S6 - Xbed The dual-sharing platform disrupting chinas hospitality industry PDF

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XBED: THE DUAL-SHARING PLATFORM DISRUPTING CHINA’S HOSPITALITY INDUSTRY Chunmian Ge, Xiao Xiao, Ning Su, and Zhihong Li wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2018, Ivey Business School Foundation

Version: 2018-08-01

The sharing-economy paradigm was no longer a foreign concept in China. Although China was not typically among the first movers globally, it was rising as one of the biggest playing fields for sharingeconomy business models. One example was the local ride-sharing platform Didi Chuxing Technology Co. Ltd. (Didi), which had driven Uber Technologies Inc., the global ride-sharing pioneer, out of the country. Another example was the proliferation of bike-sharing platforms, a business model pioneered by Chinese start-ups; this industry had now seen its first unicorn.1 Almost everything was now up for sharing, and thousands of start-ups had emerged around this buzzword in hopes of becoming the next Didi or Mobike. Founded in May 2015, Xbed Technology Group (Xbed) was one of many sharing-economy platforms and was determined to make a difference. Identified as an online hotel platform that provided decentralized accommodation services through technological innovation and a sharing-economy business model, Xbed was born out of its founder’s desire to use digital means to solve the existing problems in China’s hospitality industry. After two years of development, Xbed was present in more than 44 cities in China, and more than 10,000 rooms were available on its platform. Further, Xbed had received two rounds of fundraising worth ¥80 million 2 in total, with the third round coming up shortly. The third round of fundraising was expected to reach ¥100 million (see Exhibit 1). THE FOUNDER

The founder of Xbed, Chuntian Li, was a long-time veteran of the hotel industry in China. He was among the entrepreneurs who had pioneered the budget hotel business model in China and in 2005 founded 7 Days Inn, 3 a leader in this market category. The tremendous success of the 7 Days Inn, coupled with the founder’s efficiency and effectiveness in exploring new markets and expanding sales, had led to Li having an outstanding reputation in the hospitality industry. After retiring from his role at 7 Days Inn, Li became 1

The term unicorn referred to a start-up company that was valued at $1 billion or more (Merriam-Webster: https://www.merriam-webster.com/dictionary/unicorn); Adam Minter, “China Is the Future of the Sharing Economy,” Bloomberg, May 18, 2017, accessed November 9, 2017, https://www.bloomberg.com/view/articles/2017-05-18/china-couldbe-the-future-of-the-sharing-economy-j2uyrh27. 2 ¥ = RMB or CNY = Chinese yuan renminbi; all currency amounts are in ¥ unless otherwise indicated; US$1.00 = ¥ 6.69 on September 30, 2017. 3 7 Days Inn was a leading budget hotel group in China. It was well known for its operation strategy, management style, and membership loyalty program.

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the chief executive officer of a well-known car rental company, where he invented the “convenience store” model of car rentals and expanded its scale several times during his brief two-year tenure. THE INCEPTION

As a veteran of the hospitality industry, Li had experienced first-hand the sector’s rise and decline and had been observing the increasing struggles the hotel industry was facing. According to Li, the problem was multifaceted. First and foremost, the costs associated with running hotels had been increasing over the past decade. This was especially the case in China, where real estate prices had skyrocketed in recent years. Similarly, remodelling and decorating buildings had become more expensive, and this always formed part of a required business routine for traditional hotels upon purchasing or leasing a property. Furthermore, because of tremendous economic growth, China’s labour costs had been steadily increasing. In fact, many manufacturing jobs had moved to markets with lower cost structures, such as Cambodia and Vietnam. Therefore, in the hospitality industry, the labour costs associated with operational staff (e.g., housekeepers) had also increased. On the other hand, room prices had stayed more or less the same, leaving hotels with much narrower profit margins. Second, the value chain of the hospitality industry had also experienced important changes over the years, due to the rise of online travel agencies (OTAs). As the mediator connecting hotels to customers, OTAs controlled the main entry point of hotels’ sales and had enormous bargaining power. Therefore, when OTAs demanded a larger share of the market or when they continued to suppress prices to attract customers, such actions further tightened the already narrow profit margins for hotels. Finally, from a competitive point of view, the situation had become even more severe for traditional hotels when new ways of obtaining accommodation services emerged as a result of the sharing-economy paradigm. Customers were no longer satisfied with the traditional service channels where everything was centralized and standardized with little or no personalization. Li came to the realization that the hotel industry’s outdated business model no longer met the current market environment and distribution of resources. He saw that a fundamental overhaul of the industry was needed, but wondered how to make this happen. THE BUSINESS MODEL

Li believed that the answer lay in recombining and reallocating existing resources through the deployment of digital technologies. The question then became, what resources should be provided, and by whom? Li and his team started with a clean slate approach—breaking the traditional hotel business model into its functional elements and then systematically analyzing each element for its appropriateness to be replaced by digital technologies. By stripping the traditional hotel business model to its core, they found that only two fundamental elements were irreplaceable—the room itself and the housekeepers. Guided by the principle of remixing, Li decided that the best way to marshal these two resources was through the sharing-economy paradigm. As for the other elements of the hotel business, including the front desk, concierge, room services, and more, they could be either eliminated or fully digitalized. Following this line of thinking, Xbed was born as an effort to reinvent the way the hospitality industry operated through a new sharing business model enabled by digital technologies. Essentially, Xbed’s business model consisted of three mobile applications (see Exhibit 2). A Customer-to-Business-to-Customer Business Model

To tackle the issue of increasing costs associated with acquiring tangible assets, Xbed started with a model that was similar to those used by other sharing-economy platforms in the hospitality industry (e.g.,

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Airbnb Inc. [Airbnb]). Instead of purchasing or leasing physical properties, Xbed built a platform on which property owners could list their rooms or apartments. Furthermore, since these rooms were scattered around various locations, Xbed could now operate in different areas of a city, including the busiest districts that were once the exclusive domain of luxury hotels; the result was an increase in product diversity for minimal investment. However, Li and his team were not interested in making Xbed another Airbnb, as they were aware of the flaws of its customer-to-customer (C2C) business model. Li believed that Airbnb could never serve the whole market because the service provision process involved too much uncertainty; this was essentially caused by transferring the burden of providing services (e.g., marketing and cleaning) to the individual resource owners. In other words, a C2C model was a doubleedged sword: on one hand, product diversity and personalization increased through decentralization, while on the other hand, uncertainty also increased due to lack of standardization. To solve this problem, Li and his team came up with a customer-to-business-to-customer (C2B2C) model by serving as a mediator between the hosts and the customers to ensure product personalization without jeopardizing service quality. This model was the essence of Xbed’s first application, X-Host (see Exhibit 3). Through this platform, hosts (i.e., homeowners or, in some cases, landlords) could manage their properties that were listed on the Xbed “room calendar.” More importantly, this platform helped the hosts prepare their properties to be listed on Xbed. By collaborating with a range of other platforms and vendors, Xbed offered services to hosts in areas such as architecture, interior design, remodelling, financial support, and insurance. Doing so allowed Xbed to have a certain level of quality control over the listed properties: Xbed would supervise the preparation process and would send personnel to inspect and approve the property before it could be listed. A Dual-Sharing Paradigm

After listing their assets, hosts were freed from the responsibilities of managing them. Instead, Xbed handled the check-in, checkout, and cleaning services for its hosts. However, how could Xbed do so with the greatest efficiency? In other words, how could Xbed exert maximum control over the process using minimal personnel? Part of the answer lay in digital technology. In collaboration with a hardware vendor, Xbed developed its own proprietary digital door lock system. All the properties listed on Xbed were equipped with cutting-edge digital door locks, which could be unlocked with passwords, remote command through Quick Remote (QR) codes, and Bluetooth technologies. Together with the Xbed booking application (see Exhibit 4), the digital door lock system had become an essential part of Xbed’s effort to fully digitalize the hotel front desk. When a customer booked an Xbed property through the booking application, the booking was confirmed and the customer then received the address of the property and the passcode for the door lock. When the customers arrived at the door, they entered the passcode to unlock the door and then confirmed their check-in on the mobile application. Similarly, checkout could also be done through the application after customers had left the property. No Xbed personnel were involved in this process. If the check-in and checkout processes could be digitalized, what about the cleaning of the property afterward? Li pointed out that housekeepers were irreplaceable, but he also understood that this did not mean an individual needed to manage these staff. Therefore, the second sharing-economy platform— X-Keeper—was created for recruiting and managing part-time housekeepers and other service personnel (see Exhibit 5). After a customer successfully booked an Xbed property, a cleaning order for the expected checkout date was automatically generated and broadcast on the X-Keeper platform. Housekeepers within the vicinity of the property could then bid on the order. When a bid was successful, the housekeeper received an order confirmation, which would include all the details of the order, such as the type of task required, the date

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and time of the task, and the location of the task with map directions. Upon arriving at the property, the housekeeper scanned a QR code on the door lock to open the door. The X-Keeper application then prompted the housekeeper to check the room against a checklist and submit the report, and provided standardized guidance on how to clean the room and place the items (using another checklist that included photo illustrations). Here, quality control kicked in again, as the bed linens, towels, and other fast-moving consumer goods (e.g., bottled water, shampoos, and toothpaste) were standardized and provided by Xbed. Once the housekeeper had completed cleaning and tidying up the room, they would change the status of the room on the X-Host application, which would then release the room on the Xbed booking application. To ensure the quality of the housekeeping service and to motivate the housekeepers, Xbed also introduced a rating system for housekeeping (in addition to the rating system that most sharing-economy platforms used for rooms). The rating of housekeepers influenced both their chance of winning a subsequent job bid and the bonus they could receive from Xbed. In addition to housekeeping jobs, jobs such as maintenance and room checking were also posted and available for bidding on the platform. To sum up, the three applications—Xbed Booking, X-Host, and X-Keeper—formed a closed-loop ecosystem of Xbed that not only served end-customers but also satisfied the needs of direct stakeholders such as property owners and housekeepers. These three applications were linked to a central data system (see Exhibit 1) that was developed in-house. In this way, data were seamlessly integrated and shared across the three platforms. Furthermore, this data system was directly linked to the database of the Chinese police bureau. As customers were required to make bookings using their national identity numbers (as was the case for all hotels), such direct connection to the police database allowed Xbed to gather background information on their customers for security reasons. This arrangement solved another major challenge of C2C homesharing platforms: a lack of knowledge and control in terms of the identity of customers. Li labelled this business model a dual-sharing model. The two sharing platforms existed in parallel to provide the two irreplaceable resources, properties and housekeepers; but at the same time, the X-Keeper platform operated on top of the X-Host platform to offer complementary services that would solve one of the inherent problems associated with the sharing-economy paradigm—the lack of standardization. On top of the dual-sharing model, Xbed inserted itself as the mediator between the two customers. This allowed Xbed to (1) further ensure the quality of its products and services, hence lowering the uncertainties for both owners and customers; and (2) retain a certain level of control over its platforms. Such control was especially important amid the backdrop of increasing regulations from the Chinese government in relation to various industries in which sharing-economy platforms operated. Finally, the three applications of Xbed were designed to be open and generative. In other words, each could operate as a stand-alone platform to be used and integrated for other businesses. For instance, other hotel chains or accommodation platforms could use the Xbed booking application as their own booking front end; other homeowners could look for designers and suppliers on the X-Host platform (without listing their properties on Xbed) when they need to decorate their homes; and other businesses (e.g., convention centres) could use the X-Keeper platform if they needed on-call housekeeping services. XBED’S MAIN COMPETITORS Budget and Mid-Range Hotel Chains

When asked about Xbed’s competitors, Li surprisingly pointed at traditional hotels, especially budget and midrange hotel chains. Ironically, such hotels were also where Li had begun his career and thrived. In his mind, the traditional hotels were still the ones to beat when in the hospitality industry. He explained:

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No matter whether we talk about market share or customer inertia/habits, budget hotel chains, including some mid-range hotels as well, are the dominators . . . all the new business models, such as sharing economy platforms, that provide unstandardized hotel product are trying to steal market share from them [budget and mid-range hotel chains]. China’s budget hotel sector had enjoyed a tremendous boom in the past decade, growing from fewer than 500 to more than 16,000 by 2014. 4 However, the profitability of the sector had decreased since 2011.5 After years of mergers and acquisitions, the budget hotel sector was dominated by a mere handful of big players, and the same trend could be observed among mid-range hotels.6 According to Li, the battle was between these traditional hotel chains and the new business models. In other words, Xbed was on the same team as other similar platforms, sharing the goal of changing the way people thought about and obtained accommodation services in China. Airbnb China

Founded in 2008, Airbnb was the first of its kind to provide unstandardized and personalized accommodation services through a C2C marketplace model. Airbnb operated in 190 countries and had more than 3 million listings.7 Since 2014, Airbnb had been working on expanding to the Chinese market by opening local offices, building relationships with local governments, and attracting Chinese outbound travellers to use its services overseas.8 In March 2017, the company made a further push to grow in China by changing its name to “aibiying” and increasing its workforce in the country.9 Airbnb had approximately 100,000 listings in China.10 Tujia.com

Tujia.com (Tujia) was founded in 2011 and was the market leader in short-term property rentals in China. It was considered the biggest competitor of Airbnb China, and had more than 650,000 listings worldwide (mostly in China).11 In October 2017, Tujia received an additional US$300 million in funding from investors led by Ctrip.com International Ltd. and All-Stars Investment Ltd.12 Although Tujia was founded with a marketplace sharing model, it planned to standardize its accommodations, such as linen washing and cleanliness.13 The company was valued at $1.5 billion.

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Tom Hancock, “China Budget Hotel Brands Eye Overseas Expansion,” Financial Times, February 7, 2017, accessed November 9, 2017, https://www.ft.com/content/a87defcc-e36f-11e6-8405-9e5580d6e5fb. Ibid. 6 Mui-Fong Goh, Chee Wee Gan, and Dale Kim, China’s Hospitality Industry—Rooms for Growth, 8, AT Kearney, 2013, accessed November 9, 2017, https://www.atkearney.com/documents/10192/982632/Chinas_Hospitality_Industry.pdf/72ed0 0fb-1cad-4798-a1a1-1552604bc72e. 7 Dara Kerr, “Airbnb Goes All-in for China, Changes Name to ‘Aibiying’,” CNet, March 21, 2017, accessed November 9, 2017, https://www.cnet.com/news/airbnb-goes-all-in-for-china-changes-name-to-aibiying/. 8 Biz Carson, “Airbnb Is Hoping to Win in China Where Many Companies Like Uber Have Failed,” Business Insider, March 22, 2017, accessed November 9, 2017, https://www.businessinsider.com.au/airbnb-for-china-rentals-aibiying-2017-3. 9 Kerr, op. cit. [Dara Kerr, “Airbnb Goes All-in for China, Changes Name to ‘Aibiying’,” Cnet, March 21, 2017, accessed November 9, 2017, https://www.cnet.com/news/airbnb-goes-all -in-for-china-changes-name-to-aibiying/.] 10 Bloomberg News, “Airbnb’s Chinese Rival Raises $300 Million for Global Jaunt,” Bloomberg, October 10, 2017, accessed November 10, 2017, https://www.bloomberg.com/news/articles/2017-10-10/airbnb-s-chinese-rival-raises-300-million-to-expand-overseas. 11 Reuters, “China’s Answer to Airbnb Just Raised $300 Million,” Fortune, October 10, 2017, accessed November 9, 2017, http://fortune.com/2017/10/09/tujia-china-investment-travel-rental/. 12 Bloomberg News, op. cit. 13 Jon Russell, “Airbnb’s Major China Rival Tujia Raises $300M More at a $1.5B Valuation,” TechCrunch, October 10, 2017, accessed November 10, 2017, http://social.techcrunch.com/2017/10/10/tujia-raises-300-million/. 5

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FUTURE OUTLOOK: DISRUPTING CHINA’S H...