Last year, management of the Red Hotel Beijing took over a drab Stalinist-era style hotel on the eastern side of Beijing and decided to give the old place a facelift. Located one block north of the stadium and arena scheduled to host the Olympic soccer and boxing matches, the hotel had a location that seemed a sure moneymaker for the Beijing games. So the Red Hotel invested $1.5 million to nearly double the number of rooms to 75, add a fresh coat of brick-red paint to the facade, and install wireless Internet access. Eager to recoup its investment, management—in the days before the opening ceremony on Aug. 8—started charging room rates of $262 a night, a sixfold increase over the old rates. Even with such big price increases, management figured they could fill at least 70% of their rooms with tourists during the Games.
They were wrong. "We are not getting as many guests during this Olympic period as everyone expected," says Mary Ma, sales and marketing department manager of the Red Hotel Beijing. "Maybe it is because more hotels have opened; maybe it's because hotels have greatly increased their room rates." The hotel has since cut average room rates to $130. That's still triple the normal rate. And the change may be too little, too late. With the Games under way, the Red Hotel's occupancy rate is still an anemic 50%.
Seven years ago, when Beijing won the rights to host the Olympics, hoteliers expected a flood of tourists to arrive in the Chinese capital in 2008 and invested accordingly. But the Olympics have not turned out to be a cash cow for hotels. Most, if not all, of Beijing's hotels are hosting fewer visitors than they originally expected. During the Olympic period so far, only 77.6% of Beijing's 22,300 five-star hotel rooms and 45.5% of 34,500 four-star hotel rooms are filled, according to the Beijing tourism bureau. More than 60% of rooms in Beijing three-star or lower hotels are currently empty.
Businessmen Staying Out of Beijing
One reason for the drop is a decline in ordinary business travel, as Chinese out-of-towners try to avoid scheduling meetings in Beijing during the Games. "The benefits of the number of people attending the games is expected to be largely offset by reduced business activity during the Olympic period," David Sun, chief executive officer of Home Inn & Hotels Management (HMIN), China's largest budget hotel chain, told investors on a Aug. 11 conference call to discuss second-quarter earnings. The company's New York-traded American depositary receipts are down 53% so far this year.
Beijing's hotels also are suffering as increased security makes it more difficult for outside tourists to visit the city. In the first seven months of the year, Beijing received 9.2% fewer tourists (BusinessWeek.com, 8/6/08) than the same period last year. Hoteliers are blaming China's tighter visa policy enacted in May for the drop in tourists during the Olympics. "It was more difficult to visit and come to the Games because of visa issues," says Jeff Diskin, senior vice-president for brand marketing at Hilton Hotel (HLT). Beijing tourism officials blame the drop in tourists on terrorist attacks (BusinessWeek.com, 8/4/08), riots in Tibet (BusinessWeek.com, 3/17/08) in March, protests marring the Olympic torch relay (BusinessWeek.com, 3/27/08), as well as the earthquake in Sichuan (BusinessWeek.com, 5/13/08) in May.
Avoiding Post-Olympic Vacancy Blues
It doesn't help that the supply of hotel rooms in Beijing has shot up in the past several months as demand from tourists has unexpectedly fallen.
Like Olympic cities Barcelona and Sydney before it, Beijing built new hotels and refurbished old ones in preparation. Many have opened in the past several months, and Beijing now has 5,790 hotels or one-fifth more than it did at the end of 2007, according to the capital's tourism bureau. After the Olympics, hotels in both Barcelona and Sydney saw their occupancy rates plummet. (Athens managed to avoid that fate because high land prices and the lack of building sites kept the number of new hotels in check.)
Beijing hotels' exponential expansion shows no signs of slowing. In late April, the Korean investors of Caesar's Home Hotel started renovating an old six-story building that once housed a public sauna and turned it into a 70-room budget hotel with an adjoining Korean restaurant. "We were hoping to open before the Olympics, but it's a pity that we didn't finish work in time," says Zheng Mingjun, director of the general manager's office at Caesar's Home. Workers had to stop by July 20 as part of a citywide moratorium on construction to reduce pollution. Caesar's Home is now planning to open in late August.
Like Caesar's Home, many Beijing hotels now hope they'll get a post-Games lift as life returns to normal in the city. Even though China's economy has been decelerating for five consecutive quarters, its gross domestic product still grew 10.1% in the second quarter (BusinessWeek.com, 8/14/08). Moreover, hotels are betting on sustained growth from China's domestic travelers after the Olympics. After all, hoteliers say, many domestic tourists who didn't come to Beijing for the Olympics will visit the Chinese capital after the Games are over to see the monuments built for the Olympics such as the Bird's Nest and Water Cube.
In it for the Long-Haul
And, it's not just the high-end, internationally branded hotels such as Hilton, Marriott (MAR), and InterContinental (IHG)—whose four- and five-star hotels account for 2.7% of Beijing's hotels—that are expanding. Most of the new hotels being added in Beijing are the projects of local investors who are copying Home Inn, China's first and largest budget hotel chain, and trying to build their own budget hotel chain that targets business travelers who want affordable yet comfortable lodging.
Since 2000, Beijing Golden Pineapple Youth Hostel has opened 35 hostels in Beijing catering primarily to the backpacker crowd, including three this year. "We are building a hotel chain. Each one of our investments has a goal. We have a budget and a plan," says Coco Gou, manager of Beijing Golden Pineapple Youth Hostel. "An oversupply of hotels won't be a problem."