H World, formerly Huazhu, produces economy hotels with more than 1,000 hotels in China signed during 2Q2023 alone – its chief financial officer He Jihong shares why growth is still strong for the company, despite whatever economists might say about China economy or property crisis
What’s behind the name change from Huazhu Group to H World Group in June 2022?
As H World Group may not be so widely known outside China, let me first give a brief introduction.
Our founder (executive chairman Qi Ji) is a serial entrepreneur. He also co-founded Trip.com and Home Inns & Hotels Management. I have never in my life met anyone who brought three companies successfully to NASDAQ (laughs).
The first H World hotel was the economy HanTing Hotel in the suburbs of Shanghai, opened in 2005. Ji already had the vision then of creating a different hotel company. He is an engineering and computer science major, so he always believes that technology can change the hotel industry.
So, we really are using technology in all our operations and our management system to revolutionise the industry.
How is H World revolutionising the hotel industry in China?
We focus on technology-enabled economy and midscale hotels. Around 86 per cent of our rooms are limited service hotels, hence we are able to automate them. We are also going into select service. We do have a portfolio of full service hotels and a few ultra-luxury hotels in China through the acquisition of Deutsche Hospitality, but economy and midscale remains our core. (Note: the acquisition of Deutsche Hospitality was completed in January 2020. H World Group also holds the master franchise for Mercure, Ibis and Ibis Styles, and an agreement to co-develop Mercure and Novotel, in China.)
Most of our hotels are ‘manchised’ (a model that combines management and franchise). We develop all our operating systems internally – the CRM, RMS, PMS, staff management, etc – so we can keep everything in our own ecosystem, which is important. As a result, we have the largest membership programme with 218 million members. The next largest is maybe Jin Jiang (International), probably below 200 million. Marriott (International) has less than 190 million (a check with Marriott shows it has 182 million Bonvoy members globally). Our members account for 76 per cent of nights spent in our whole system – so, technology has enabled us to develop traffic.
We also automate almost everything. Members can book online through our app, choose or change rooms online, check in automatically at the lobby, produce the key and go to their room, order services such as laundry online, request for extra pillows and our robots – we have lots of them now running around in our hotels – will deliver and call them to pick up the items outside the door. Basically, you can do practically everything online.
What is your staff to room ratio?
Half of the industry standard. We still spend quite a lot of time thinking about how we can further use technology to improve efficiency.
We also try to make life easy for our franchisees. Each of our brands has a clear design and the hotels are highly standardised. We have a very big supply chain management; we even source construction companies for them (franchisees). So, if you are a lazy franchisee, you don’t need to do too much – you just need to get the location and pay for the model. As you know, with the managed franchise model, we recruit the hotel manager, train the staff and send them to the hotels to deliver our standard.
We are proud that we have revolutionised the Chinese hotel industry and we are still growing very fast.
It’s very commoditised yet people want experiences, but I guess this is relevant for a huge market like China?
Limited service is still the biggest market no matter where, even in the US, because only a small portion of people can afford luxury.
I travel a lot internationally and I believe our limited service products are among the best in the world.
When you compare our products such as HanTing with, say, the motels in the US or Europe, ours are much better products. We keep our rooms clean and extremely efficient, and we constantly push out a new version of our brands and ensure people will love them.
Yes, I noted that in the first half of the year you closed 302 low-quality economy soft brand hotels, and HanTing 1.0 properties, as part of your drive towards quality growth.
Yes, we are not looking to pump up our number of rooms. We tried that before and learnt from the Oyo effect (the group still has a small stake in the budget hotel player). We tried to imitate their business model and created a soft economy brand but it didn’t turn out well. The business model is just distribution: you come onto my platform and I charge you a fee. We found a lot of the hotels were just not up to our standard. Some were badly managed. It’s more damaging to our reputation.
Nevertheless, H World Group is still growing very fast, and you already have 8,622 hotels in China as of June 2023. I saw that you signed 1,054 new hotels in China in 2Q2023 alone, a jump from 561 signings in 2Q2022. These are excluding the economy soft brand hotels. So, still a lot of room to grow, especially in secondary-tier cities?
We find that more and more customers in China, and more so in the US, like branded hotels, even in the lower end. In the US, 70 per cent of hotels are branded. In China, I saw a newly-published number from an association that 38 per cent are branded, compared with 26 per cent in 2019. You can see it’s increasing fast.
During Covid-19, many independent hotels closed shop. They learnt it’s quite difficult to make money in such (an unprecedented) down cycle. People began to understand they needed a consistent brand and a solid distribution system. This benefitted us actually.
I see that you’re growing fastest in Tier 3-4 and below cities.
China is a huge single market. There are four Tier 1 cities – Beijing, Guangzhou, Shanghai, Shenzhen – followed by the Tier 2 cities, which are the capital city of each province, and we are quite well covered in many of these cities. It’s important to go into every corner where we can have our hotels, thus we’ve set up a target of about 2,000 counties we think are possible for our expansion. Currently, we’ve covered close to 1,100 cities and counties, so still quite a lot of blank spots for us to go into.
During Covid-19, there’s less business, so we did some internal restructuring and set up six regional offices – in east China, south, central, west, north and north-east – to penetrate those places.
How’s the situation in China now? What are your views on reports of China’s cooling economy and China’s property crisis?
Actually, business is excellent for us. As you saw, our first-half earnings were the best ever.
We did not feel a slowdown. We benefit if there is a consumption downgrade as demand for our types of hotels grows stronger. We also benefit from revenge consumption, and there was some of that as reflected in the Spring Festival, for example.
There are lots of projections about how China’s GDP is going to grow. I’m not an economist, so it’s difficult for me to comment. What I want to stress is our business model is inelastic. If the business environment is good, we do well. If the business is challenged and people do not have that much money to travel, they will come to our hotels because these are really mass market products.
We do not see a slowdown in our demand. This year, we’re going to do quite well and we believe this trend will continue for our hotels.
But we don’t see Chinese travellers coming back in full force yet. What’s your take on the outbound market?
There are several reasons. One, (the number of) people who could afford outbound travel is not a huge amount (versus domestic travel). Second, the international flights are not fully recovered. The third is the visa issue – a lot of people cannot get visas. So, it’s a different play from the domestic mass market.
You’ve opened an office in Singapore. Are you planning to expand your brands in Asia?
We already have a JI Hotel (in Singapore), which opened during (the pandemic). It did quite well during the (recent) F1 event.
I think some of our brands that are universal, like JI and Orange, could be expanded. It depends on the market and on the owners.
I would imagine Thailand is an opportunity, since it’s the biggest market for Chinese travellers who are already familiar with your brands?
Yes, we do like Thailand, also Vietnam – actually the whole South-east Asia because our members like to go to these countries.
You joined the company in 2021 as CEO of international business, from CapitaLand and Temasek in Singapore. You were then promoted to H World Group CFO in December 2022. How do you find the hotel business in China
(Laughs) It’s very interesting and I meet very interesting people, especially at property level. They are so passionate and pay attention to every detail. I really like to interact with them – it’s better than dealing with data centres!