Interactive Q&A: Mitchell Presnick, Chairman & Chief Executive Officer, Super 8 Hotels (China)

by: SA Editors July 02, 2007 | about stocks: CTRP / HMIN / LONG / WYN    
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This is the latest in the Seeking Alpha series of interviews with leading companies of interest to our readers. These, however, are interviews with a twist: the executive has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

Super8HotelThis interactive Q&A is with Mitchell Presnick, Chairman & Chief Executive Officer, Super 8 Hotels (China), which through its parent company Tian Rui Hotel Investment Corporation, is licensed by Wyndham Worldwide Corporation (WYN) to develop the Super 8 brand in China. This interview works like this:

  • Mitchell briefly introduces himself and the issues he's focused on below.
  • Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
  • Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
  • Mitchell will respond to the questions and remarks beginning Monday, July 2nd. Readers can track his answers and respond to them during that period, with the resulting dialogue remaining on the site.

Yahoo Finance readers may join the Q&A by following this link.

Over to Mitchell:

mitchell presnickHi - I'm Mitchell Presnick, Chairman & CEO of Super 8 Hotels (China), which through our parent company Tian Rui Hotel Investment Corporation, is licensed by Wyndham Worldwide Corporation (WYN) to develop the Super 8 brand for the territory of China, including Hong Kong and Macau.

According to Smith Travel Research, Super 8 is the largest economy hotel chain based upon number of properties. The Super 8 franchise operates hotels in China, the United States and Canada.

We entered the China market in 2004 and opened our first hotel in Beijing on June 8, 2004. As of June 2007, we currently have 49 properties open and operating, and more than 70 properties under construction in over 60 cities across China.

Prior to Super 8 China, I served as China country manager for Edelman Public Relations, where I provided brand development counsel to multinationals such as Procter & Gamble, M&M Mars, Johnson & Johnson, and Anheuser-Busch. I have been a resident of Beijing and Hong Kong for over 18 years. I am originally from Brooklyn, New York.

I also serve as a director of the China Hotels Association, commissioner of the Franchise Committee of the China Chain Store & Franchise Association or CCFA, and executive member of the Hotel Industry Experts Committee of China’s Ministry of Commerce.

I'm happy to discuss a range of topics with Seeking Alpha readers, including:

  • Super 8's China growth strategy
  • China's hotel and travel market
  • The Chinese economy and real estate market
  • Western companies establishing themselves in China

Please leave your questions by using the comment box below.

Thank you!

-- Mitch

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This article has 37 comments.

  •  
    Jul 02 11:23 AM
    Mitchell,
    Thanks for doing this interview.
    Can you talk about your approach to launching Super 8 in China back in '04? My impression is that there were tons of economy hotels in China before you got there.
    Thanks,
    David
    | Link to Comment
  •  
    Jul 02 04:37 PM
    Hi David,

    Thanks for the question.

    In 2004 we did see a handful of brands who had established the beginnings of regional presence and some other chains gearing up. Most of all, we noticed that neither the consumer nor the potential licensee, seemed clear about the value proposition an economy hotel product actually offered. The context at the time was that almost no one was licensing or franchising their brand at the time, and there were approximately 5-6000 2 and 3 star properties in China, many of them undermanaged and unprofitable at the time.

    Thanks,

    Mitch
    | Link to Comment
  •  
    Jul 02 11:53 AM
    What's your expansion strategy -- are you placing properties in first-tier or second-tier cities? Are you taking over existing properties or opening new?

    Where does your order flow come from, and what are the trends? (Aggregators such as Ctrip or Elong? Direct? Other?)
    | Link to Comment
  •  
    Jul 02 04:37 PM
    Dear Liudy,

    Our expansion strategy has been to establish our brand using franchising in first and second tier cities, then to move into smaller cities and satellite towns where the economics are actually favorable long term compared to the big four and the provincial centers. We like taking over existing properties either operating or not, and then heavily renovating the buildout, over a six to nine month period, to accommodate our life safety and other standards. One of the more common structures one is likely to see as they tour around the country is a 4-5 story concrete reinforced structure with a footprint of about 8000-10,000 square feet (approx. 800-1000 sq m) and total area of 3-40,000 square feet (3000-4000 sq m).

    It will be a while before we or our industry colleagues can penetrate the 3000+ 'town and country' markets which we think will eventually be available to economy hotel properties. Primarily its a factor of time against the primacy of maintaining quality and standards for all of us.

    Mitch
    | Link to Comment
  •  
    Jul 02 04:39 PM
    One additional comment as part of my answer to Liudy; we plan on directly operating properties in this market, alongside our franchised properties. We have several properties underway. This is something Super 8 does not currently do as a brand in the United States.

    Mitch
    | Link to Comment
  •  
    Jul 02 12:48 PM
    Thanks for doing this. It's not often we get to hear from people who really know what's going on in China. Can you talk a bit about leisure and business travel in China generally? How fast is demand growing? How is pricing, and are companies (including your own) making reasonable margins?

    Thanks,
    Ralph
    | Link to Comment
  •  
    Jul 02 04:40 PM
    Dear Ralph,

    Nice to hear from you. Thanks for the question.

    Regarding leisure and travel business in China in general, I see the industry as one of the most direct beneficiaries of economic growth over the last 20 years. The real story here is not foreign inbound travel, but internal and outbound travel by Chinese nationals. Its been shown in developing countries around the world that, as soon as consumers begin to enjoy disposable time and income, one of the first things people do is travel. That has certainly been the case in China, and the infrastructure is barely keeping up despite phenomenon growth and investment in the national road, air and rail networks.

    According to a study by the World Travel and Tourism council, travel GDP growth in China has exceeded overall country GDP growth in each of the last five years, and in some of those years the annual growth rate approached or exceeded 20%. Quite an impressive performance. So we are bullish on the travel sector as a whole, and especially in the runup to the Olympics in 08 and the Shanghai World Expo in '10.

    To the second part of your question, pricing and margins, I think the smart players are investing in the key drivers of long term profitability; distribution and brand power, cost control, quality assurance and information systems. We are especially focused on maintaining an adequate margin pool for all commercial participants in our brand to access. That means we will be maintaining our 'upper economy' positioning and a slightly higher ADR than the industry average. It also means that we will be trying to capture our customers as early as possible on our brand.com site and through our VIP card program, so the number of participants in our margin pool will be as few as possible.

    Thanks,

    Mitch
    | Link to Comment
  •  
    Jul 02 12:53 PM
    Thank you for taking the time out of your schedule to chat with us Mr. Presnick. My first question piggy backs Liudy with regards to expansion strategy. Do you believe you can garner more growth buy expanding into secord tier markets? 1st tier? or a combinations of both?
    | Link to Comment
  •  
    Jul 02 04:36 PM
    Dear Larry,

    My pleasure. Thanks for the question. I think in time we will see chains like Super 8 expanding all the way down into markets with populations of 1-200,000 people, which is something like a small town here in China. The saying in golf is the 'drive for show and putt for dough'. In this market, the majority of budget hotel revenue generated by the chains 10 years out in time will be in little places that most foreigners, and for that matter many Chinese, have probably never heard of. That said, I don't see the expansion of roadside motels happening on any true scale for a while.

    Thanks,

    Mitch
    | Link to Comment
  •  
    Jul 02 12:54 PM
    Do you see Home Inns (HMIN) as your biggest competitive threat --- especially now that it's flush with cash after its recent IPO?
    | Link to Comment
  •  
    Jul 02 04:50 PM
    Dear Joe Mama,

    We have watched Home Inns closely from the beginning, and they and other brands have earned our respect. They have worked very hard to establish themselves in this competitive environment.

    Its early days for everyone, however, and one shouldn't forget that the sum total of all branded properties in China is still less than 1000...a small fraction of what we are going to see in the near future. Its a race to scale and a race to capital for everyone. Whatever capital has been raised by any of the leading brands to date will not be sufficient to satisfy the market's appetite for this product.

    The constraining factors for us and our competitors will continue to be management time, human resources and the physical process of converting, receiving govt approvals and opening a large number of properties all across the country.

    With regards,

    Mitch
    | Link to Comment
  •  
    Jul 02 12:55 PM
    Following Liudy's question above, what's your view of the Chinese Internet stocks? Specifically interested in the travel sites.

    On your own business, how much competition is there in the hotel sector? Are you seeing any US hotel chains expand successfully in China?
    | Link to Comment
  •  
    Jul 02 05:01 PM
    Dear Lisa,

    Ctrip's share price seems to have performed well over time, which makes sense given that they and eLong were established before the economy hotel brands arrived (compared to the US, which saw the chains established before the likes of Orbitz and Travelocity) and they have an impressive management team, some of which were involved in the establishment of economy hotels chains as well.

    That said, I am no expert on the Chinese internet companies, and we don't want to comment on subjects about which we don't know much.

    As is the case with most industries in China, the hotel sector is seeing strong competition but also strong growth numbers. Domestic travel is the real story here, and those budget chains who can capture and maintain an ever growing, loyal domestic Chinese customer base will probably be fine.

    As for other US chains expanding in China, certainly most of the leading American chains in the mid-scale, upscale and upper-upscale markets are either here or coming soon. Just speaking about brands in the Wyndham family, Ramada has a well established presence and an excellent product here. They have been in the market since the early 90s. Howard Johnson and Days Inn have terrific product as well. Wyndham recently announced it will open and operate a flagship property in Xiamen, Fujian province.

    Mitch
    | Link to Comment
  •  
    Jul 02 01:05 PM
    Mitchell,

    Many thanks for making yourself available for our questions.

    How much does WYN stand to gain from your business if successful? Could it be meaningful for WYN's stock?

    On the Chinese market, what do you think US investors understand least well about what's going on in China?

    Many thanks.
    | Link to Comment
  •  
    Jul 02 05:11 PM
    Dear Frank,

    You'd probably have to ask Wyndham about your first question.

    As for US investors understanding what's going on in China, I have always been impressed with how much China incorporated understands about the US market, and vice versa. That said, I'd have to say that the average Chinese investor probably understands the US market a bit better than the average US investor understands China.

    In a previous life I served as vice chair of the American Chamber of Commerce in China, where we published an annual White Paper on issues affecting the bilateral commercial relationship. The findings showed a fair amount of understanding by US business and institutional investors about the China market. I think for individual US investors, the understanding level is probably less and will undoubtably improve over time as the China market becomes a more established destination for US individual investors.

    Best,

    Mitch
    | Link to Comment
  •  
    Jul 02 01:58 PM
    Hi Mitchell,

    Barron's did an interview yesterday (July 1 07) of a fund manager who revealed that while the average Shanghai stock trades at 40x earnings, Chinese stocks traded OTC in the U.S. are still trading at a much more modest 7-8x, representing a hidden opportunity for shrewd investors (I summarized the interview here).

    Is your parent company thinking of selling shares on U.S. markets? Why do you think Chinese companies trading in the U.S. are garnering smaller multiples than their overseas counterparts?

    Unrelatedly, as a visitor to China, in what ways would my visit in a Super 8 hotel resemble my experience in the States, and how would it differ. Dollar for dollar, how do room prices compare? What is the current breakdown of your guests (domestic vs. U.S. vs. Europe)?
    | Link to Comment
  •  
    Jul 02 06:09 PM
    Hi Eli,

    Thanks for the question and comments about opportunities for investors in Chinese stocks both in the US and China.

    As you know both the Chinese real estate and stock markets have seen impressive price growth over the past 24 months. There is an enormous volume of capital in individual savings and under mattresses here in China, and up until recently, not many reliable destinations for people to invest. So I suppose that might have something to do with the 40 times earnings multiple in Shanghai you mentioned.

    To the extent that we invest in Chinese real estate, we are long term, strategic investors and operators, so our investment criteria is probably not be applicable here. We invest to support our growth strategy, so I'm not that familiar with the market arbitrage opportunities you describe in your first paragraph. I don't doubt that arbitrage opportunities may exist, given that the currency is not yet fully convertible and the stock and real estate markets are broken out into investments available for Chinese and investments available for foreigners. Its just that I probably don't have anything thoughtful to say about that topic.

    As to your question about our parent company, TRHC, selling shares on US markets, we don't have any announcements to make at this time.

    As to your question about the potential difference between a Super 8 in the US and in China, I would start by inviting you to come over and try our product here if you haven't already. We are very proud of the value Super 8 offers the Chinese market. Super 8 USA's ADR in the US is something around 60USD, which is over twice the ADR we capture here in China, but our buildout costs are less than half that of the US Super 8 system (a full renovation of a Super 8 property here in China costs less than $1m or $10k per room unit) Our product is up to US Super 8 standards in all material respects. Go to super8.com.cn and click "English", or visit super8.com to view our product online.

    Best,

    Mitch
    | Link to Comment
  •  
    Jul 02 03:56 PM
    Hi David,

    Thanks for the question.

    In 2004 we did see a handful of brands who had established the beginnings of regional presence and some other chains gearing up. Most of all, we noticed that neither the consumer nor the potential licensee, seemed clear about the value proposition an economy hotel product actually offered. The context at the time was that almost no one was licensing or franchising their brand at the time, and there were approximately 5-6000 2 and 3 star properties in China, many of them undermanaged and unprofitable at the time.

    thanks,

    Mitch
    | Link to Comment
  •  
    Jul 02 04:06 PM
    Dear Liudy,

    Our expansion strategy has been to establish our brand using franchising in first and second tier cities, then to move into smaller cities and satellite towns where the economics are actually favorable long term compared to the big four and the provincial centers. We like taking over existing properties either operating or not, and then heavily renovating the buildout, over a six to nine month period, to accommodate our life safety and other standards. One of the more common structures one is likely to see as they tour around the country is a 4-5 story concrete reinforced structure with a footprint of about 8000-10,000 square feet (approx. 800-1000 sq m) and total area of 3-40,000 square feet (3000-4000 sq m).

    It will be a while before we or our industry colleagues can penetrate the 3000+ 'town and country' markets which we think will eventually be available to economy hotel properties. Primarily its a factor of time against the primacy of maintaining quality and standards for all of us.

    Mitch
    | Link to Comment
  •  
    Jul 02 04:10 PM
    One additional comment as part of my answer to Liudy; we plan on directly operating properties in this market, alongside our franchised properties. We have several properties underway. This is something Super 8 does not currently do as a brand in the United States.

    Mitch
    | Link to Comment
  •  
    Jul 02 04:25 PM
    Dear Ralph,

    Nice to hear from you. Thanks for the question.

    Regarding leisure and travel business in China in general, I see the industry as one of the most direct beneficiaries of economic growth over the last 20 years. The real story here is not foreign inbound travel, but internal and outbound travel by Chinese nationals. Its been shown in developing countries around the world that, as soon as consumers begin to enjoy disposable time and income, one of the first things people do is travel. That has certainly been the case in China, and the infrastructure is barely keeping up despite phenomenon growth and investment in the national road, air and rail networks.

    According to a study by the World Travel and Tourism council, travel GDP growth in China has exceeded overall country GDP growth in each of the last five years, and in some of those years the annual growth rate approached or exceeded 20%. Quite an impressive performance. So we are bullish on the travel sector as a whole, and especially in the runup to the Olympics in 08 and the Shanghai World Expo in '10.

    To the second part of your question, pricing and margins, I think the smart players are investing in the key drivers of long term profitability; distribution and brand power, cost control, quality assurance and information systems. We are especially focused on maintaining an adequate margin pool for all commercial participants in our brand to access. That means we will be maintaining our 'upper economy' positioning and a slightly higher ADR than the industry average. It also means that we will be trying to capture our customers as early as possible on our brand.com site and through our VIP card program, so the number of participants in our margin pool will be as few as possible.

    Thanks,

    Mitch
    | Link to Comment
  •  
    Jul 02 04:29 PM
    A correction on the above comment; that should read 'phenomenal' not 'phenomenon' in the last line of the first paragraph.
    | Link to Comment
  •  
    Jul 02 04:50 PM
    Hi Mitchell,

    How easy or difficult is it to find qualified local personnel with serious hotel experience. I would imagine that with the rapid growth the industry in general and of your business in particular it could become an increasingly difficult issue.

    Herb from NC
    | Link to Comment
  •  
    Jul 02 05:22 PM
    Dear Herb from NC,

    Human resources is a key constraint for all service industries in China. In order to keep up with Super 8's speed of growth in this market, we hire and train a large volume of people. Each employee requires a 2-4 week full time training to ensure our "Clean and Friendly" product is maintained. We've found it easier to train (at our training facility in Dalian, Liaoning Province) people with slightly less experience than to try to find highly experienced individuals with relevant skills in the market. Economy hotels are sleep retail as much as they are hospitality. So the skill sets are not always 100% transferable. One thing is true, human resources will be a key constraint on the branded Chinese economy hotel participants for some time.
    | Link to Comment
  •  
    Jul 02 05:02 PM
    It's great having this opportunity to ask questions. Thanks!

    I'm still wondering about where your reservations come from, and what you see as the trends.

    Obviously, long-term you'd like customers to do the equivalent of reserve your entire trip at 1-800-super8.
    But travel agencies such as ctrip or elong and who-knows-who will have some role for the indefinite future. Any comments on the relative maturity of your originators or aggregators of reservations, how good or bad a job they do, what the customer experience is like in booking hotels and flights and train tickets, and what it will become like?
    | Link to Comment
  •  
    Jul 02 06:31 PM
    Dear Liudy,

    Thanks for joining this Q&A and making me feel welcome.

    Our reservations come from multiple sources, including our brand website, our China national reservations "Superline" 400 810 7822, and our Super 8 China VIP card, which alone generated over 3000 room nights last week.

    You bring up an interesting subject about the relationship between the third party intermediaries, travel agents and aggregators such as CTrip and CITS, and the hotel brands, airlines etc. The fact that the TPIs came before the economy hotel brands in the China market cannot be emphasized enough. It has created a very different dynamic than that which exists in the North America and Europe.

    We see three trends with regards to travel agents and economy hotel brands (1) economy hotel brands will continue to work with online agents when it makes sense, especially in the first year of a property's operation, (2) economy hotel brands creating direct relationships with their customers through targeted marketing and strong loyalty programs, and (3) travelers continuing to rely on TPIs and aggregators for package travel and bookings with non-branded hotels.

    Thanks again for the question.

    Mitch
    | Link to Comment
  •  
    Jul 03 05:39 AM
    Mr Presnick,

    Greetings from a fellow China dweller. I've been out here for almost 3 years and can see no forseeable time when I will leave. However, finding employment as an ex-patriate in China (without specific skills such as I.T. or software, for example) is extremely difficult (bordering on impossible) if one is not in the TEFL (Teaching English as a Foreign Language) field.

    Could you provide any ideas/insight on breaking into a company (preferably from a western country) that is doing business in China in this regard?

    Thank you for your time and consideration.

    Jason in Hainan
    | Link to Comment
  •  
    Jul 03 07:15 AM
    Dear Jason,

    I totally understand what you are talking about. When I entered the job market in Hong Kong in 1990, I experienced many of the same problems you describe. Difficult for a young westerner to secure an entry level position without professional specialization or relevant experience. The system is not really set up for Westerners to come here and easily find professional positions.

    In general, my advice to you would be to either gain a professional specialization in your home country and then come back or get sent back by your company (advice which I received and rejected back in 1990), or establish your temporary base in one of the major commercial centers such as Beijing, Shanghai or Hong Kong, then give yourself three to six months to find an internship or pro-bono entry level position (if you can manage financially) with a reputable company. Once you are employed and 'in the system' you can move to a better paying position.

    I am not sure you will find your China dream job in Hainan. That said, if you are not sure about your next step, Hainan is a great place to be unemployed while you figure it out.

    Good luck.

    Mitch
    | Link to Comment
  •  
    Jul 03 12:52 PM
    Hello Mitch,

    Thanks again for taking the time out to chat with us. I just wanted to comment on a couple of thoughts which your shared with us yesterday. I was hoping that you could elucidate a bite more for us.

    You had mentioned to David that in 2004 when Super 8 launched that the properties were undermanaged and unprofitable. What do you think were the key drivers for the undermanaged and unprofitable performance during that stage of Super 8's development?

    Secondly, you mentioned to Liudy that Super 8 is directly operating properties in China, alongside our franchised properties and that this approach was not being utilized in the US. How much strategic tailoring has Super 8 had to conduct within the Chinese market in order to gain traction within China? Moreover, do you believe this approach will be more successful as opposed to a standardize approach employed by other multinationals?

    Futhermore, you mentioned difficulty penetrating the 3000+ town & country markets. What factors do you believe contribute to this? And what strategic approach do you believe will be successful in reducing this barrier to entry.

    Finally, why do you think Chinese investors have a better understanding of the US market as opposed to US investors of the Chinese market? Do you think it's the Chinese - holistic view vs the American - individualistic approach? I say this because it always seems to baffle me when 'in my view'... it appears the US multinational are not conducting a rigorous due diligence process pertaining to investing within the Chinese market. Or is the Chinese market too fragmented to obtain a clear understanding of all the variables that effect the marketplace?

    Thanks in advance for your feedback.
    | Link to Comment