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Kempinski hotels: Rising in the East

16 March 2006

The juggernaut that is the fifth-largest economy in the world shows no sign of slowing. China's economy expanded by 9.9% in 2005, and officials say that 2006 is likely to be another year for powerful growth.

Continuous growth from 1979 onward has already lifted several hundred million of the Chinese population out of abject poverty. According to the country's National Bureau of Statistics (NBS), last year the average income per head of China's 1.3 billion citizens was US$1,700, making the country richer than Morocco. Consumption accounted for 33.3% of the increase in GDP, compared with trade at 17.9%.

The very structure of Chinese life is changing, creating a middle class with money for leisure and a large network of corporate travel.

This runaway economic growth means China continues to be an attractive market for hotel investment, with Hilton, Starwood, Six Continents, Hyatt, Accor and Kempinski all establishing a presence - not just in the gateway cities of Shanghai and Beijing, but across the country. For Kempinski, China's secondary cities and resorts are playing the starring role in its expansion strategy.

"China is definitely our largest market," says Juerg Siegenthaler, Kempinski's senior vice-president of sales and marketing. "By 2009, we'll have 16 hotels there."

He adds: "Everything started with the Beijing Kempinski hotel Lufthansa Center in 1992, the largest hotel of the group, with 526 rooms. That allowed us to grow in secondary cities. Last year, we opened in Dalian and Chengdu. They might not be well-known to Westerners, but these are cities with populations of six million. Ninety-five per cent of our customers are Chinese. At the moment, it's all about the Chinese market."

Siegenthaler adds that the Chinese will slowly develop into an outbound market, as the world's most populous nation provides a potentially vast new pool of clientele for Kempinski's current portfolio of 55 hotels throughout the world.

Investment, covering everything from art centres to hotels, accounted for nearly half of China's 2005 growth, according to the NBS. Siegenthaler says this frenetic growth rate means developers are not always experienced in hotel construction and critical details can be overlooked.

"For each hotel," he says, "we have different owners. We coach them to make sure they don't oversee important things. Some are more coachable than others.

"The owners can have completely different ideas over basic things - how to get into the hotel by car, parking, the size of the restaurants, where to put which rooms. You have to try to take it on board and explain why this and that should be done in another way."

A 438-bedroom hotel is due to open this April in Shenzhen, China's first Special Economic Zone and the only mainland city with a cross-sea bridge to Hong Kong.

With seven Kempinski hotels already operating in China and another nine to open by 2009, Siegenthaler believes one reason Chinese developers choose Kempinski is that it's a collection of hotels rather than a chain. "We build up long-term relationships with the owners," he says. "We try to build a hotel together with the owner. If he did something with Hyatt, for example, it would be much more uniform and Hyatt would dictate and say, ‘That's how it's got to be.' Sometimes, to be honest, when I see what we go through, I'd prefer that as well."

Kempinski holds solely management contracts at all its hotels, apart from three German properties that it also owns. For Chinese developers, the return on investment can be relatively quick, says Siegenthaler, because of the low labour costs. The Dalian hotel had occupancy of between 60% and 80% right from the start, and room rates of ¤150 (£103). Siegenthaler estimates that the owner will have repaid all construction costs within 11 years.

"We really take individual care with the owners and make it happen as quickly as we can," he says. "We coach the owners in having the know-how to build and operate five-star properties."

Kempinski's expansion in China is not restricted to highly populated cities. Commune by the Great Wall, opening this October, is a series of six-bedroom villas 70km from Beijing, displaying the talents of 11 diverse architects - and it has become a visitor attraction.

Kempinski won the management contract to run the site as a hotel, and is remodelling the villas to make them more saleable, while staying faithful to the various architectural styles. The site includes private access to the Great Wall, which will be used for entertaining.

Another project is in Sanya on the southern tip of Hainan Island in southern China. It enjoys average temperatures of 25°C, sunshine for more than 300 days a year, and 7km of fine sandy beaches, and Siegenthaler is confident the resort will be a success.

The current goal for Siegenthaler is to streamline distribution systems and to find new ways of cross-selling Kempinski's portfolio. An important tool in this process is the Global Hotel Alliance (GHA), a marketing consortium founded by Kempinski, which represents Europe. Other members are Wyndham, which covers the USA; Pan Pacific, which covers the Pacific Rim; and Ridges, which takes in Australia. The GHA is now being relaunched and Siegenthaler is confident that Kempinski can shift some central marketing services to the group.

Siegenthaler is also a firm believer in having the right sales people in the right place to promote certain regions. For example, he knows that the Spanish are one of the biggest groups of travellers to China. "You need to go and approach these potential customers and bring them to our hotels," he says.

After China, Kempinski's key expansion markets are the Middle East and Africa. This month, the 400-bedroom Mall of the Emirates opened in Dubai, complete with 20 ski chalets, an indoor ski slope with views over the Arabian Gulf, and the world's largest shopping mall outside the USA.

But Siegenthaler suggests that Dubai may be in danger of creating an oversupply. "You can't look beyond three or four years," he explains. "With the World and the Palms, they are building condominiums, houses and hotels that all need to be sold. It's a huge capacity coming on to the market."

He reckons that, for the leisure market, Dubai is too hectic ("It's a building site - don't go there for a holiday," he says) and Abu Dhabi, where Kempinski runs the Emirates Palace, will benefit from a rise in popularity. It is also looking at projects in Oman and Qatar.

Another focus is Africa, where Kempinski is opening the first five-star hotel in Ndjamena, the capital of Chad, a country with the second-largest gas reserves in the world.

By African standards, Tanzania has been identified as an efficient and well-organised country, and Kempinski has recently opened in the capital, Dar Es Salaam, and on the island of Zanzibar, where 85% of tourists are Italian. Siegenthaler says: "Our aim will be to have a share of this Italian cake but also generate more traffic from the UK and France."

Kempinski's planned openings in China

Shenzhen
438 rooms, April 2006
Situated in the bay area close to the Shenzhen-Hong Kong bridge.

Urumqi
282 rooms, June 2006
Kempinski's partner is China South Airlines, which uses the city as a hub to the Middle East.

Sanya, Hainan Island 409 rooms, December 2006
Average temperature is 25°C, with 300 days of sunshine a year.

Wuxi 450 rooms, March 2007
This city of 800,000 inhabitants is known for its lake scenery and silk production.

Qingdao
452 rooms, June 2007
A seaside city known as a summer and health resort.

Changchun 400 rooms, 2008
Changchun is home to Audi and Volkswagen car manufacturing plants, and film production.

Yinchauan 350 rooms, 2008
Famous for its Helanshan stone sculptures and wolfberry fruit wine.

Tianjin 450 rooms, 100 serviced apartments, 2008
A modern port and industrial city of 10 million, near Beijing.

Shanghai 500 rooms, 2009
Located in the Puxi district across from the new Expo area.

Investing in China's secondary cities

Pros The advantage to hotel operators of casting their nets wider in China clearly lies in the potential demand: the scale of China as a country, its rising levels of affluence, the growth of domestic business and leisure travel.

Early hotel development by overseas players focused mainly on the major cities of Shanghai and Beijing, while some companies used loss-leading strategies to promote their four- and five-star brands in some secondary cities.

Now it is the strength of domestic travel that has made hoteliers sit up and pay attention.

The mid-range domestic tourism segment has not been catered for, and this is an area destined for rapid growth. Brands such as Jin Jiang Inn, Super 8 and Express By Holiday Inn are rolling out across China.

High standard retail, conference facilities and F&B in the settings of modern and international hotels will attract other international (or high-end local) retail and F&B operators to China's secondary cities.

Cons Levels of transparency and regulation differ from city to city.

Often, the release of sites for hotel development is tightly controlled, so hotel players will have to enter into a joint venture with a local developer.

Possible pitfalls for joint ventures include loss of independence, and exposure to less professional developers and local contractors.

Operators should expect to invest more time and resources in training and staffing for their hotels in secondary cities.

Source: CB Richard Ellis Hotels

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