According to Apex Experience, the bulk of air travellers travelling to, from or within China will be millennials. An additional study commissioned by the Singapore Tourism Board, “Chinese millennials are the biggest spenders among Asian millennials and have no qualms about spending upward of USD 14,000 on travel per year.”
These impressive statistics raise the question of what it means for domestic and international hospitality services. Clearly, a competitive edge is required to attract customers. However, depending on consumer motive and goals, there’s a reason why he or she may choose one over the other.
This brief article will focus on Chinese hotel start-up, Atour Hotel, an international brand, Airbnb. Both companies use an asset-light business model, an attractive model for investors. However, in the Chinese market, Atour still has a competitive advantage in its stronger network effect. However, Airbnb is slowly gaining traction in China, but to gain a real competitive advantage over local competitors is perhaps getting a thorough understanding of the market and R&D investment.
P2P Accommodation
Airbnb offers an online marketplace for leasing of properties and short-term renting. Since 2008, the United States hospitality company has more than 200 million members in more than 65,000 cities in 191 countries.
In 2017, travellers could choose from more than 3 million spaces. In China, Airbnb bookings grew 180% to 1 million in the third quarter of 2017, according to CNBC. By 2020, the company is expecting China to “be its most significant market.” Airbnb’s co-founder and company chairman in China, Nathan Blecharczyk, mentioned on a podcast hosted by GGV Capital, an Airbnb investor, that Chinese millennials make up 80% of its customers compared to 50% in other countries. However, according to The Information, the company is expected to lose USD 20 million in its overall China operations in 2018, a number the company was “comfortable with.”
Chinese apartment rental start-up, Tujia’s co-founder, implied Airbnb’s lack of tourist differentiation in an interview with Forbes. There’s a “stark contrast in cultural and consumption behaviours between travellers in China and the United States.” However, Airbnb has struck partnerships with local governments and city authorities; its efforts reflected favourable results where the number of guest arrivals in Beijing increased by 91%.
Compared to hotels, P2P accommodation’s competitiveness arises from social and cultural characteristics. Additionally, P2P puts more emphasis on host hospitality, location, and convenience to restaurants, shops, and attractive destinations. In Airbnb’s case, local government relations are important for attracting customers. As more Chinese millennials become more accepting of Airbnb, the company took the opportunity to latch onto millennial trends to attract a niche local market.
According to a study done on P2P and traditional hotels, P2P bookings are mainly leisure driven and the most influential factors were the trip length, dwelling size, party size, location, and price. Consumption habits differ from country to country, but within China, as some cities are wealthier than others, consumption habits may also differ.
Therefore, as Airbnb expands to various Chinese cities, some may be more profitable as Chinese millennials look toward apartment-sharing in tier one and two cities rather than tier three and four cities where millennials aren’t as pressured to buy real estate as their tier one and two counterparts.
Additionally, it appears Airbnb is tapping into two different markets: long-term and short-term apartment sharing services where consumer needs vary. However, regardless of which market Airbnb is tapped in, it must maintain a strong network effect, an effect that its Chinese competitor may have a competitive advantage. Yet, Airbnb has an absolute advantage globally compared to Chinese hotels and counterparts. International visitors may also choose Airbnb in China over traditional hotels due to familiarity.
Airbnb is also a light asset model where the company is the platform and the hotel room it provides is the product. Compared to traditional hotels who may use an asset-heavy model, Airbnb is a more attractive option. Furthermore, while hotel ARPU amounts to USD 192.29 compared to USD 102.47 in 2019, ARPU for vacation rentals is showing a steeper growth than its hospitality counterpart.
IP Theme Hotel
Atour Hotel is a mid to high-end lifestyle hotel, serving the middle class. As of March 2019, Atour signed 600 hotels and opened more than 300 hotels. It entered nearly 150 cities across China and serves more than 18 million members. Under Atour, the group has six major hospitality services: Atour Hotel, Atour S Hotel, Atour Light, ATHouse, SAVHE, ATLiving. All of these sub-brands are meant to target different customers.
According to China’s Business News’ interview with Atour’s CEO, WANG Haijun, the fastest profitable hotel is in Shenzhen. Others have achieved profitability after 6 months. Atour’s prices are approximately CNY 80 to 100 higher than similar hotels. However, WANG is banking on high-quality to lure customers.
Atour has also partnered with big names in China such as NetEase Yeation and Tencent to provide IP themed hotels. Before NetEase, WANG mentioned in the interview that Atour and WU Xiaobo jointly opened a hotel which was more “influential” and had a higher rate of return.
By cooperating with other companies, Atour increases its scalability, strengthens its network effect, and shifts to an asset-light business model. In addition, Atour uses a membership model to build a strong customer base and brand loyalty. This also allows the hotel to track consumer data, assuming the company has an efficient logistics system. The company may also track which kinds of rooms are more popular between members which allow for better accommodation tracking.
Atour or Airbnb?
Part of Atour’s strategy is to expand further into tier one cities which may be due to targeting a different target audience than Airbnb. Recent studies have shown that safety, security, price, and facilities and services are factors consumers consider when choosing hotels over P2P. Therefore, in addition to different attributes between consumer preferences, Atour may win over Airbnb in its stronger network effect and asset-light business model.
However, while Airbnb also uses a similar strategy, it’s slowly gaining traction in China and may become a leading competitor in the country’s hospitality sector. Additionally, despite having an absolute global advantage over Atour, to win over local competitors strongly depends upon understanding the target market and perhaps heavy investment in R&D to gain a competitive advantage.