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The demand for travel and tourism in China is growing rapidly and is expected to surpass other markets in Asia. Travel within China currently accounts for most trips, driven by visiting friends and family, but leisure travel is expected to surge. While business travel growth will be steady, overnight leisure travel will more than quadruple and dominate the domestic travel market by 2020. International travel from China is also growing quickly and China is on track to become a top source market for destinations around the world.
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- 1. R Taking Off Travel and Tourism in China and Beyond
- 2. The Boston Consulting Group (BCG) is a global manage- ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet- itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 71 offices in 41 countries. For more infor- mation, please visit www.bcg.com.
- 3. Taking Off Travel and Tourism in China and Beyond Vincent Lui Youchi Kuo Justin Fung Waldemar Jap Hubert Hsu March 2011 bcg.com
- 4. © The Boston Consulting Group, Inc. 2011. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: bcg-info@bcg.com Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
- 5. Contents China’s Rocketing Demand for Travel Services 5 Travel Within China 5 International Travel 6 The Profile of the Chinese Traveler 7 First-Time Travelers 7 Group Travelers 7 Modes of Travel 8 Travel Planning 8 Travel and Shopping 8 What Constitutes Value? 9 Traveler Segments 11 Inexperienced Travelers 11 Experienced Travelers 11 All Segments Are Underserved 13 Troubles on the Domestic Front 13 Challenges in International Travel 13 Differentiated Premium Services 14 Online Travel Planning 15 Big Opportunities for Early Movers 17 Tailored Offerings for Specific Segments 17 Brand Loyalty Through Customer Relationships 17 Hassle-Free Travel Planning 18 Serving Travelers from Smaller Cities 18 For Further Reading 21 Note to the Reader 22 T O
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- 7. China’s Rocketing Demand for Travel Services N ot long ago, most Asian tourists were well as for the burgeoning segment of middle-class tour- from Japan, South Korea, or Hong Kong— ists emerging in China’s large and smaller cities. the region’s more affluent markets. But that is rapidly changing. By 2013, China While the hangover from the global recession continues is expected to surpass Japan as the sec- to dampen spending on travel by Western consumers, ond-largest travel and tourism market in the world. Chinese consumers are eager to venture forth—and to Travel within China, which currently accounts for most spend. Last year, in a survey of more than 4,000 consum- Chinese travel and travel spending, is projected to grow ers in seven countries, only about one-quarter of U.S. by 16 percent per year and to be worth RMB 3.9 trillion and European respondents said that they planned to by 2020. (See Exhibit 1.) Meanwhile, the country’s out- trade up on vacations, whereas more than one-third of bound travel market will have grown to triple the size of Chinese intended to do so—a gain of 16 percentage Japan’s. points over the previous year. Indeed, vacations were the highest-rated category for trading up among Chinese re- Yet China’s travel industry is still in its infancy. Travel spondents. remains a highly discretionary expense, secondary to upgrading a home or owning a car. It is also a highly regulated sector and a challenging one for foreign Travel Within China players. Intense competition with little innovation or differentiation characterizes all areas of the industry, Today, the reason for most domestic travel in China is to from travel agencies and hotels to airlines. Only a visit friends and family. Some urban Chinese travel for handful of companies understand the needs of leisure, yet fewer than one-third spend the night away Chinese travelers, 95 percent of whom claim they are from home. But travel companies should get ready for a poorly served on both the domestic and the internation- big change: we expect the market value of leisure trips to al front. more than quadruple by 2020 and the demand for do- mestic accommodations to double.2 This report is an “all aboard” call for growth-minded trav- el companies. In a survey conducted by The Boston Con- What about business travel? Although it accounts for few- sulting Group in the third quarter of 2010, we found that er trips, spending per trip is higher. (Business travelers in the rapidly rising demand for travel in China, together China spend even more per trip than affluent leisure trav- with the lack of offerings for Chinese tourists (both with- in China and abroad), presents a rare opportunity to gain 1. We interviewed 4,250 Chinese travelers—domestic and out- a first-mover advantage—which can be enormously valu- bound, business and leisure—in 15 cities regarding their attitudes able in a market where consumers are desperate for toward travel, travel frequency and patterns, travel planning, and decision criteria, as well as their dissatisfaction with current travel- brands that meet their needs.1 Equipped with better in- service providers. sight into targeted segments, travel providers could de- 2. Findings on Chinese domestic leisure travel assume overnight velop differentiated products for affluent travelers, as stays. T O
- 8. Exhibit 1. China’s Travel Market Will Grow Significantly over the Next Decade Number of trips (millions) Market value (RMB billions) 5,455 +14% per year +9% per year 2,481 1,544 101 798 1,895 202 1,058 37 245 1,484 321 1,163 108 1,380 426 668 454 853 283 2010 2020 2010 2020 Outbound travel Domestic overnight leisure travel Domestic business travel Other domestic travel Sources: BCG Chinese Consumer Travel Survey, July 2010; National Bureau of Statistics of China; BCG analysis. elers.) We expect growth in business travel to remain sta- the next decade, we expect that nearly 20 million trips ble at about 10 percent per year over the next decade, will be made to long-haul destinations. while the overnight leisure market is likely to surpass the business segment, accounting for nearly half the market Chinese international travel will become a major source for domestic travel by 2020. of growth for travel providers in destination countries. Our findings indicate that by 2020, 25 percent of interna- tional travelers arriving in Japan and South Korea will International Travel come from China, while arrivals in Europe from China will quadruple. China will become one of the largest Compared with the already significant domestic-travel sources of growth for Europe’s travel market, accounting market, the Chinese market for international travel is still for more than half the incremental arrivals from coun- young. But it is expected to grow by 17 percent per year tries outside the EU. In North America, travelers from over the next decade, driven by rising incomes and aspi- China will rank third in number aer travelers from the rations. U.K. and Japan. Slightly more than two-thirds of all international travel Before long, overall Chinese tourism in the West will today is to Hong Kong or Macau, but Chinese tourists are dwarf even tourism from Japan, yet few U.S. and Euro- increasingly venturing out to other parts of Asia and even pean travel providers really understand what Chinese to “long haul” destinations (defined as those that require tourists want or how to capture a greater share of their more than six hours of flying time). As incomes grow over spending. T B C G
- 9. The Profile of the Chinese Traveler T he rapid escalation in social and economic with large groups of friends. (See Exhibit 2.) In our sur- mobility in China has brought a relatively veys of Chinese and U.S. travelers, about twice as many rapid increase in discretionary income avail- Chinese as U.S. domestic leisure travelers said that they able for travel. Chinese travelers (including take trips longer than six days in duration; 26 percent of the affluent segment) are therefore more ea- Chinese travel with more than five people, whereas only ger than Westerners to increase their spending on travel. 13 percent of U.S. travelers do so. Of the Chinese who But Chinese travelers differ from their Western counter- travel in groups, nearly half said that they travel with parts in ways that are significant for the companies that friends rather than family members, whereas only 12 per- serve them. For instance, demand for travel in China comes cent of U.S. group travelers made that claim. mostly from active young adults eager to visit new places, whereas demand in the West is driven by senior citizens, The Chinese propensity for longer trips may partly be a who tend to have more time and money for travel. result of holidays that occur consecutively, but that is becoming less of a factor as the government takes steps to even out the demand for travel. The preference for First-Time Travelers traveling in large groups reflects the age of the market— most Chinese travelers are under 40, whereas senior cit- Today, fewer than 200 million urban Chinese consumers izens represent a larger share of the travel market in have taken an overnight leisure trip. With an average of 25 other countries. million people taking their first-ever such trip every year, however, that number will more than double by 2020. Mid- The Chinese also take less time to plan a trip. In response dle-class and affluent consumers, most of whom have nev- to the question “How much time in advance did you be- er traveled overnight, are spearheading this explosion. gin to plan your last domestic leisure trip of four days or Over the next decade, this population will increase from more?” 39 percent of U.S. travelers said that they started 150 million to more than 400 million, and two-thirds of planning more than three months ahead, whereas only these people will reside in smaller cities. By 2020, there 4 percent of Chinese travelers began that early. Of course, will be nearly 800 urban locations (cities and the urban the larger the travel group, the more difficult it is to coor- portions of counties) where real disposable income per dinate schedules months ahead of time. But the Chinese capita is greater than Shanghai’s today. Middle-class and also love a bargain, and travel agents don’t announce spe- affluent travelers, especially those from smaller cities, will cial deals until one or two months before the departure create a huge opportunity for the travel industry. date. Yet another factor may be force of habit. In the past, travelers from China’s big cities could buy train or bus tickets no more than four days in advance; in smaller cit- Group Travelers ies, travelers oen had to wait until the day of the trip. Finally, it’s a little unusual and somewhat frowned upon Whether traveling in China or overseas, the Chinese are in China to tell your boss six months in advance that you likely to take longer trips than Westerners and to travel plan to take a vacation. T O
- 10. Exhibit 2. Chinese Travelers Take Longer Trips Than Western Travelers and Travel in Larger Groups Chinese travelers take ...who are more likely to be longer trips... ...with more people... friends than family Relationship of travel Length of last domestic Number of travel companions in last companions in last domestic overnight leisure trip domestic overnight leisure trip overnight leisure trip % of respondents % of respondents % of respondents 5+ people 13 18 6+ days 23 26 Family (adults) 35 45 4 people 16 6 17 4–5 days 18 3 people 13 24 Family 33 22 (with children) 41 2–3 days 43 2 people 45 30 12 Friends 30 Spouse/partner 20 24 1 day 16 3 By myself 13 14 U.S. China U.S. China U.S. China Sources: BCG Chinese Consumer Travel Survey, July 2010; BCG U.S. Consumer Travel Survey, 2009. Modes of Travel mendations, information, and reservations. More than half of our survey participants ranked online information In contrast to the U.S., where most travelers either fly or as their most trusted source for travel planning, while drive, in China, trains and buses remain the most popular only a third favored word of mouth. This is probably be- modes of transportation. The dominance of rail and bus cause many people do not know anyone who has been to means that being located close to train and bus termi- the places they want to visit. For travel outside China, nals, city centers, and tourist attractions is an important people prefer to rely on travel agents, not only for the factor for tour operators and hotels. But since China’s cit- convenience (government regulations require travelers to ies are changing rapidly, companies should know the area some destinations to obtain visas, and applying can be an before making a large investment. uncertain and tedious process) but also because agents help bridge cultural differences and language barriers. Automobile travel is increasing in China, especially for shorter trips, but it is unlikely to become the dominant form of travel in the near future. Roadside facilities are Travel and Shopping still sparse, accident insurance protection is inadequate, and driving itself can be unpleasant because of pollution Although traveling is expensive for most budgets, the Chi- and the prevalence of hazardous driving habits. nese are willing to pay for it. They typically spend up to 8 percent of their income on a single domestic trip—more than travelers in other emerging markets spend and far Travel Planning more than the 2 percent that travelers in developed coun- tries spend. But in terms of absolute spending, the Chi- China has nearly 400 million Internet users, so it is not nese spend only $150 each per domestic trip—about one- surprising that Chinese travelers are embracing do-it- third of the $300 to $500 each that Westerners spend. yourself travel arrangements for domestic leisure trips. Because most Chinese have had little experience with lei- On nondomestic trips, the Chinese are willing to spend sure travel, they seek out online travel sites for recom- much more than they do when traveling domestically, T B C G
- 11. even excluding transportation costs. And they allocate What Constitutes Value? their spending differently from Westerners. Whereas U.S. travelers prefer to spend the lion’s share of their travel Trading up beats trading down across most travel catego- budget on accommodations and meals, the Chinese de- ries in China, especially for meals and entertainment and vote nearly half to shopping. China’s strong gi-buying slightly less so for accommodations. However, the Chi- culture stimulates some of this spending. As one consum- nese tend to trade down for transportation—where a er told us, “I travel overseas only once a year, so my fam- larger cash outlay is required. Nevertheless, in our survey ily and friends all know when I go. If I don’t buy gis for of travelers from around the world, the Chinese were everyone, I feel very embarrassed.” (See the sidebar more willing than Westerners to pay for better services in “Shao Jin Travels Oen and Loves to Shop.”) Moreover, air travel. A significant number of Chinese respondents Chinese travelers are asked by their friends to make pur- said that they would pay extra for 13 out of a list of 25 chases for them. More than half the outbound travelers service items, whereas Western travelers said that they in our survey said that they carried lists of products to would pay more for only 3 or fewer items. buy for friends. However, companies offering premium services to Chi- Chinese tourists purchase luxury items mainly overseas nese travelers should realize that Chinese and Western and in Hong Kong and Macau, rather than in duty-free views on value can differ. For example, baggage delivery shops in Chinese airports. Burberry claims that one-third from the airport to the hotel ranks second among desired of the sales in its London stores are made to Chinese premium services for Chinese travelers, while it is not shoppers. In Hong Kong, the Louis Vuitton and Chanel even among the top ten for U.S. travelers. This is proba- stores also have long queues of Chinese tourists. bly because automobile travel, which essentially elimi- Shao Jin Travels Often and Loves to Shop ◊ 28 years old, married without children ◊ Lives in Shanghai ◊ Annual income: ~RMB 150,000 ◊ Extensive experience with overseas travel—as many as two trips per year. Recently visited South Korea, the Philippines, and Indonesia Her recent trip to South Korea Why she likes to shop on trips ◊ “Prices in Korea are more competitive Time allocation (%) Budget allocation (%) than in other Asian countries. Some- times even a Louis Vuitton wallet Shopping list 100 100 can be cheaper than it is in Hong “I always bring one 12 Other2 28 Other1 Kong.” on a trip. My Korea 20 Hotel and list included airfare cosmetics and gis.” ◊ “Family and friends oen ask me to 29 Sightseeing shop for them when they find out that 50 50 I’m going on a trip.” Trip planning “I visited Korean 68 Shopping websites to get ◊ “I was able to purchase birthday more information 43 Shopping presents for all my best friends about what to buy during my Korea trip.” and where to shop.” 0 0 Total time spent Total spent on ◊ “If it’s my first time visiting a country, in Korea: 3.5 days trip: RMB 15,000 I love to bring home some souvenirs.” Source: BCG consumer interviews and analysis. 1 Includes meals, local transportation, and other entertainment activities. 2 Includes meals, local transportation, sightseeing, and other entertainment activities. T O
- 12. nates baggage as a factor, is much less common in China exclusivity conferred by access to lounges and priority se- than in the U.S. Furthermore, since the Chinese oen curity lines. (See Exhibit 3.) Rather than try to nudge Chi- travel in groups with a full schedule of activities, they ap- nese travelers in the direction of Western preferences, preciate not having to deal with their baggage. The Chi- companies should consider whether the services that the nese are also more likely than Westerners to prefer spe- Chinese prefer might offer the potential of larger profit cial treatment at airports, and they enjoy the sense of margins. Exhibit 3. Chinese and Western Travelers Rank Value-Added Services Differently Chinese will pay more for some air-travel services Ranking by country China U.S. U.K. Option to change flight times 37 1 2 6 Baggage delivery to the hotel 31 2 13 9 Higher weight allowance for checked baggage 25 4 10 7 Lounge access 23 7 16 11 Priority security/passport control 21 10 17 18 0 10 20 30 40 % of respondents Source: BCG survey of 4,300 travelers in seven countries. T B C G
- 13. Traveler Segments T he characteristics of Chinese travelers con- Chinese tourists are attracted to places that reflect their nected to infrastructure, regional, and cul- heritage—for example, the willow tree at King’s College, tural factors are unlikely to change in the in Cambridge, England, made famous by a twentieth-cen- near future. But other aspects of China’s tury Chinese poem taught to schoolchildren in China. travel market are beginning to evolve as the Chinese become more seasoned travelers. As a re- sult, a dynamic process of market segmentation is oc- Experienced Travelers curring, with significant differences between inexperi- enced and experienced travelers.3 (See Exhibit 4.) As Chinese travelers become more experienced, they are likely to arrange their own transportation and accommo- dations through online search and booking sites rather Inexperienced Travelers than rely on a travel agency, especially for domestic lei- sure travel. And whereas inexperienced travelers tend to Chinese consumers who have had little opportunity for pack their schedules with sightseeing activities in order leisure travel beyond annual family visits are beginning to get the most value (as they perceive it) for their money, to venture out. They tend to start with trips to nearby re- experienced travelers are more willing to spend time and gions and then to extend their travel to more distant parts money on activities such as entertainment and shop- of the country. Next comes a vacation to Hong Kong, ping—an inclination that also influences their choice of Macau, or another Asian country and eventually a long destinations. Indeed, we’ve found that the more experi- trip to a Western destination. ence a Chinese traveler has, the less organized activities matter. For all market segments today, sightseeing wins Our survey indicates that many Chinese consumers are out over relaxation for domestic travelers, but by 2020, still in the very early stages of this evolution. We found, we expect relaxation to become the dominant travel goal. for example, that approximately two-thirds of domestic (See Exhibit 5.) travelers from Nanjing and Chengdu travel to nearby re- gions, while the remaining third still limit their travel to Travel businesses should give particular attention to the within their home province. special needs of the affluent subset within the experi- enced segment. Our survey found a strong correlation be- The inexperienced segment of China’s travel market is tween leisure travel and income level; not surprisingly, as enormous. It constitutes 70 percent of all domestic over- income grows, so does the incidence of leisure trips. Ex- night travelers and 77 percent of outbound travelers. perienced travelers with higher incomes are much more Seeking good value for the price, inexperienced travelers generally prefer packaged tours that offer a full schedule of sightseeing activities. They want to visit all the must- 3. We define inexperienced travelers as those with fewer than three years of travel experience who have taken fewer than three trips in see sites, including the historically significant, the cultur- the past 12 months. Experienced mass-market and affluent travel- ally important, and the scenically beautiful. In particular, ers have made more than three trips in the past 12 months. T O
- 14. Exhibit 4. As Market Segments Continue to Evolve, Affluent Travelers Are Becoming Increasingly Important Inexperienced Experienced mass- Experienced travelers market travelers affluent travelers ◊ Travel is for sightseeing— ◊ Travel is to explore cities ◊ Travel is good for relaxation Attitudes and the more the better outside nearby regions and stress relief aspirations ◊ Traveling around the world ◊ Outbound travel is an ◊ Prefer to return to places is a lifetime dream indication of status and that offer relaxing activities special occasions and a slower pace of life ◊ Packed schedules of must- ◊ Sightseeing and relaxing ◊ Entertainment, shopping, see sites entertainment and luxury accommodations Trip activities ◊ Historical sites and museums rather than overscheduled sightseeing ◊ Travel agencies for packaged ◊ Fewer packaged tours and ◊ Websites are the main tours and booking assistance more independently planned channel for travel planning Trip planning ◊ Word of mouth, TV, and trips ◊ Premium theme-based tour websites ◊ Online search and booking packages for outbound trips Share of total travel spending1 2010 ◊ 56% ◊ 23% ◊ 21% 2020 ◊ 33% ◊ 26% ◊ 41% Sources: BCG Chinese Consumer Travel Survey, July 2010; BCG consumer interviews. Note: We define inexperienced travelers as those with fewer than three years of travel experience who have taken fewer than three trips in the past 12 months. Experienced mass-market and affluent travelers have made more than three trips in the past 12 months. 1 Share of the total value of the domestic and outbound overnight leisure markets. Exhibit 5. By 2020, Travel for Relaxation willing to trade up for better meals and entertainment. Will Become More Popular Than Furthermore, rather than visit popular sites that are over- Sightseeing run with tourists, affluent travelers seek out memorable experiences, such as a week in a quaint farmhouse in ru- ral Heilongjiang province in the northeast of China. Ex- Primary reason for leisure travel perienced affluent travelers also look for something dif- CAGR ferent when they travel, such as sports-themed trips, Millions of trips1 2010–2020 (%) wildlife adventures, and cruises. 1,000 882 800 By 2020, we estimate that there will be nearly 100 million travelers in the experienced affluent segment in China. 409 10 600 These people will account for approximately one-third of all trips and more than 40 percent of the total value of 400 the domestic and outbound leisure markets. 274 473 16 200 164 110 0 2010 2020 Sightseeing Relaxation Sources: BCG Chinese Consumer Travel Survey, July 2010; National Bureau of Statistics of China; BCG analysis. 1 Includes domestic and outbound overnight leisure trips. T B C G
- 15. All Segments Are Underserved A s we’ve noted, China’s travel and tourism rather than as an experience to be enjoyed for itself. (See industry is only beginning to develop. Exhibit 6.) Even affluent travelers in China seek out budg- Many companies serving tourists were un- et hotels with low prices and basic offerings, although til recently (or still are) state owned, and they may enjoy premium-hotel packages when they trav- they are just learning how to serve con- el abroad. Of course, as travelers gain more experience, sumers in a competitive environment. Because of regu- their list of preferences will expand, but even seasoned latory constraints and because most Chinese can’t afford travelers are particularly demanding about cleanliness to travel, foreign companies in China have focused large- and comfort. When we asked Chinese travelers to rate ly on expatriate customers or on the very affluent do- the hotel where they had stayed on their last domestic mestic segment. As a result, a huge portion of the mar- vacation, multinational-brand premium hotels scored ket has been underserved. The first thing travel and lowest. (See Exhibit 7.) Presumably, premium hotels in tourism companies in China must do to capture the po- China are not meeting Chinese consumers’ very high ex- tential of this growing market is to understand the spe- pectations for value. cific needs and preferences of the segments they want to target and develop a competitive plan and a sustain- able business model. We’ve singled out a few (among Challenges in International Travel many) examples of underserved needs that offer oppor- tunities for all sectors of the travel industry. Chinese travelers are more willing to trade up when they travel abroad. They feel that they need a higher level of service to deal with language barriers and unfamiliar cul- Troubles on the Domestic Front tures, and they view international travel as a special treat—an occasion to splurge. The luxury end of the con- Middle-class domestic travelers in China care more about sumer retail industry has already begun to invest in serv- basic services, such as the price and cleanliness of their ing this growing market by hiring Mandarin speakers in accommodations, than they do about value-added extras. their stores and providing language lessons and exchange This is only a little less true for the affluent segment, programs in China for local staff. Some retailers have VIP which ranks price below a hotel’s amenities and cleanli- programs that require important customers to be greeted ness. Such basic requirements are taken for granted by by their first name at all the company’s locations around Western travelers, but Chinese travelers in our survey the world. said they were going unfulfilled, particularly on the do- mestic front. Most of the complaints about hotels in Chi- However, we don’t see the same level of attention to the na concerned a lack of cleanliness and basic comforts. affluent segment in the travel sector, except for some ca- sinos in Las Vegas and Macau, which have become very The concept of paying for premium hotel services is rela- sophisticated in serving Chinese high rollers. Hotels at tively new to Chinese travelers. Unlike Western consum- many popular destinations for Chinese tourists in the U.S. ers, they think of a hotel as a place to spend the night and Europe have yet to provide special services, although T O
- 16. Exhibit 6. For Most Chinese, a Hotel Is a few are offering third-party translation services through Just a Place to Spend the Night a hotline. Most airlines lack signs in Chinese, and restau- rants in hotels overseas rarely offer menus in Chinese, Chinese breakfast items, or information about Western “Outside of sleeping, how much time do you spend at your hotel each day?” cuisine and customs. % of respondents Differentiated Premium Services In light of the increasing willingness of experienced afflu- 58 66 64 ent travelers to trade up and their dissatisfaction with most current offerings, the window of opportunity is wide open for travel providers that can offer unique products and services for this segment. So far, however, most offer- ings are either undifferentiated and targeted at the mass 38 29 33 market or they lack sufficient quality to appeal to affluent 2 travelers. Here are just two examples. 5 0 1 4 0 Five- to four- Three-star hotel Two-star to Travel Packages. The affluent travelers in our survey star hotel economy hotel were less satisfied than those in other income segments Hardly any time Half the day with packaged tours offered by travel agencies. (See Ex- A couple of hours Most of the day hibit 8.) Frequent complaints related to the quality of the guides and the sameness of the tours available. Our sur- Source: BCG Chinese Consumer Travel Survey, July 2010. vey participants noted that they could detect little differ- Exhibit 7. Multinational-Brand Premium Hotels Are Not Meeting Expectations “How satisfied were you with your hotel on your last leisure trip in China?” Satisfaction level Satisfaction level 100 Top five unmet needs 100 Top five unmet needs Premium ◊ Not clean ◊ No free breakfast hotels1 ◊ Environment ◊ Location 50 50 ◊ Not comfortable ◊ Environment 49 ◊ No free Internet 54 ◊ Not clean ◊ Meals ◊ Meals 0 0 Satisfaction level Satisfaction level 100 Top five unmet needs 100 Top five unmet needs ◊ Not clean ◊ Not comfortable Mass-market ◊ Not comfortable ◊ Not clean 50 50 hotels ◊ Customer service ◊ No free Internet 53 62 ◊ No free breakfast ◊ No free breakfast ◊ Location ◊ Customer service 0 0 Multinational-brand hotels Local hotels Sources: BCG Chinese Consumer Travel Survey, July 2010; BCG analysis. 1 Guests spend more than RMB 500 per day on accommodations and other hotel services. T B C G
- 17. ence between two European tour packages—one priced dow to shop in them. Therefore, most Chinese travelers almost twice as much as the other. Aside from a slightly wait until they are overseas to spend their money. As the more relaxed schedule and somewhat better hotels in the Chinese government relaxes control of the duty-free mar- more expensive package, the two tours comprised activi- ket, local duty-free stores have the opportunity to im- ties more than half of which were identical. We heard prove their services and offerings and capture the afflu- similar complaints about tour packages to South Korea. ent segment’s increased spending on travel. The lion’s share were undifferentiated, low-price, and tar- geted to the mass market. And because these packages provided insufficient details on itinerary, many consum- Online Travel Planning ers ended up disappointed with the choice they had made. One respondent noted, “I regretted the tour I se- As we noted earlier, a trip represents a significant outlay lected. We spent too much time on activities I wasn’t in- for Chinese travelers, so they want to make sure that terested in, and I didn’t enjoy the trip at all.” they get good value and that all their needs will be met. But the travel industry in China is fragmented and un- Shopping. Up-market travelers like to plan their purchas- differentiated, and there is a general distrust of travel es in advance, and they look for offerings that are not agencies and advertisements. Moreover, for most Chi- available at home, as well as for brands that they regu- nese, a critical mass of travelers among family and larly purchase. Duty-free stores abroad, where 40 percent friends is not available to provide recommendations. So of the affluent travelers in our survey shop and spend Chinese travelers—especially experienced travelers— more than in other channels, are particularly popular. In spend a good deal of time searching for and comparing China, these stores lag far behind their international information and prices on their own. And most of this counterparts in luxury brands and service, and they are planning—researching destinations, booking transpor- mostly restricted to airports (unlike duty-free stores in tation, and reserving hotel rooms for domestic travel—is other countries), so consumers have only a limited win- done online. Exhibit 8. Affluent Travelers Are Not Satisfied with Packaged Tours Short-haul trips Medium- and long-haul trips (Hong Kong and Macau) (other Asian countries, U.S., and Europe) Areas of dissatisfaction with guided tours Meals Services provided by tour guide Tour guide’s attitude Tour guide’s experience 0 5 10 15 20 0 5 10 15 20 Percentage of respondents Mass-market travelers Affluent travelers Source: BCG Chinese Consumer Travel Survey, July 2010. T O
- 18. However, there is a price to pay for using this do-it-your- cal: she visited ten travel websites when planning her self channel. Downloading and interpreting the complex most recent trip to Xiamen, a major city that’s just an information that appears on the Web, comparing prices, hour’s flight away. (See the sidebar “Mrs. Tu Wants to and determining which reviewers to believe can consume Simplify Her Trip-Planning Process.”) There’s a growing hours and even days for most Chinese. Furthermore, as market in China for one-stop, user-friendly travel sites more sites join an already crowded field, it is becoming that provide information travelers can trust and service more difficult to find reliable brands online. The experi- they can rely on. ence of a traveler we interviewed from Shanghai is typi- Mrs. Tu Wants to Simplify Her Trip-Planning Process Mrs. Tu’s online search process 4 ◊ “I visited more than 10 travel ◊ “So I’d know what to expect, websites to plan my last trip to Finalized hotel and I gathered basic information Xiamen!” flight bookings 1 on regional history, geography, (3 sites) weather, and must-see ◊ “I checked to see if the prices Researched the attractions recommended by offered on the airline and hotel destination travel websites that weren’t sites were cheaper and then (1 site) biased by travel agencies or booked the best deals.” hotels.” ◊ “I cross-checked many sites for ◊ “I visted several sites to find promotions or attractive deals out where other travelers and studied hotel reviews and had gone in order to create guest comments. (But you have 3 my own itinerary and list to be careful, because some are of dos and don’ts.” fake!)” Compared offerings 2 ◊ “I’d really love a one-stop website. (5 sites) It would make my planning Read blogs to process much easier.” develop an itinerary (3 sites) Source: BCG consumer interview. T B C G
- 19. Big Opportunities for Early Movers C ompanies that invest in understanding the lished the necessary capabilities to support a consistent special characteristics of China’s travel mar- premium-brand image and service offering, such as ele- ket (such as its youth) and commit them- gant offices, professional staff, and high-quality service selves to serving the needs of its different delivery. segments will find themselves with a pow- erful competitive advantage. Hotels, for example, might A good example of the second, more affordable model is reconfigure their rooms and facilities to better serve Italy’s Costa Cruises. It entered the Chinese market in larger groups, booking agents and promoters could offer 2006—the first international cruise company to do so— multisuite villas to attract groups traveling at the last and has rapidly won the approval of Chinese tourists and minute, and local transportation companies could ac- the industry. Costa offers attractive value packages with commodate groups traveling together. But companies affordable prices and more appealing activities than seeking lasting advantage will need to do more than re- mass-market travelers can find with airline packages. For arrange the furniture. Below we note just a few of the example, it provides five-day, four-night cruises between companies that have already started down this road. Shanghai and Japan or South Korea for less than $400, which is considerably less expensive than a cruise of sim- ilar length in North America or Europe. More important Tailored Offerings for Specific Segments for Chinese travelers, these packages are cheaper than a flight to Japan or South Korea. Costa Cruise tourists are The first step for companies committed to pursuing an spared the hassle of air travel and are provided with advantaged position in China’s growing travel market is ground transportation and visits to several cities, as well to define the segment they intend to target and develop as international entertainment, cultural activities, and ex- a nuanced understanding of its needs. Then they can ex- cellent Italian cuisine. As a result, Costa’s Chinese cruises plore ways to develop value-added services that differen- are always nearly totally booked. tiate them from the competition. Their business model should play a key role in providing and supporting this differentiation. For instance, one business model might Brand Loyalty Through Customer focus on premium offerings targeted at the fast-growing Relationships segment of experienced affluent travelers. Another might develop local offerings to attract the rising numbers of Our survey participants listed brand—the promise of less wealthy Chinese who are interested in traveling. quality and service—as the most important factor in their choice of hotel or airline. Indeed, they said that they rare- Caissa, a Beijing-based travel agency founded in 2000, is ly choose brands that are entirely unknown to them. a good example of the first model. It launched a set of However, they are always eager to try a new brand if they premium products, including theme-oriented overseas- have heard of it. But the fact that there are so many travel packages, priced as high as RMB 100,000 for a ten- brands in the market with few differentiating character- day VIP tour of the U.S. But just as important, it estab- istics makes it difficult for travel providers in China to T O
- 20. generate brand loyalty. In fact, only about 10 percent of the complexity. This has created a tremendous opportu- consumers in our survey said that they would choose a nity for travel providers with well-known brands to pro- travel agency because they’ve used it before. When they vide quick and easy solutions to the tedious process are deciding among hotels whose brands are equally fa- of making travel arrangements. Companies that fulfill miliar to them, they are likely to base their decision on this need could also be in a position to define standards, price and promotions. guide customer behavior, and establish barriers to entry. Therefore, establishing brand loyalty is both an imperative and a challenge in Chi- Establishing brand Ctrip, a leading travel site that attracts na’s travel market. International players 25 to 35 percent of Internet traffic for ho- loyalty is both an are rushing to leverage their well-known tel and airline bookings in China, offers names. Club Med, perhaps the best-known imperative and a value-added services beyond its core prod- brand in family-focused resorts, inaugurat- challenge in China’s ucts to help customers plan their trips. ed its presence in China in 2010 with a ski The comprehensive travel-related infor- resort in the mountains of Yabuli, next to travel market. mation it provides ranges from important Harbin. It held events with local celebri- facts about the customer’s planned desti- ties to increase brand awareness and offered activities for nation, to recommended itineraries, to photos and ac- high-end business customers, including the Yabuli China counts of the experiences of other travelers. It also pro- Entrepreneurs Forum, which it hosted. These efforts and vides a transparent, reliable, and convenient payment others helped Club Med acquire a record number of new process with Internet banking, mobile, credit-card, third- customers through its distribution channels, including party, and cash-on-delivery options, as well as hotline as- outlets in Shanghai and Beijing, which the company sistance. opened in partnership with travel agencies. Some travel providers are simplifying the planning proc- A familiar brand name is important in acquiring new cus- ess and strengthening their brand by extending them- tomers, but a good customer-relationship program that selves across sectors. 7 Days Inn uses its customer base enhances a traveler’s experience is necessary for main- and online platform to cross-sell airline tickets and car- taining a core customer base and creating a competitive rental services. Rather than compete on price, such com- advantage. 7 Days Inn, a low-price hotel chain in China, panies compete on the convenience of a one-stop shop- appeals to younger travelers with a strong online plat- ping experience that also allows customers to accumulate form of services. Its website (the first to offer online book- membership points. Airlines in other emerging-market ing) has the highest booking rate in the country. Accord- countries are likewise giving customers the option of ing to the company’s annual report, nearly all bookings booking hotel rooms, rental cars, and even train reserva- come from its 14 million members, of whom 82 percent tions through their branded websites. are repeat customers. The chain, which has grown by an average of 140 percent every year since 2006, monitors customer satisfaction, offers a loyalty program to retain Serving Travelers from Smaller Cities core customers, and maintains a strong member commu- nity through social-networking applications. It’s not just With most providers targeting affluent travelers in Chi- the technology, however, that makes 7 Days Inn stand out na’s big cities, the needs of middle-class travelers from from its competitors. It’s also the comprehensive custom- smaller cities have been largely ignored. These consum- er-relationship program. And it also gets the basics right, ers have more limited access to airports and fewer flight with clean rooms and value-for-money amenities. options, necessitating troublesome commutes to big-city airports. Smaller cities have few travel agencies, and ser- vices are minimal. (See the sidebar “Sun Dan Is Looking Hassle-Free Travel Planning for Better Travel Services in Her Small City.”) Travelers from smaller cities also encounter a higher refusal rate Chinese travelers spend hours planning their trips, and when applying for visas, especially when making their they are looking for a simple, reliable way to reduce own arrangements for trips overseas. T B C G
- 21. Sun Dan Is Looking for Better Travel Services in Her Small City Complicated visa process Constraints on driving ◊ “I went to Sanya because I wanted to visit a tropical ◊ “My husband and I like to drive because it’s convenient. country without getting a visa.” We hoped to drive to Xinjiang, but it’s difficult to get directions and find good hotels and restaurants along ◊ “I plan to travel to Hong Kong and Europe in three the route. Maybe we will have to give up this idea.” years. I’ll choose a packaged tour because the agency can help me get visas.” ◊ Married with one infant ◊ College teacher ◊ Lives in Weihai (a tier 5 city) ◊ Extensive domestic-travel experience, but no outbound trips Limited help from agencies Willing to trade up but doesn’t know how ◊ “I believe travel agencies can offer more attractive prices ◊ “It takes a lot of time to search for promotions at four- than the prices I find online, but there are none nearby.” star hotels. I ended up staying at a budget hotel even though I am willing to pay up to RMB 400 a night.” ◊ “I can’t find a travel agency in Weihai that will help me book flights and hotels without joining a packaged tour.” Source: BCG consumer interview. Our survey found that middle-class consumers in smaller should note, however, that it takes more than discount cities are more likely to increase their spending on travel prices to attract this market. Spring Tour provides direct and to trade up than their counterparts in top-tier cities. flights from lower-tier cities and improved access to air- This neglected segment of travelers offers a clear oppor- ports, thus meeting a significant need of people living tunity for companies looking for growth beyond China’s outside China’s major cities. largest cities. Shanghai Spring Tour, which started out as a low-cost air- B line and then expanded into the tour operator business, ecause the travel and tourism sector in China is is one company that has recognized the potential of the still relatively undeveloped, it offers some of the smaller cities. On new routes, 80 percent of the seats on best opportunities in the consumer industry. Spring Airlines are reserved for Spring Tour customers. Companies entering now will be able to set standards Thanks to this vertical integration and the company’s low and guide consumers in their shopping behavior. So far, operating costs, Shanghai Spring Tour is able to offer there are no clear winners among the companies that budget travel in China’s western regions, along with have already entered the market—but that window tailored services such as free transportation to airports in won’t remain open forever. Therefore, it is important for Shanghai for some customers. The move into smaller players to act now. If you believe your company can ben- cities (including the lowest-tier cities) has brought a con- efit from this opportunity, we recommend the following siderable number of first-time travelers to the company, actions: thereby introducing a new growth segment. One satisfied customer reported, “I chose Spring Tour for my first lei- ◊ Invest in consumer insight to develop differentiated sure trip. The package was much cheaper than other products and services for mass-market and affluent agencies—even cheaper than train tickets.” Companies consumers, as well as for consumers with different lev- seeking to duplicate Shanghai Spring Tour’s success els of travel experience. T O
- 22. ◊ Identify opportunities to develop a trusted umbrella China’s speedy ascent in the world’s travel and tourism brand that will attract the loyalty of consumers new to sector—from sixth place in 2008 to a projected second the travel market. place in 2020—presents an unprecedented opportunity for growth at a time when most mature markets remain ◊ Consider opportunities for acquisitions in new, frag- sluggish. Considering the colossal advantage to be gained mented sectors where you may not have an estab- by innovative first movers in a market desperately seek- lished operation. ing trusted brands, companies in China and abroad can’t afford to ignore the challenge of meeting the needs of ◊ Design a well-timed, cost-effective, and innovative ex- Chinese travelers. pansion into low-tier cities to capture this rapidly grow- ing and underserved market. T B C G
- 23. For Further Reading The Boston Consulting Group pub- Big Prizes in Small Places: China’s Sourcing Consumer Products in lishes many reports and articles on Rapidly Multiplying Pockets of Asia: Managing Risk—and Turning Growth Crisis to Advantage China that may be of interest to sen- A report by The Boston Consulting A Focus by The Boston Consulting Group, ior executives. Recent examples in- Group, November 2010 March 2009 clude: The Internet’s New Billion: Digital The Next Billions: Unleashing Consumers in Brazil, Russia, India, Business Potential in Untapped China, and Indonesia Markets A report by The Boston Consulting A report by the World Economic Forum Group, September 2010 in collaboration with The Boston Consulting Group, January 2009 Winning in Emerging-Market Cities: A Guide to the World’s China’s Digital Generations: The Largest Growth Opportunity 570-Million-Hour Opportunity A report by The Boston Consulting A report by The Boston Consulting Group, September 2010 Group, July 2008 2010 BCG Global Report on Foreign or Local Brands in China? Consumer Sentiment: A New Rationalism Trumps Nationalism World Order of Consumption; A Focus by The Boston Consulting Group, Consumers in a Turbulent June 2008 Recovery A report by The Boston Consulting The Quest for Defendable Scale in Group, June 2010 China A Focus by The Boston Consulting Group, China’s Digital Generations 2.0: December 2007 Digital Media and Commerce Go Mainstream Winning the Hearts and Minds of A report by The Boston Consulting China’s Consumers Group, May 2010 A Focus by The Boston Consulting Group, September 2007 The Keys to the Kingdom: Unlocking China’s Consumer Power A report by The Boston Consulting Group, March 2010 China’s Luxury Market in a Post- Land-Rush Era A White Paper by The Boston Consulting Group, September 2009 Lucky 8: Understanding and Capturing China’s New Growth A White Paper by The Boston Consulting Group, July 2009 T O
- 24. Note to the Reader About the Authors Acknowledgments For Further Contact Vincent Lui is a partner and manag- The authors would like to acknowl- The research for this report was con- ing director, Youchi Kuo is a project edge the valuable contributions ducted by the firm’s China Center for leader, Justin Fung is a principal, of Matilda Ho, Cynthia Hui, Amy Consumer Insight and was spon- Waldemar Jap is a partner and man- Lee, Bo Lu, and Zhaowei Xu. They sored by BCG’s Consumer practice. aging director, and Hubert Hsu is a would also like to thank Sally For inquiries about this topic, please senior partner and managing direc- Seymour for writing assistance and contact any of the authors. tor; all five are in the Hong Kong of- Gary Callahan, Angela DiBattista, fice of The Boston Consulting Group. and Gina Goldstein for contributions Vincent Lui to editing, design, and production. Partner and Managing Director BCG Hong Kong +852 2506 2111 lui.vincent@bcg.com Youchi Kuo Project Leader BCG Hong Kong +852 2506 2111 kuo.youchi@bcg.com Justin Fung Principal BCG Hong Kong +852 2506 2111 fung.justin@bcg.com Waldemar Jap Partner and Managing Director BCG Hong Kong +852 2506 2111 jap.waldemar@bcg.com Hubert Hsu Senior Partner and Managing Director BCG Hong Kong +852 2506 2111 hsu.hubert@bcg.com T B C G
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