Starwood Hotels & Resorts Worldwide Inc. (HOT) has taken a strong step to strengthen its China operations with the shift of its management team, including president & CEO Frits van Paasschen, to Shanghai for a month effective June 8.
The group will look into Starwood’s business pattern in China and understand the market more closely through interactions with local stakeholders, while exploring new properties throughout the country. The move accentuates Starwood’s ground-breaking approach to develop as a global company beyond its domestic boundaries.
Over 80% of the company’s 85,000 room pipeline will be built in international markets. The demand for hotels in the international market is greater than in the U.S.
Of its total pipeline, more than 60% is concentrated in the Asia-Pacific markets. Within Asia-Pacific, China promises immense growth potential with visits expected to double by 2014.
Starwood management will open one hotel every two weeks in China this year. Starwood’s current U.S. portfolio is roughly seven times the current size of the number of hotels in China.
But the company expects China to outpace the U.S. in the near future as its largest operation. The other markets that Starwood is eyeing for expansion apart from China are Brazil, the United Arab Emirates and India.
While in the past Starwood hotels in China were mainly occupied by Western travelers, today, more than 50% of the guests are Chinese. This is indicative of China’s fast growing domestic tourism. We see this as the reason behind Starwood management’s keenness on local market knowledge.
According to an analysis on the enrollment and travel trends of Starwood Preferred Guest members, Chinese enrollment in Starwood’s loyalty program, shot up 71% in 2010.
Starwood enjoys a first-mover advantage in China as it opened the first branded hotel, The Great Wall Sheraton Hotel, in Beijing in 1985. Presently, Starwood operates four and five star hotels in China and is preparing to take a lead with a pipeline, significantly larger than its peers.
However, Starwood’s nearest competitor Marriott International Inc. (MAR) also plans to double its portfolio in China, which is expected to remain the second largest market of Marriott after North America, over the next five years.
However, we see a near-term concern in the China business. Although booking momentum remains strong in China, management expects tough comparisons in second and third quarters of 2011 as the country will lap up some one-time profits from revenues owing to the World Expo in Shanghai that took place in the third quarter of 2010.
Starwood currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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