Tuesday, February 09, 2010

Local Chains Sitting Out Hotel and Travel Boom in Malaysia

Malaysia's growing travel industry.

Naza Group of companies is best known for selling imported cars. But in November it made headlines announcing it would spend $231 million to build five hotels around Kuala Lumpur over the next five years. With three hotels already in its portfolio, Naza seemed on its way to becoming something that Malaysia's never had--a sizable homegrown hotel chain outside of the resort niche.
Not so fast. Last month Chief Executive S.M. Nasarudin told FORBES ASIA that Naza's plans have been scaled back to just two hotels, at a cost of $75 million. One will carry the Naza Talyya name, a brand that caters to the masses, and the other will be either a luxury or boutique hotel. He declined to explain why three hotels were dropped.

While Malaysian businesspeople are reluctant to build local hotel chains, big international brands such as the Mandarin Oriental, Nikko Hotels, Hilton and others have jumped into the market. The Hyatt and Four Seasons chains will open hotels in Malaysia in the next few years. A new Doubletree in Kuala Lumpur is expected to start accepting guests in May.

What the foreign invaders see is the country's growing travel business. Malaysia's profile has risen considerably since the world's tallest twins, the Petronas Towers, opened more than a decade ago. More and more, the country finds itself on itineraries, with low-fare airline Air Asia--perhaps Malaysia's most recognized brand--making it easier and cheaper to get to and around the country. Arrivals of visitors who stayed at least one night hit 23.7 million last year, up from 7.9 million in 1999. Tourism is now the country's second-highest revenue producer (behind manufacturing), accounting for 12.3% of the gross domestic product last year.

At the same time a more open regulatory environment for the industry--compared with other parts of the region except Singapore and Hong Kong--is attracting hotel investment from abroad. Foreigners find it easier to buy property and to move their money in and out of the country.

Are local companies missing out on a good business? They don't seem to think so. While there may be an undersupply of hotels in Malaysia, there's apparently an oversupply in the Klang Valley, and ten more three-, four- or five-star hotels are slated to open by the end of next year, an 8.7% increase. That's keeping room rates down and hitting returns. Average rates in Malaysia are lower than anywhere else in the region. A room in a five-star hotel can be had for $100, unheard of in most Asian countries. In fact, a World Economic Forum report on travel and tourism found that Malaysia was the fourth-most-price-competitive country in the world last year. Low prices mean that occupancy rates are holding firm at their historical average of 60% to 70%, but that's a shade too low to draw many local investors into the sector.

What's more, the travel industry was hit last month by the publicity over a series of attacks on churches, mosques and temples that rocked the nation. Investors were already jittery due to rising ethnic tensions, and after the attacks the tourism minister conceded that they may well affect tourist arrivals.

Yet in many ways Malaysia is ideally suited for long-term growth in the hospitality industry that could nurture local operators. Operating costs are low, the infrastructure is solid, and the country's always eager industrial-promotion authorities tout this as a strategic sector. Indeed, the eastern states of Sabah and Sarawak on the famed island of Borneo are becoming outdoor-travel destinations. And the country sits comfortably between the two extremes in the region, undeveloped Asia on the one hand and a seemingly Westernized version on the other, making it attractive for visitors who want a taste of the "real" Asia without the fuss.

The lack of a successful, recognizable homegrown hotel operator is a peculiar distinction for Malaysia. Thailand has Dusit Thani and Centara Hotels, for example. Malaysia notably does have the Shangri-La chain, started by tycoon Robert Kuok, but it largely makes its mark abroad.

Ivo Nekvapil, vice president of the hotel association, blames inept local operators. He says that when they do jump into the sector they often don't invest enough money. Too many, he says, look for a short cut; they fail to understand their customers, deliver quality service, carve out a niche for themselves and secure foreign tie-ups to glean expertise. "Branding [in hospitality] takes 20 years and millions of dollars," he says.

This is something Tune Hotels seems to understand well. Tune is the closest Malaysia has come to building a hotel brand on its home turf. Cofounded by Air Asia Chief Executive Tony Fernandes in 2007, it's looking to offer little beyond high comfort and security at a low price. Tune has shown promise; it has 7 hotels now--5 in Malaysia and 2 in Indonesia--and last year it signed contracts to open 44 more. But most of those will be overseas. By 2015 Tune hopes to have 30 hotels in India and 64 elsewhere in Southeast Asia and China, compared with only 20 in Malaysia. Others are planned for Australia, the Middle East and even London.

Other Malaysian hoteliers are also setting their sights abroad. Cititel Hotel Management plans to open two branches of its Express budget line in Malaysia, where it now has four hotels. But it will be relying heavily on growth in Vietnam, Thailand, Australia, the Philippines and London--which each host one Cititel hotel--to boost its earnings.

Malaysian property giant ta Enterprise now runs three hotels but none in Malaysia. It may open two hotels in Kuala Lumpur, one under its Aava "Asian flavor" brand that it's looking to market offering five-star service and four-star accommodation. It opened an Aava hotel in Canada in November. Its aim is to develop its own chain, but Managing Director Alicia Tiah says: "We're interested in overseas growth primarily. We don't want to be known as a local brand. We want to cater more to business travelers." She says business travelers are willing to spend more and "Malaysia is not a main destination for business travelers," adding that rates of return there "are not so fantastic--we want to invest in countries where the exchange rate has a chance to go up."

The trend in hospitality may reflect the exodus of capital from the country, which has hurt the exchange rate. UBS says Malaysia suffered the biggest foreign-exchange losses in Asia in 2008. The country's reserves fell by a third from April 2008 to last November, to $96.3 billion.

But foreign hotel operators using stronger currencies continue to stake out turf in the country's hotel sector. Some 5,600 hotel rooms with a four- or five-star rating are expected to come on line within three years; most will be built by overseas companies. Malaysia is getting lots more places for people to stay, but it may still have to make do without a big brand to call its own.

Source : Forbes
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