Home Inns' listing on NASDAQ last October was the catalyst for a boom in China’s budget hotel industry. Home Inns CEO David Sun talks to Amy Cheung of The China Perspective about the industry's prospects and the company's plans to remain number one.

The China Perspective (TCP): Home Inns has achieved a great deal of success in just a short period of time since it was established in 2002. What are the major factors which have led to this success and how has Home Inns differentiated itself from competitors?

David Sun (DS): There are four main factors driving Home Inns’ success in the past five years. First of all, China’s economic growth in the past decade has boosted domestic tourism and business travel and improved spending power and disposable income have drastically changed consumer behavior. Second, the growth of the overall travel industry in the past five years is a natural driver. Thirdly, Home Inns’ unique business model has successfully grasped market demands. When Home Inns was first established in 2002, China’s hotel landscape was composed of 10,000 star hotels and small, family-run guesthouses. We launched budget hotels as a new product targeting consumers seeking reasonable and affordable accommodation. Moreover, our management team has been dedicated to driving our business according to the business plan that we drafted.

We try to create our point of difference through the following. Firstly, Home Inns is a pioneer in China’s budget hotel industry. Our early entrance enables us to establish and secure a loyal consumer base as well as brand awareness and credibility. Second, Home Inns operates a budget hotel chain of extensive geographical coverage, providing convenience to consumers. Thirdly, we consistently standardize our products and services offered by our leased-and-operated and franchised-and-managed hotels according to corporate strategies. By cultivating customer loyalty and appeal, we now have more than 200,000 nation-wide active members, contributing more than 45% of room nights.

TCP: Motel 168 is also preparing for a NASDAQ IPO. Can you give us a basic breakdown of the competitive landscape and what Home Inns is doing to maintain and increase its’ market share?

DS: It is a very normal development that the budget hotel industry is giving rise to more NASDAQ IPOs. Home Inns has attracted many investors to the industry and other hotel chains will follow suit. However, we cannot see major changes in the competitive landscape in the near future. The key to maintaining and increasing our market share lies in how to generate more active members and guests. Apart from service consistency, we are working on more advanced IT systems and human resources systems to enhance our corporate competitiveness. In 2007, we plan to achieve 60 to 70% year-on-year growth in annual revenues and grow the number of our hotels by over 70%.

TCP: In January you reported 134 hotels in operation, with 94 leased-and-operated hotels and 40 franchised-and-managed hotels. Can you explain the difference between these two, especially in terms of how they contribute to your top and bottom lines? Over the next two years what is your goal for hotels under operation and what will the breakdown likely be between leased and operated hotels and franchised hotels?

DS: At present, 70% of our hotels are leased-and-operated and 30% are franchised-and-managed. Leased-and-operated hotels generated 90% of our total revenues. As for franchised-and-managed hotels, we only assist and standardize hotel service offerings with our on-site management. We then collect 300,000 yuan as an entry fee to our network and a fixed annual revenue fee. 10% of our total revenues are derived from these hotels, and this is almost all net income since we have not invested in them from scratch.

When Home Inns enters a new city, we open leased-and-operated hotels before franchise-and-managed hotels. In the next two years, we are aiming for a hotel mix consisting of 60% of the former and 40% of the latter.

TCP: The real estate market has done quite well over the last several years. How has this impacted Home Inns development strategy? How might this affect your future growth and development plans?

DS: The real estate market has had limited impact on our development strategy and growth model. Home Inns does not purchase land to expand. We lease older land instead of newly developed land, and since old property resources do not receive much attention from the market, they also come with lower costs.

Home Inns has already identified 100 mainland cities as our target cities, of which we have entered 50. And in most of the cities we have entered, we have opened only 2 or 3 hotels. There is a lot of market penetration and business development we can achieve in the near future.

TCP: Can you give us more detail on your average customers/guests and whether you are trying to target other demographics as well?
DS:
On average, more than 60% of our customers are individual business travelers and leisure travelers. This primary customer group consists of small and mid-size enterprises which are looking for cost-effective accommodation for their employees, as well as mostly domestic travelers who seek affordable and comfortable accommodation. Furthermore, many SMEs [small and medium-sized enterprises] use their Home Inns membership even during leisure travel. We have a loyalty membership program and corporate agreements to secure the loyalty of corporate clients. We are now researching the possibility of targeting other demographics.

TCP: As of January 1 this year, Home Inns had hotels in operation in 39 cities. Can you give us a breakdown of what regions these 39 cities are in and what the major differences are between these cities and regions. Also which cities/regions are likely to see the greatest expansion in the next year or two?
DS:
Every region in China has the potential to see strong growth. Of the 50 cities we have entered, most are provincial capitals, regional capitals, economically developed zones and coastal cities. We will follow and execute our business strategy to open several new hotels every quarter in order to enter the other 50 cities as planned.

TCP: Do you have any plans to expand outside of the budget hotel market?
DS:
Though growing at fast pace, China’s economy is still at an early development stage, and that offers much room for the growth of budget hotels. For the time being, Home Inns is striving to focus on driving revenue growth and enhancing corporate efficiency. Our biggest challenge is to strengthen management and thorough execution. It is important for us to focus on developing the budget hotel business. If Home Inns maintains its strong business growth in the next few years, we will consider expanding outside the budget hotel industry. However, there is no timeframe for such a plan at the moment.

 

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