Behind Starwood's Hotel Expansion in China

On a recent business trip to Shanghai, Eagle Yin received all the perks of what he calls a "high-level international hotel." There was the free Internet connection, three in-house restaurants, a mah-jongg parlor, and an assortment of moon cakes, a Chinese delicacy, from which to choose. Moreover, the national sales director for Bayer HealthCare got all that for $80 a night at a Four Points by Sheraton, about 20% less than the average cost of a room in Shanghai.

For travelers who associate the Sheraton brand with plastic ice buckets and polyester bedspreads in the U.S., Yin's experience may come as a surprise. Like Buick, KFC (YUM), and Pizza Hut (YUM), Sheraton is one of those American names that may seem past its prime at home but is still popular and growing abroad. The hotel brand has particular cachet in China, going back to 1985, when it opened the Great Wall Sheraton Hotel Beijing. "Developers come to us," says Frits van Paasschen, chief executive of Starwood Hotels & Resorts Worldwide (HOT). "Within three years we'll have as many rooms in Shanghai as we do in New York."

Like a lot of U.S. companies being hammered at home, Starwood sees China as one of its best hopes for growth. The lodging giant, which also owns the upscale St. Regis, Westin, W, and Le Méridien brands, saw revenues fall 26% at its 1,000 hotels in the first six months of this year. While Chinese occupancy rates have suffered amid a decline in travel, analysts are optimistic. With a growing economy, China's banks are still lending and developers continue to bet on real estate. Starwood is planning to double the number of hotels it operates in China by 2012, to 100. And about two-thirds of those will operate under the Sheraton banner. Sheraton's average room rate of $138 internationally makes it a better bet to capture the emerging Chinese road warrior than the $223 average for a room at a W or $303 to stay at a St. Regis.

Starwood anticipates that much of its growth will come from outlying regions. Although big cities such as Beijing now have a glut of rooms, thanks in part to the Olympics, there is growing demand for business-class accommodation in second- and third-tier cities such as Jiangyin and Dalian. Lower construction costs and inexpensive labor mean the company's Chinese hotel owners are able to offer guests a lot more frills than comparably priced U.S. properties.

In recent years the focus has shifted from international travelers to Chinese consumers. Starwood now asks its hotel staff to greet guests in Mandarin instead of English, which was long used to convey a sense of prestige. Many of its hotels do not label their fourth floors as such because four is considered an unlucky number.

Starwood is hardly alone in recognizing the potential of the Chinese market. Marriott International (MAR) hopes to increase its China presence by 50% by 2014, to 61 hotels. "We're entering markets where the Marriott name is not present," says Edward Fuller, the company's president of international lodging. And InterContinental Hotels Group (IHG), parent of Holiday Inn, plans to double the 118 hotels it has in China over the next three years.

One major perk Starwood can offer over local competitors is its extensive global network and loyalty perks. More than 40% of its Chinese business comes through its Preferred Guest program, and Chinese membership in the program has jumped 50% this year. But local customers aren't particularly focused on accruing points to earn a free stay. They are "more interested in status," says van Paasschen, using points to get room upgrades, a free breakfast, or anything that accords them conspicuous V.I.P. treatment. Among other things, the preferred guest system allows staffers to see people's titles immediately. That makes it easier to give better rooms to managers than the subordinates they are traveling with, and to greet them first when a party arrives.

MIDDLE-CLASS DREAMSAfter a long period in which Starwood paid more attention to its hipper W and Westin brands, the company recently has been remodeling its U.S. Sheratons. Among mainland Chinese travelers the Sheraton name has continued to exude an aura of international class. While that's helpful for Sheraton's domestic Chinese business, van Paasschen says the real potential comes when they start to travel. He hopes to lock in the loyalty of mainland customers now so they'll stay at a Sheraton when they start to travel abroad. "If you think back to the wave of Japanese tourists that came to the U.S. in the mid-1980s, we could have 100 million outbound trips from China," van Paasschen says.

Overall he sees a growing role for Sheraton in a world where expense accounts are heavily scrutinized and luxury seems almost taboo. "Half of humanity is middle class," van Paasschen says. "That middle class needs hotels." And the fastest-growing population of that middle class is in countries like China.

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