Starwood in China

If the hotel industry could speak in one collective voice, it likely would be chanting "China!" In a modern business-world equivalent of the Oklahoma Land Rush, U.S. hotel companies are engaged in a fierce expansion race eastward to plant their individual chain flags. The prize? The attention and, ultimately, guest loyalty of a new and growing contingent of deep-pocketed Chinese customers.

And arguably no hospitality company is more focused on gaining the high ground than White Plains, N.Y.-based Starwood Hotels & Resorts Worldwide. This past June the chain, in an unprecedented move, relocated its entire eight-member leadership team to China for five weeks. It was a strategy that immediately set competitors speculating and the media humming. But for Starwood's chief executive officer, Frits van Paasschen, the relocation made perfect sense. "I didn't go to China to have some kind of epiphany or close a big deal. It wasn't some kind of watershed moment," van Paasschen says. "Our team went to make sure that we are supporting our local teams there in every reasonable way that we can."

During the five-week effort, M&C shadowed the Starwood team's progress through a series of early morning phone interviews, as members crisscrossed the country from Shanghai to Chengdu in the west, and Beijing to Guangzhou in the south. Among detours along the way, they met with their 26-member Asia Pacific advisory board at the W Taipei; attended a divisional conference at the Royal Orchard in Bangkok, Thailand, with some 700 general mangers, directors of sales and others; and attended a board of directors meeting in Shanghai.

"It was," reflects van Paasschen, "the most intense five weeks of my life."

Eastward to ChinaExactly how dominant a player has Starwood become in the China market? In 2010 the company opened more hotels there than any other chain, comprising its second largest market outside of the United States. At press time, Starwood had 75 hotels in the country, with another 100 in the pipeline and set to debut by 2013.

By comparison, here's what other major hotel companies have going in the world's most populous country:

• Marriott International has 57 hotels (10 of them in Beijing) now open in China, with plans to add another 27 by 2014.

• Hilton Worldwide, which has 18 Chinese properties (including nine Hilton Hotels & Resorts), plans to grow its portfolio to 100 within the next five years. Just last month, the company appointed veteran hospitality executive Edmond Ip to the new role of chairman for Greater China, charged with overseeing Hilton's operational interests in the country.

• Best Western has 31 properties in China, with 41 more in the pipeline.

• The only hotel companies with larger portfolios than Starwood in China are Wyndham, with 324 properties, and InterContinental Hotels Group, which currently has 150 and is on track to double that number by 2015. However, most of the product for these two chains is in the budget and limited-service sectors.

Driving the robust international hotel development engine is China's booming multibillion-dollar tourism sector. According to the United Nations World Tourism Organization, China beat out Spain in 2010 as the third most visited country in the world, right behind France and the U.S., with the number of international arrivals reaching 55.66 million -- and it is predicted to snag the top spot by 2020.

Meanwhile, the number of outbound Chinese travelers reached close to 57.4 million in 2010, up 20.4 percent from the year before. But it is the Chinese domestic traveler who clearly is the front-runner. According to China's National Tourism Administration, this segment made 2.1 billion trips in 2010, an 11 percent jump over 2009. And as China's economy continues to percolate, the volume of Chinese traveling for business and vacation within their homeland is predicted to swell.

Starwood has this new domestic traveler squarely in its crosshairs. "This sector has grown exponentially for us," says Alison Taylor, vice president of sales, Asia Pacific, speaking from Shanghai, where she and relocated team leader Christie Hicks, senior vice president of global sales, have made their way after spending several days at the Westin Beijing. Based in Singapore, Taylor is a 23-year Starwood veteran, with 15 of those years spent in the Asia Pacific region. "Five years ago, Chinese travelers represented about 15 to 20 percent of our business," she notes. "Today, 58 percent of our business is from them, and 10 percent of that is from same-day bookings."

In Beijing, Hicks' top priority was scoring a sit-down meeting with Guangfu Cui, the CEO of eLong, and his senior team. Owned by Expedia Inc., Beijing-based eLong represents 20,000 hotels in more than 700 Chinese cities (Starwood's portfolio included) and more than 135,000 hotels in some 100 countries overall. Besides being a major partner for Starwood, eLong is widely considered the country's fastest growing online travel service provider. In 2010, the company booked 6.4 million room nights, an increase of 49 percent over 2009.

The meeting with eLong's management, Hicks says, represented an opportunity to affirm their importance to Starwood. "In the U.S., it's normal to conduct business by e-mail and phone and never lay eyes on the customer," she notes. "In China, face-to-face meetings are very important. They are a sign of respect. I wanted eLong to take away from that meeting that Starwood is taking the Chinese market very seriously, and that we respect their company and appreciate the work they are doing."

Forging aheadThree weeks into the trip, van Paasschen is in Shanghai readying for the company's board of directors meeting. He says he can't wait to take board members around the market in Shanghai, so they can experience the excitement he has been witnessing.

"This is an economy making a shift to consumption. There is a real sense of urgency everywhere you go," he says. "It used to be that hotels were built as outposts for Western travelers inbound to China, but that has completely shifted. Today, the majority of our guests are Chinese nationals. And as we start to build in second- and third-tier cities, that number will only go up."

In 1985, Starwood became the first global hotel operator to enter the Chinese market when it opened the 827-room Great Wall Sheraton in Beijing. While all nine of its brands have since established a presence there, it is Sheraton that continues to lead the company's growth in the region by aggressively leveraging its first-in advantage. Currently, the Sheraton portfolio stands at 35, with another 40 in the pipeline. Not only will the brand increase the number of its properties in big cities like Beijing, where it will add a second property, and in Shanghai a fourth, it is moving into rapidly developing urban centers such as Chongqing and Huzhou.

To capture the legions of newly minted Chinese road warriors and leisure travelers, van Paasschen acknowledges that Starwood must adapt to cultural nuances to stay competitive. And the first priority, he says, is language accessibility. As such, in March, after plowing a significant amount of investment into its technology infrastructure, Starwood added online booking capability in Chinese to all of its branded websites, including SPG.com, the Starwood Preferred Guest loyalty program site. In addition, the company has expanded its Customer Contact Center in Guangzhou, which employs more than 160 associates to support Chinese-speaking customers. Hot on those heels, Marriott International in June opened its first dedicated China reservation center in the same city, with 45 associates.

Hotel companies have good reason to chase down the Chinese traveler. According to the U.S. Department of Commerce, a Chinese tourist spends an average of US$6,000 per person, per visit, in the U.S. And that represents just the outbound traveler. At home, China's appetite for luxury goods is growing faster than any in other country and is expected to surpass the U.S. by 2012, according to the 2010-2011 World Luxury Association Annual Report, released in June. "Some 200 million well-heeled consumers are increasing consumption by at least 15 percent annually," Michael Ouyang, chief executive of WLA China, noted in the report.

Meetings, Chinese-style Starwood plans to equip its new Chinese properties with state-of-the-art meeting facilities, which might help offset some of the hectic nature of organizing events here. For example, the average window for booking meetings requiring 20 to 150 rooms at Starwood's properties, where overall meetings represent 20 percent of business (40 percent at Sheraton), is just 13 days. That means response times to requests have to be trigger-finger sharp, leaving scant opportunity for the massaging of 25-page contracts.

"It's a little like the Wild West," admits Alison Taylor. "A good portion of our banquet and business meeting accommodations are booked on the same day. We can't afford to be as contractually anal. Sometimes we don't have a contract at all, and there are not a lot of deposit and attrition requirements."

"The number-one differentiator to closing meetings business in China is response time, not rate," says Hicks. "They want space and availability, and they don't have a lot of time to shop." After that, she says, the next negotiated point is a flexible payment schedule. And if that's what it takes to grow Starwood's share of the meetings market, adds Hicks, she and her team have no problem adapting. Currently under consideration, as a way of shortening the response time for group business, is creating clusters of sales associates who work on a "follow the sun" strategy. "That doesn't mean we are going to have 75 people working the graveyard shift," notes Hicks. "But with today's technology, and the requests from our employees for flexibility in lifestyles, the possibility of shifts from 11 a.m. to 7 p.m. is very real."

To delve into the mind of the Asia Pacific meeting buyer, Starwood recently hosted its top 35 buyers at the W Taipei in Taiwan for a day of meetings and a showcase of the chain's hotels. None of the clients, says Taylor, had ever met the CEO of a hotel company before, and many remarked how unusual and exciting it was to have Frits van Paasschen addressing them in a meeting. "Honor is very important in Asia, and that just took our relationship with our clients to an even greater level," says Taylor.

Growing pains While China's hotel building boom continues its frenzied pace, industry watchers predict that an oversupply in markets will lead to price discounting, as demand lags. Horwath HTL's Annual China Hotel Industry Study 2011, released in July at the China Hotels Development Conference held in Hangzhou, pointed out that a drop in foreign demand, coupled with the increase in the supply of international hotels, was leading to oversupply and keeping the average daily rate down.

In its 2011 Spring Asia-Pacific Lodging Real Estate report, Portsmouth, N.H.-based Lodging Econometrics said China had 1,260 projects, representing 353,252 rooms, in the pipeline -- 62 percent of the total Asia Pacific pipeline. Van Paasschen acknowledges the burst of supply has led to saturation in some cities, but he is confident that demand eventually will catch up. "The economy is developing so quickly now, there will be places where supply and demand is out of kilter," he says, "but with 300 million people eventually on the move, a little extra capacity today will quickly meet that."

Of a more immediate concern, he insists, is ensuring Starwood's properties are staffed to the correct levels, because Chinese travelers are far more demanding when it comes to service expectations. "We are focusing on selecting, training and promoting people who understand how to deliver the brand experience," says van Paasschen -- and it's shaping up as quite a job, considering that Starwood currently has close to 30,000 associates in China alone and plans to triple that number in the next several years.

The sheer magnitude of the task is daunting, admits van Paasschen, who has been on the road visiting hotels across the portfolio, meeting with management teams and sizing up each property's fidelity to the brand. To help keep standards in line, each new hotel is used as a stepping stone to the next in development, with trainee employees on every level shadowing their more experienced counterparts, before going on to take over that role when the new property opens. "You can't open 90 hotels from a standing start. This is the only way to get the job done," says the CEO.

One eye on the competition Earlier this year, the InterContinental Hotels Group announced plans to launch in 2013 an "upscale, made-for-China" brand that will cater specifically to the Chinese domestic business traveler. IHG expects that one in four hotel rooms the company opens in the foreseeable future will be in China.

Not to be outdone, Marriott International said in July it was working on a Courtyard by Marriott prototype for China but did not offer details on how it would differ from existing Courtyards.

At present, Starwood has no plans to develop a brand specifically for the China market, says van Paasschen. Instead, to meet the needs of the lower price-point traveler, the company will focus on expanding its Four Points by Sheraton, Element and Aloft brands.

Meanwhile, now back at their U.S. headquarters, the Starwood team says they are more keenly aware of local needs after their sojourn. Stay tuned, they say, because in the next several months they will launch even more initiatives aimed at capturing this dynamic travel market.

"The Chinese are used to cutting-edge hotels," says Hicks. "The exciting part now is making sure we capture them as they travel outside their country. That's what we will be focusing on now."