When will business in China turn around?

During 2Q24 earnings reports among the industry’s biggest developers, managers and franchisors, the refrain was consistent: RevPAR declines in Greater China were in the 3% to 5% range, with no defined end in sight. The impact has been significant, causing several hotel companies to trim their RevPAR growth expectations for the rest of the year.

Marriott is forecasting negative RevPAR growth in China for the rest of the year with continued weak demand and pricing trends. Even worse, as Marriott tends to manage more than franchise in China, incentive management fees will suffer; they were down $8 million in 2Q.

Hyatt reported China domestic travel was down 9% in the second quarter compared to last year, with a notable impact on hotels in secondary and tertiary markets.

In addition, there has a reduction in international inbound flights from both the U.S. and Europe, with numbers still below pre-COVID levels and some airlines cancelling certain routes into cities such as Shanghai.

This shift in consumer behavior has naturally seen a decline in demand, especially in discretionary spending which in turn has slowed the country’s economic recovery. How long these challenges will persist is uncertain, but they are likely to continue until confidence in the real estate market is restored and broader economic stability is achieved.

Gary Rosen

Share this quote

While China’s hotel business suffers, the rest of Asia Pacific, including India, is thriving with the ongoing loosening of outbound travel restrictions by the Chinese government driving inter-regional travel.

“After years of restricted international travel due to COVID-19, Chinese tourists are now eager to travel abroad again,” said Horwath’s China-based Project Director Jingjing Zheng. “This surge in outbound travel is diverting demand away from domestic destinations in China. As a result, domestic hotels, especially in tourist destinations facing international competition such as Sanya, are experiencing declines in occupancy and room rates.”

So, the big question remains: when will domestic Chinese business rebound?

Caution pervasive

The Chinese government is trying to stimulate the economy and a subsequent rebound in the residential real estate market should increase consumption levels, but that remains to be seen.

“China is currently facing a number of economic and business challenges that are having a notable impact on its growth,” said Gary Rosen, CEO of Greater China for Accor. “In reality, Chinese households are experiencing an economic downturn for the first time (in modern times), which has been caused by structural factors as well as recent financial market issues, in particular the stagnation in the residential real estate market. Historically, real estate has been a primary investment avenue for Chinese people. However, the recent difficulties faced by property has triggered the economic decline.”

Zheng added that this economic softness is most evident in the business and MICE markets, where companies are cutting budgets and reducing travel and event expenditures. “This has led to a significant drop in demand in markets reliant on business travel,” she said.

Rosen added that it’s important to note that the issue isn’t attributable to a lack of income or savings among the population. “Instead, the uncertainty has led consumers to become more cautious and an increase in saving rates in a similar way to what was seen during the pandemic,” he said. “This shift in consumer behavior has naturally seen a decline in demand, especially in discretionary spending which in turn has slowed the country’s economic recovery. How long these challenges will persist is uncertain, but they are likely to continue until confidence in the real estate market is restored and broader economic stability is achieved.”

Rosen continued, explaining that while domestic tourism remains robust, the primary issue for global hotel companies lies in the significant dip in room rates, particularly in the luxury segment. “This decline is a direct consequence of the broader economic challenges and associated lower consumer spending, as well as more people traveling for cultural experiences in Tier 3 and Tier 4 cities, which typically have lower room rates.”

This impact (geopolitical tension) currently is more pronounced in hotel investment, where state-owned enterprises are becoming increasingly cautious about partnering with international brands. If geopolitical tensions escalate, consumer attitudes toward international brands could also turn more negative.

Jingjing Zheng

Share this quote

Zheng pointed out that global hotel companies primarily operate in the upper midscale or higher segments, whereas the midscale and economy sectors are dominated by well-known domestic hotel groups such as Huazhu, Atour, BTG and Jinjiang. “These local brands have achieved high levels of localization, digitalization, and operational efficiency,” she said. “With the economic downturn, tightened consumer spending, and a growing preference among Chinese consumers for domestic brands due to national pride, global hotel chains face intense competition from established local hotel brands.”

Additionally, corporate travel isn’t as robust, which Rosen said causes the global hotel companies to balance competitive pricing with maintaining service quality to attract both leisure and business travelers.

Simply put, improvement in business for global hotel companies in China hinges on increased leisure and business travel. “While domestic tourism volume is strong, the return of international inbound travel is crucial but may be delayed by the long planning cycles of U.S. tourists, which typically take two or even three years,” Rosen said.

He said key to this recovery will be the resumption of large city exhibitions and events, which drive significant business travel. “Additionally, the continued strengthening of Hong Kong as a travel hub will plays a vital role. For global hotel companies to see substantial improvement, these elements must align, fostering a more favorable environment for both domestic and international tourism,” Rosen said.

Zheng said the ongoing challenges will require hoteliers to focus on unique experiences, diversified offerings, and targeting different market segments to navigate through what may be a prolonged period of softness.

“If the central government can stabilize and stimulate the economy, consumer confidence and spending could rebound, improving domestic travel demand,” Zheng said. “However, economic recovery might be slow and uneven, potentially taking years to see significant improvements.”

Despite the weakness it is not deterring development by the industry’s giants.

Marriott said it experienced record signings in first half of year in China. “Owners believe in long-term dynamics of travel and continue to sign and construct, and we don’t see slow down,” said Marriott President and CEO Anthony Capuano. “We signed 63 select deals in China in first half and half of those will open inside 12 months. We are not just stacking paper and the pace of construction is encouraging.”

That said, ongoing geopolitical tensions between China and other countries could impact the business environment, according to Zheng. “This impact currently is more pronounced in hotel investment, where state-owned enterprises are becoming increasingly cautious about partnering with international brands,” she said. “If geopolitical tensions escalate, consumer attitudes toward international brands could also turn more negative.”