Joon Aun OOI Photo/ provided to NBD

President of Wyndham Hotels & Resorts (from now on referred to as Wyndham) Asia Pacific, Mr. Joon Aun OOI, believes that the hotel industry in China has entered a new phase.

Data shows that 2023 franchising accounted for as much as 60% of newly signed hotels in the Asia-Pacific region, compared to less than 50% in 2022. "Both international hotel brands and domestic Chinese hotels are now transitioning towards franchising," said Joon Aun OOI.

According to research report data, the proportion of franchising projects in the hotel industry in 2023 continues to expand, reaching 82%, significantly higher than in previous years.

Joon Aun OOI keenly observed this significant change. Many management-type hotel owners are transitioning to a franchise business model in the cases he has encountered. During negotiations and contract signings with owners, the number of competitors (franchise hotel brands) has grown from 2 or 3 to 6 or even 8, indicating that many hotel groups are now opening up their franchise brands.

Self-operated, managed, and franchised operations are among the most common models in the global hotel industry. Franchising is considered a powerful tool for brand expansion because it can achieve rapid growth at lower costs. However, it has yet to become popular in China due to various immature conditions. Nowadays, franchising is frequently mentioned in the Chinese hotel industry.

In the franchise market, Wyndham holds a 20% market share across the Asia-Pacific region. Recently, National Business Daily ("NBD") interviewed two senior executives from Wyndham, which has consistently ranked among the top ten global hotel groups for many years. The interviewees were Mr. Joon Aun OOI, President of the Asia-Pacific region, and Mr. Bill Wang, Chief Development Officer for Greater China. They delved deep into why franchising has become a new trend in the Chinese hotel industry.

Photo/ provided to NBD

Scale Matters: Hotel Brands Persist in Opening New Stores

Wyndham, one of the world's largest hotel groups, boasts 25 brands across 95 countries with over 9,200 hotels worldwide. China has approximately 1,600 hotels with a total of over 170,000 rooms. Among these, budget hotels make up 70%, mid to high-end hotels makeup 24%, and luxury hotels make up 6%. The first hotel was opened in Guangzhou in 1991, marking Wyndham's 33rd year in the Chinese market by 2024.

In the global hotel room count ranking of the "HOTELS" magazine, which solely considers quantity as the indicator, Wyndham held the fourth position from 2013 to 2017. In 2018, it dropped to fifth place, then to sixth in 2019. From 2020 to 2022, Wyndham regained and maintained the fifth position. It is worth noting that, based on hotel numbers, Wyndham ranks the second largest globally.

"It's normal for rankings to fluctuate in a highly competitive industry. Ranking fluctuations are a natural occurrence that drives innovation, but it should not be the sole focus of daily operations," Bill Wang remarked nonchalantly about the ranking changes. On the other hand, the number of hotel openings is a crucial metric for those in the hotel industry. At the beginning of each year, many hotel brand market development teams set ambitious goals for the number of hotel openings as a matter of life and death.

"Why are hotel brands so persistent in opening new locations?" Bill Wang explains, "In the hotel industry, 'bigger is better' is the golden rule. The scale and number of hotels are crucial factors for measuring their brand influence and market share."

He believes that emphasizing scale and quantity can expand market coverage and achieve economies of scale, which is crucial for enhancing brand visibility and improving operational efficiency. This strategy attracts more property owners and guests and strengthens the hotel group's market position.

The Chinese market plays a significant role in the strategic plans of international hotel chains. Joon Aun pointed out that, compared to the mature hotel industry, such as the United States, the average number of rooms per capita in the US is three to five times higher than in China. As a populous country, China has great potential for growth in the hotel market.

In 2023, Wyndham accelerated its expansion in China, annually opening 158 new hotels in the Asia Pacific region. China accounted for 137 new hotels, adding over 14,200 new rooms. The number of new hotel openings and the increase in room numbers reached a new high since 2020.

According to Joon Aun's insights, the advantage of China's large population contributes to a vast domestic hotel market and positions China as a significant source of outbound tourism. The number of Chinese outbound tourists has increased annually, reaching 20 million in 2020 and growing by 20% to 25 million in 2021. Despite a slight decline in outbound tourism in 2022 due to the global pandemic, the number bounced back to 87 million in 2023 following policy adjustments. Predictions suggest that by 2024, the number of outbound Chinese tourists will reach 130 million.

He believes in the immense potential of the Chinese market. Wyndham has 15 brands and more than 1,600 hotels in China. When Chinese people travel abroad, they are more likely to choose a hotel from Wyndham's brand portfolio because they are familiar with these brands from their hometown.

Bill Wang Photo/ provided to NBD

Franchise Operations Are On The Rise

According to the "2024 Development Report of China's Hotel Industry", by the end of 2023, there were approximately 90,600 chain hotels in China, a 28% increase from 71,000 in 2022. Calculated by the number of chain hotel rooms, the penetration rate increased from 38.75% to 40.95%. Among them, the chain penetration rate of economy hotels was 32.49%, while that of mid-range and luxury hotels exceeded 55%.

Compared to the over 70% chain rate in the American hotel industry, there is still significant room for development in branding for Chinese hotels. Looking at the chain rates, primary, secondary, tertiary, and below-fourth-tier cities in China have chain rates of 44%, 36%, 25%, and 14%, respectively. There is excellent potential for chain development in third—and fourth-tier cities, so hotel groups emphasize the importance of expanding into low-tier city markets.

Wyndham sees this as an opportunity. According to Joon Aun's prediction, franchising is a growing trend. 'In the past few decades, managed hotels have had the largest market share in China. Now, the proportion of franchising is increasing, indicating great potential for development in the future,' he said. In mature hotel markets, such as the United States, franchised hotels have a very high market share, while managed hotels have a lower share. After many years of development in the Chinese hotel market, there is now a shift towards the franchising model, with increasing market acceptance."

According to Zhao Huanyan, a senior economist in the tourism and hotel industry, the hotel industry's current development is relatively saturated, leading to a significant decrease in new real estate investments. As a result, there has been a relative decline in the development of hotel brands with strict hardware requirements, while franchise operations with lower hardware requirements have become more convenient. Investment in luxury hotels has decreased, and there has been a substantial increase in the proportion of mid-range hotel brands suitable for franchise operations.

"Franchise operations are relatively easier to develop and operate in all aspects compared to the full delegation model, and there is a growing trend towards further development in the future," said Zhao Huanyan.

Associate Professor Zou Guangyong from the School of Hotel Management at Shanghai Business School also believes that the franchise business model has great potential for development. According to Zou Guangyong's analysis, the hotel industry is entering a stage of low profitability. For owners, franchising mainly involves introducing brands and standardized management, which leads to lower costs and a more suitable option.

Bill Wang emphasized the importance of cost-effectiveness in the current environment of continuously rising economic costs. Franchise operations offer a crucial advantage by providing hotel owners with opportunities to increase revenue and expand their business cost-effectively. This effectively helps offset the impact of inflation and rising costs on hotel profits.

Bill Wang has noticed that in China, property owners are becoming more diverse and moving towards a more flexible model. They seek a say in cost control across various aspects, such as construction, labor, and marketing costs. They treasure brand value, want to be more involved in the daily management of hotels, and emphasize the return on investment of individual properties.

In China's continuously maturing hotel industry, franchising has become the preferred option for major hotel chains. Since opening its doors to franchising in China in 2016, InterContinental Hotels Group has seen franchised hotels account for nearly 40% of its properties opened by 2023. Hilton followed suit in 2021 by introducing a franchising model with the launch of Hilton Garden Inn in China. In 2024, Marriott International expects franchised hotels to make up over 60% of its new hotel openings, surpassing the proportion of managed hotels for the first time.

Joon Aun emphasized that franchising's key feature is its "light asset" nature. Franchisors provide comprehensive support to owners, including branding, revenue generation, management, training, operations, and marketing. Another significant characteristic is flexibility. Owners have primary control over hotel operations while the brand is a supporting partner, offering owners significant flexibility.

It's worth mentioning that Wyndham has over 1,600 hotels in China with over 170,000 rooms, yet the total number of employees in China is less than 100. "The essential difference between franchising and managing hotels lies in people. Without a team of talented individuals in the hotel industry, it's impossible to carry out franchising. Over the past decade, as the Chinese hotel industry has developed, there has been a shift from predominantly foreign management personnel in international brand hotels to many hotels now being run by local teams. This shift has laid a solid foundation for franchising," said Joon Aun OOI.