By XIE Yixin
Guests staying at the budget chain Hanting can expect nicer rooms, better service, and more rooms in lower-tier cities. A major upgrade in parallel with an ambitious nationwide expansion will strengthen Hanting’s hand in an industry reset precipitated by the pandemic. Hanting’s 3000 properties already enjoy 75 percent occupancy, far above that of most luxury hotels.
Hanting has largely steered clear of price wars that have afflicted its competitors. Demand for budget hotels has stabilized after ten years of steady growth. From 2005 to 2015, the industry grew by more than 12 percent annually and was highly profitable. But margins have since dropped, and hotels find themselves competing on service as well as price. In today’s market lowering prices has little effect on occupancy. Customers are attracted by stylish rooms, personal service, and better wifi.
Small town tastes
Since a secondary public offering in 2020, Hanting has focused on lower-tier cities. The chain now has properties in almost every city on the east coast and is marching on the south and southwest of the country.
Hanting made a previous assault on smaller cities in 2015, without much success. Guests are now are willing to spend more and landlords are more accommodating. Demand, however, remains fickle and if a megaproject were to flop, it may take a long time to recover.
Executive XU Haochun, explained how the product, highly standardized after 15 years of operations, is easy to tweak according to local demand. “Guests in smaller cities want more of a feeling of being served,” he said. “They expect a menu that caters to local tastes.”
And the planned expansion need not be executed at top speed. “In smaller cities, location matters much more than in big cities,” Xu said.
Budget hotels fared best during the pandemic and have bounced back strongly. The market is big and less vulnerable to economic downturns. Hanting will remain a budget brand: low cost, low price, and high return.
“The goal is to have a budget brand that is resilient in lean times, and able to charge premiums when the market is strong,” said Xu. A room at Hanting typically costs around US$50. On big travel weekends prices sometimes double. Properties that have been upgraded can charge about one dollar a night more, a substantial increase in gross margins.
Guests seem to like Hanting well enough as a budget chain. A tourist who stayed at Hanting Haichang Ocean Park in Shanghai said the room was cluttered but overall “it was great for a budget hotel.” Xu said Hanting has no intention of moving up a notch and that it would be able to offer better products at affordable prices by controlling costs.
Expanding from the center
The expansion plan is not aggressive, but analysts worry that opening 80 new properties this year will lead to cannibalization. The new properties are mostly franchises. Franchisees pay an initial fee of 2500 yuan per room (150,000 yuan minimum), plus 5 percent of revenue every month. In the current market, where a room in a small town can easily cost 250 yuan per night, franchisees can get their investment back within two years.
Budget chains need to keep reinventing themselves to keep up with demand. The past five years have seen the demise of many hotels with poor construction quality and outdated rooms and service. It will cost at least 30,000 yuan to upgrade each room, and about 80,000 to build a new one. It will cost a lot more in old properties or those in disrepair, whose earnings trajectories were riskier to begin with.
One concern is that the cost of the upgrade is to be borne by franchisees. Hanting calls it a win-win. Each major upgrade in the past increased occupancy by around 5 percentage points and franchisees save on labor by installing centrally produced modules supplied by Hanting.
