Triple Threat for Chinese Luxury Hotels: Austerity, Slowdown, and Oversupply

on September 11 2013 | in Travel | by | with No Comments

Mandarin Oriental Shanghai, Mandarin Oriental, Shanghai, luxury hotel

There can be too much of a good thing, says Skift, reporting on the oversupply of luxury hotel rooms in China. The travel news website proclaims, “The triple attack—austerity, slowdown, and oversupply—could ravage mainland China’s luxury hotel market and result in plummeting room prices and occupancy rates.”

Currently, 110,000 luxury hotel rooms are available for rent in China, but that number will experience a 45 percent increase once the 50,000 currently under development are completed, says research firm STR Global. Half of the new rooms  — located in lower tier cities — will be available within 18 months. This does not bode well, as cities like Tianjin and Sanya are not drawing the international tourists needed to keep hotel rooms booked in this saturated market. While the demand for luxury hotels in China is up 4 percent this year, supply is up 7.4 percent.

The slowdown is being attributed at least in part to Xi Jinping’s call for government officials to exercise self-control when it comes to wining and dining publicly. The China Hotel Association reports that the country’s overall hotel revenue through April of this year was 16.4 percent lower than the year before, in part because government meetings being hosted in hotels have fallen by 40 percent. Hotel managers in Beijing say that food and beverage sales have declined by 10 to 20 percent for the same reason.

Insiders have expected the bubble to burst for quite some time; many have worried for years that incentives to lure international hotel chains to the nation were watering down the market. Some hotels have entered China knowing they would lose money, but realizing the hotel restaurants, bars, and amenities would generate revenue. “Most hotels are losing money,” a Shanghai developer told The Economic Observer, “If you build a skyscraper, mall or luxury hotel in a third- or fourth-tier city, in return the local government will offer discounts on the price of land or tax concessions.”

International hoteliers may be in hot water, but they are remaining nonchalant for the moment. “What we find is the types of customers are changing,” says Wendy Huang, vice president of sales and marketing at Starwood Greater China. Big corporate clients have been replaced with couples and repeat customers seeking a nice, quiet dinner and paying out-of-pocket. Starwood has also hosted a St. Regis wedding fair in China to draw in customers in new ways.

Consumers stand to benefit the most from the current market. Both the Four Seasons in Shenzen and the Mandarin Oriental in Shanghai are adding credits and rewards for inbound travelers.

photo credit: mandarin oriental

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