (RMB 00,000)
Hotels profit (%)
2,721,462 3,155,025 3,209,776 3,513,182 2,733,953 2,687,334 2,166,247
307,372 292,2117 271,991 199,212 158,563 165,136 9465
11.29 9.26 8.47 5.67 5.8 6.14 0.44
Source: Yearbook of China tourism statistics-supplements (1995–2001). China National Tourism Administration, China Tourism Press, Beijing.
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Table 11 Comparisons of profit levels for domestic-invested and overseas-invested hotels from 1994 to 2000
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standard business and management techniques and having access to higher spending guests. The FAT clearly shows the ineffectiveness of the deployment of fixed assets. Hotel general managers should be enhancing the deployment of public space (lobbies, corridors) and customer facing areas such as guest rooms and restaurants. Moreover, the FAT may be understated, as the ratio can be effected by the use of old assets (low values), which being lower, tends to increase the FAT. Therefore, if hoteliers need to replace old assets this would reduce the FAT. Another relevant issue could be the fact that hotel industry financial executives are not optimizing the returns from new capital expenditure projects. For example, despite using a variety of capital-budgeting techniques such as payback, net present value and internal rate of return, the discount rate being used may be less than the cost of capital. This would lead to investors preceeding with projects that are giving a return less than the desired rate of return, which would exacerbate hotel performance at the individual, group and industry level. China, like many other countries starting to develop a hotel industry, has seen most effort of investment and higher-quality management targeted at the larger, more luxurious properties. The main impetus for this is usually to create a supply of good-quality hotels to satisfy international visitor demand. However, this market sector is limited in size, and although there is certainly still more room for development of such properties, especially in secondary cities and smaller towns, the bigger volume lower-price market of the future should be worth examination for new developments. As China’s own domestic tourism continues to grow, and the international demand from more low-price oriented travellers increases, there may be a strong need for budget level hotels. But not the ones typically available now in China, but rather ones that are more efficient in their building and planning, and which have high levels of operational capabilities. Hotel operators and investors in more developed hotel markets tend to rely on statistics such as occupancy, average daily rate and revenue per available room to assess performance. By analysing and interpreting these key indicators hoteliers can benchmark their performance. However, any statistic used must be an effective yardstick of the balance between hotel room supply and demand. Several assumptions had to be made with some of the calculated data. For example, in this paper RevPar was calculated without data for room nights actually sold. The provision of more detailed and credible data by hoteliers to enable better analysis would certainly be useful to allow more accurate reflections about the continued expansion of China’s hotel industry. Also, there are opportunities for practitioners and academics to draw conclusions and take actions from our findings.
References CNTA, 1979–2002. The Yearbook of China Tourism Statistics. China National Tourism Administration, China Travel and Tourism Press, Beijing. Coltman, M., Jagels, M.C., 2001. Hospitality Management Accounting 7th Edition. Wiley, New York.
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