The H World algorithm: How a Chinese brand keeps changing the hotel business

By Caixin Global

Against the backdrop of a sluggish economic recovery, China’s travel and tourism industry’s rebound has been unexpectedly strong. Over the 8-day Mid-Autumn Festival and National Day holiday period starting end of September, you would deem yourself lucky to have found accommodations at reasonable prices in mega-cities like Beijing and Shanghai. And if you did, it’s very likely you’re stepping into one of China’s largest hotel chains, the H World.

NASDAQ and Hong Kong-listed H World Hotel is a major player in both economy and mid-scale hotels in China. As of September 30, 2023, H World’s worldwide hotel network in operation totaled 9,157 hotels with 885,756 rooms across 18 countries, according to the latest released data. H World ranked No. 6 in operated rooms after Marriott, Jinjiang, Hilton, IHG and Wyndham, according to the Hotel Magazine published in the U.S. In market capitalization terms, H World rose to No. 3 behind Marriott and Hilton in February 2023.

Covid hit the hospitality industry hard, survival became luxury. The number of hotel rooms in mainland China has decreased to 13.46 million in 2022, having lost one quarter of total supply during the pandemic. Economy hotels bore the brunt, with 3.6 million rooms lost. In contrast, H World managed to phase out under-performing hotels and opened 1,244 new hotels in 2022.

In the second quarter of 2023, H Word’s revenue increased 63.5% year-on-year to 5.5 billion yuan ($754 million). It predicts that full year revenue growth of 48%-52%. Meanwhile, H World has a healthy cash reserve, with net cash of 2 billion yuan ($274 million) and a cash balance of 7.8 billion yuan ($658 million).

What has it made of it? Internally, the enterprise of H World is often likened to an airplane, with one body and two wings – brand and operation at its center, while traffic and loyalty program, and self-developed technology system as the wings. In an article titled ‘Competition Strategy,’ founder Ji Qi summarizes the company’s success in an equation of “H World = Marriott + Oracle operating system + booking.com,” meaning H World is a combination of hotel management company plus branding and software-as-a-service (SaaS) provider, all in one.

How does that formula work and will it hold in a post-pandemic world? What has changed that necessitates the hospitality industry to adapt? What are the ambitions of China’s leading hotel chains moving forward?

Loyalty Rewards

Traffic is key to the hospitality industry. A loyalty program is a standard practice to woo and retain customers. What makes H World’s different is the stickiness of its membership – high participation and utilization rates, enabled by in-house technology development, which feed into a self-reinforcing growth pattern with diminishing cost.

H World currently has over 218 million members of its loyalty program, the largest hotel membership scheme in the world.

The success of H World’s loyalty program is based on various key factors: first and foremost is starting in the right place. H World pioneered in an underserved market, created and continuously developed a specific segment of the hotel business: limited service hotels with consistent qualities.

It began with a cost-effective business model in the early 2000s, when serial entrepreneur Ji Qi noticed the enormous opportunity in the service hotel market for business travelers. Usually on a budget of about 200 yuan ($27) per day, these travelers were tugged between bare-bones and five-star hotels. At the time, the hotel market in China had a few luxury hotels at the tip top, which were mostly foreign brands, and a clutch of mid-range hotels, while the majority were individually owned lower end hotels.

Enter the then-called Hanting hotel, which set a standard for limited service hotels in China by providing free internet, comfortable bedding and a reliable shower. The formula proved to be a success as Hanting Group listed on the NASDAQ Global Selected Market in 2010, after only five years of opening its first location. In 2022, Hanting was the dominant player among economic hotel chains in China.

The second ingredient for success lies in technological prowess. The H Rewards is an autonomous customer-driven direct-marketing platform, as both an independent online booking platform and a mobile application, which enables H World hotels to bypass third-party online travel agency (OTA) channels, which typically charge 15% of the booking revenue.

The H Rewards traffic system is bringing a steady flow of customers, where 76% of guests are members, and direct sales amount to 80%. The H Rewards is able to provide 17 services for guests during their stay, from booking to after checkout. For example, one can select the room online before check-in and hail a taxi after checkout directly from the app. It is estimated that 76% of check-ins take less than 30 seconds.

“H Rewards will no longer be just a hotel booking platform for business trips; it is transforming into a business and leisure travel scene-setting platform and service provider,” said Jin Hui, CEO of H World. In preparation for the week-long National Day holidays, H Rewards launched the “Where to Stay in Beijing” recommendation and offered 11 members-only national holiday benefits and other activities.

Last but not least, H World strives to constantly improve its services, meet customer demands, and on many occasions bring them happy surprises. The creation of new hotel products and constant upgrade of older versions bring vitality and profitability to H World. Loyal Hanting travelers will find new hotels created with better facilities such as 24-hour free laundromat, bright meeting areas inside the hotel, and free breakfast for frequent travelers.

Like all hospitality businesses, the strength of H World was tested during the hard times of pandemic. But H World was prepared and as a result, it rebounded quickly. According to the newest operational results, in the third quarter, its revenue per available room (RevPAR) was 129% of RevPAR in the third quarter of 2019. The average daily room rate (ADR) in the third quarter of 2023 was 324 yuan ($47), compared with 305 yuan ($42) in the previous quarter, a much higher rate compared with only 254 yuan ($35) in the third quarter of 2019.

“The strong recovery continues to be largely driven by ADR growth in the second quarter, which reflected a combination of product mix change and product upgrades,” said CEO Jin on H World’s second quarter earnings call.

Looking forward, H World will tap into the strong recovery in the travel and tourism industry. According to data released by the Ministry of Culture and Tourism, in the first half of 2023, total domestic tourist trips amounted to 2.384 billion, representing a year-on-year increase of 63.9%.

Partners endure

Scale matters in the hotel business. With over 9,000 hotels in 18 countries, branding stays at the core of H World’s value proposition. H World has been constantly transforming to a low capital intensive, know-how exporting and standards setting services provider.

Franchising is key. As of September 30, 2023, H World has 690 leased and owned hotels in operation and 8,467 manachised and franchised hotels. The winning strategy for H World: treating franchisees as their own, and going through ups and downs hand in hand.

It is not rare that the founder and senior executives are seen on the ground talking to staff and managers. Social media circulated with exclamation like “I bumped into the big boss of Hanting at Hanting, in-the- middle-of-no-where small county.”

Liu Lanrong from Beijing has been a franchisee of H World for the past 16 years. Before she opened the first Hanting Hotel in Beijing, she managed two individual hotels on her own. “I invested in Hanting and several other brands on the basis of trust and quality. The (then) Huazhu team was particularly supportive, they stay in the hotel (and adjust the operation parameters) until all rooms are filled. I said to myself, if such team can’t succeed, no other team would.”

H World’s distinct comparative advantage is that franchisees are viewed and treated as business partners. Today, 88% of the hotels are owned by franchisees, in Huazhu alone, H World is proud to form a partner network of over 10,000 franchisees.

H World executives also believe partners should endure hardship together, and the company can only make it if their franchisees survive. In times of Covid, H World was the only hotel company in the country with an ongoing franchise fee waiver policy – 300 million yuan ($41 million) waived in 2022. In addition, H World provided legal support for negotiations of franchised hotel rent exemptions, helping them to obtain loans and apply for VAT exemption. Some franchisees’ hotels were able to stay open during the outbreak, thanks to the company’s food and daily operation supplies.

During the pandemic, founder Ji Qi announced a pack of stringent cost control measures in headquarters, including the donation of his full salary and salary cut for senior management team. Yet he urged the franchisees not to lay off staff, stay in safe places and avoid travelling.

“What counts most is the confidence of our franchisees,” added He Jihong, CFO of H World, “the steady growth rate of new franchisees and re-purchase projects shows that the franchisees are willing to continue to invest and work with us.”

Altogether there are 34 brands in H World’s portfolio. Hanting is one of the biggest chains of economy hotels in the country. At the mid-scale, household names such as Ji Hotel, Orange Hotel and Starway Hotel are popular. For business travelers and holiday makers, upper mid-scale hotel brands such as Crystal Orange Hotel and Manxin Hotel are strong competitors to their foreign counterparts. While Steigenberger Icon was the group’s first venture into the luxury segments, the emblem of Classical Chinese Aesthetics Song Hotel was launched in 2021 to further enhance its the luxury appeal.

Ji Hotel, China At mid-scale, Ji Hotel, Orange Hotel and Starway Hotel are popular?household names.

Trusted by investors and franchisees alike, H World was able to remain aggressive in opening new properties. In 2022 alone, it opened 1,244 new hotels. Coming out of Covid, H World’s new room year-on-year growth rate was 12.6% in the first half of 2023, including a record high of over 1,000 new hotels signed in the second quarter.

Tech enables

Rapid expansion to meet customer demands at diminishing cost relies on the other “wing” of the H World philosophy – technology. In 2019, H World was awarded by CIO under IDG Group as one of the 100 most innovative organizations, “an IT-enabled next generation smart hotel.”

Serial entrepreneur Ji Qi, one of the founders of China’s dominant OTA platform Ctrip, looked at his hotel chain as a tech business in the first instance. That helps achieve economies of scale and remains a distinct competitive edge over peers.

A distinctive feature of H World tech-wise is that its whole hotel operating IT-system is developed in-house. Its digital system platform is 100% based on independent intellectual property rights, leveraging advanced technologies such as algorithms, big data analytics, data mining, AI, machine learning and Internet of Things.

The H World platform accommodates a central reservation system, a distribution platform, supply chain ecosystem and an efficient PMS hotel management system. “We have a strong team of IT professionals to develop whole suite of our operating system, this is one of a kind in the hotel industry.” said He, CFO of H World.

With solid tech foundations, H World’s system is flexible to connect with future brands or newly-acquired hotels under the H World portfolio. A self-owned digital platform could also be tailor-made for new customer acquisition, in areas such as the more lucrative corporate clients, and meetings, incentives, conferences and exhibitions (MICE), as well as general leisure travelers.

H World is one of the first hotel groups in China that has achieved large-scale deployment of smart robots. These robots, powered by big data and algorithms, can travel the entire hotel to make deliveries of snacks, toiletries and other hotel amenities, greet guests, and lead them to their rooms, improving the hotel’s operating efficiency. This contactless method was welcomed during the pandemic and is welcomed by many modern-day “introverts,” like tech-savvy guests such as Ji Qi, by his own admission.

Built on digital automation, H World’s staff-room ratio is 0.16, way lower than their peers. And the rate of online service is at an astounding 92%.

In August, H World released Huazhu Business Travel 2.0 products, including “Digital Accommodation Solution,” “Full Scene Digital Link Solution” and “Digital MICE Solution.” Imagine such a tailor-made application could be linked via API, H5 or cable, realizing a self-help loop from customer card building, contract signing, customer service, account management, customer booking, enterprise settlement, billing management, data reporting, and compliance control.

In sum, tech-prowess helps H World achieve economies of scale, attract customers and franchises on two sides of the market at diminishing cost – a model comparable to internet platform economies. And profitability follows. The hotel’s turnover recorded a 72% year-on-year increase in the second quarter of 2023. The adjusted EBITDA for the quarter reached 1.767 billion yuan ($242 million), up 65.4% from the same period of 2019.

“We invested a lot in the digital infrastructure. It will be the backbone of H World’s future development, a truly global integration based on a digital platform,” added the CFO, who is appreciative of the platform’s profitability improvement enabled by comprehensive digitalization.

Eyes set

Looking ahead, H World is going to continue its winning streak built on its proven methods. One is focusing on economy and mid-scale hotels, serving the mass market.

“Following the end of the pandemic and the gradual recovery of the economy, coupled with varying degrees of domestic demand stimulation and various government-supported cultural and tourism activities, we saw a very strong recovery in overall travel demand,” said Jin Hui, CEO of H World.

Data from China’s Ministry of Culture and Tourism show that during the 2023 Mid-Autumn Festival and National Day holidays, the number of domestic trips was 826 million, a year-on-year increase of 71.3% and up 4.1% from 2019. Domestic travel revenue shot to 753.4 billion yuan, an increase of 129.5% from last year and up 1.5% compared to 2019, both historical highs. The World Travel & Tourism Council (WTTC) predicts that China’s tourism industry will be worth $4 trillion in 2033, surpassing the U.S.’s $2 trillion.

H World is looking to expand its reach to over 1,196 cities in China and 90 cities overseas in 17 countries, altogether over 10,000 properties by the end of 2023. As of the end of September, H World was operating 9,157 hotels worldwide, of which 55% were economy hotels and 36% were mid-scale. There are still 2,970 hotels in the pipeline: 37% are economy hotels and 48% mid-scale.

Another strategy of maintaining resilience is by developing the upper-mid scale and upper-scale segments. If budget hotels are the starting point and foundation of H World, moving up the value chain is the next step.

Franchisee hotel owner Liu believes that H World is not only good at economy hotels. When she opened the first Ji Hotel in Beijing and RevPAR rose to 440 yuan ($60). Encouraged by the results, she renovated a courtyard house in the historic Qianmen Area of Beijing, and opened the first Manxin Hotel in the country.

“First tier cities like Beijing are in no shortage of hotels, even in the same location, so if your branding and quality is better, your revenue is naturally higher.” With an annual RevPAR of 1,390 yuan ($191), Qianmen Manxin is now a flagship location for the brand.

Overseas expansion is also on the roadmap. Considering the popularity of Ji Hotel in Singapore, and the rebound of Chinese travelers abroad, H World has assigned a team to increase H World’s presence in Southeast Asia, developing a multi-brand strategy for upper-mid scale segment brands.

Steigenberger Icon Grandhotel & Spa Petersberg, Germany Steigenberger Icon is the H World group’s first venture into the luxury segments.

H World’s other pillar, accounting for over 20% of the group’s revenue, is Deutsche Hospitality (DH), which are located in Europe, Middle-East and Africa. DH now has 129 hotels, most important brands are Steigenberger Icons, Steigenberger Hotels and Resorts, Intercity Hotel and Zleep Hotels.

From the beginning, H World has been an ambitious enterprise with high aspirations. “Our vision is to become a world-class enterprise by providing world-class service, by raising China’s hotel industry to world-class standard,” Ji Qi wrote in a letter to H World franchisees. The hotel chain has once changed the landscape of travel and hospitality in China. It will continue doing so while pursuing this goal.

Source：https://www.caixinglobal.com/2023-10-25/the-h-world-algorithm-how-a-chinese-brand-keeps-changing-the-hotel-business-102119583.html?originReferrer=caixinsearch_pc