Southeast Asia’s inbound tourism industry has grown by an annual average of 7.9% since 2005 and the region now accounts for over 30% of international expenditure in this sector.
But as high-end and mid-market hotel brands strive to attract a greater number of tourists to fill up their rooms, they might be missing out on an emerging demographic: the domestic Asian millennial traveler who is more likely to opt for a budget hotel.
According to E&Y, millennials and millennial-minded travelers are far more cost-conscious and experience-focused than their predecessors.
This view is augmented when you consider travel preferences in Asia. The top three requirements for travelers looking for recommendations within the region are to help them save money, make travel more comfortable, and to save time.
Millennials are increasingly likely to ditch glitz and glam for minimalism and function. And with travel within APAC democratized by the likes of no-frills carriers such as Air Asia, it’s only a matter of time before complementary industries start riding this wave too.
The budget hotel industry has certainly witnessed greater investor interest in the past couple of years looking to solve a key problem – standardization. It’s often that travellers booking online even after combing through ratings & reviews are commonly surprised upon arriving at the hotel.
The idea to club together existing hotels, upgrade their facilities to ensure safety & comfort, and bring them under a unified brand was popularized by India’s OYO Rooms. The startup has raked in US$450 million in funding primarily by Softbank.
Since 2000 the Chinese tourism industry has also witnessed a surge in budget hotel franchises, aiming to address the historical issue of lack of standards, safety, trust, and reliability. Franchises like the China Lodging group and 7 Days Inn are now worth billions.
ZEN Rooms is another startup that operates on a similar model and was brought to Asia by German startup incubator Rocket Internet in mid-2015. It’s now present in seven countries across Asia, namely Indonesia, Singapore, Hong Kong, the Philippines, Malaysia, Sri Lanka, and Thailand.
At the time of launch, the company pointed to the expanding nature of regional travel as a critical factor in its decision.
“…in terms of accommodation and travel, Southeast Asia behaves like one big country. There is a lot of inner-country travel. Indonesians travel from Jakarta to Bali, Malaysians from one city to another. There is a lot of inter-region travel, from Jakarta to Singapore to Bangkok to Kuala Lumpur, for example,” said co-founder Kiren Tanna while speaking to TechCrunch.
In 2017, ZEN Rooms received a fresh capital injection of US$4.1 million adding further credence to its business model. New investors joined the party, namely Redbage Pacific and SBI Investment Korea.
And the Rocket Internet-backed startup isn’t the only contender in this space. Companies like Reddoorz, Nida Rooms, and Tingall have all propped up aiming to cater to an ostensible gap in the market. Cumulatively they’ve managed to attract US$10 million in funding so far.
Another competitor is Goldman Sachs-backed Red Planet. Its model is slightly different; rather than partnering with existing budget hotel operators, it chooses to own and operate its own properties. The company has over US$200 million in funding purportedly because it’s not an asset-light model, but is trying to solve the same pain points of uniformity of service.
“The [budget] hotels in Southeast Asia lack efficiency in many aspects and that eventually translates into substandard customer satisfaction,” explains ZEN Rooms co-founder and global MD Nathan Boublil to ecommerceIQ. “That’s the difference between Southeast Asia and the West. We want to improve the budget hospitality market with better sales and distribution, technology, and lowering the cost of procurement.”
“The Southeast Asian market is largely made up of small “mom-and-pop” hotels with no structural efficiency, which penalizes both guests and the hoteliers themselves. In the end, prices have to go down and the service level has to go up so that domestic and regional travelers can fully access travel,” he adds.
The Philippines in focus
The Philippines has rapidly emerged as one of ZEN Rooms’ largest growth areas.
Nathan says the dominant budget hotel chain before them only had 11 hotels on board which his company has surpassed since, although he declines to disclose the total number of partners they have.
11 certified budget hotels compared to the 6 million international tourist arrivals in the country in 2016 presented a large gap in the market and existing infrastructure – a fact alluded to by Domingo Ramon Enerio, Chief Operating Officer of the Philippines Tourism Promotions Board.
“We ended 2014 with 4.8 million tourists; this year we’re hoping to reach 5.2 to 5.5 million. We estimate that the demand for Philippine tourism is in excess of 10 million – meaning these are people who want to visit the Philippines but couldn’t for several reasons, whether it’s flights or not enough rooms or information,” he explained to Philstar in 2015.
The government has also aggressively promoted tourism in the island-drenched nation under the “It’s more fun in the Philippines” banner.
Hence according to official estimates, there’s still a gap of about 4 million inbound tourists who would like to visit the country but aren’t able to do so. This doesn’t factor in domestic tourists who might be put off by similar challenges of finding suitable rooms. So the total number is likely to be higher.
In the Philippines, ZEN Rooms first piloted a project to bring serviced apartments under its banner in addition to regular hotels. This has grown to be immensely popular with the category running at 95% occupancy and an average customer rating in excess of 9, according to Nathan. There’s 200 such budget serviced apartments in Manila alone with plans now to introduce the category in Kuala Lumpur.
Domestic travelers account for 50% of ZEN Rooms’ customers, with regional travelers making up an additional 30%.
In the Philippines itself, domestic travel is being fueled by an emergent middle-class, strong GDP growth, and a larger number of households with young children.
The push towards branded serviced apartments does bring ZEN Rooms in competition with property owners on Airbnb but Nathan says they’re succeeding due to economies of scale and lower prices.
Typically Airbnb owners can’t offer things like late night check-ins or daily housekeeping unless they partner with a management agency like GuestReady. This also drives up costs as the agency will typically charge a commission.
Nathan points out that ZEN Rooms’ existing operations drive synergies between the two business units. As they’re already helping improve the level of service in budget hotels, the team can leverage its expertise and manpower towards serviced apartments. This helps facilitate things like late check-ins and quality controlled daily housekeeping.
The French entrepreneur is taking a long-term view of the market.
Really, we’re just starting our expansion in Southeast Asia, the region is huge and inter-country travel is growing very fast,” he notes.
Southeast Asia is, in fact, the world’s fastest-growing travel region according to the World Travel & Tourism Council.
And there’s little doubt about a palpable sense of optimism engulfing the region: 80 million new consumers came online via their phones last year, representing a 31% increase as compared to 2016. Asian millennials are also addicted to social media, internet shopping, and increasingly rely on the web for travel & tourism research.
It’s time for no-name, obscure hotels to partner up with players like ZEN Rooms in order to gain more exposure, efficiency and latch on to emerging millennial travel needs.