RS Market breakdown Russian hotel business: demand for high quality and reasonable price

Russian hotel business: demand for high quality and reasonable price

September 2012

The Russian hotel business is a promising industry for potential investors. Most of the industry’s post-Soviet problems have become a thing of the past. From year to year, the market is gradually approaching international standards. Its potential for development and growth is still very high, which is applicable to nearly every segment of the Russian hotel business.
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Construction of new hotel in Rose-Resort for the Olympic Games 2014
Construction of new hotel in Rose-Resort (Sochi) for the Olympic Games 2014

Profits growing faster than anything else

The Russian hotel business is one of the most dynamic industries showing annual growth. In 2011, according to estimates by BusinessStat, the hotel service market grew by 12% in volume terms. In addition, market value increased by 22% and reached 144 billion roubles (more than €3.5 billion or about $4.5 billion). Profits are growing faster than the number of provided services, which is promoted by increasing prices among other things. Over the past 5 years, the average price of the Russian hotel services has grown by 63% and in 2011 it reached 1,662 roubles (€42.3 or $52.5) per person per day.

BusinessStat notes that the Russian hotel market is growing in natural units owing to infrastructural development of the industry and increasing customers and average nights spent at hotels, while increasing prices are caused by growing numbers of international chain companies entering the market, growing numbers of expensive hotels, rising personnel salaries, and increasing additional hotel services.

Business representatives are positive that major developments in the Russian hotel market are still ahead. The time is ripe for global development. This is promoted by slow yet growing domestic and foreign tourist flows, changing domestic consumer needs, and the fact that the hotel business retains its stability even under recession.

Main market participants are already on board

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Hotel Baltschug Kempinski, Moscow
Hotel Baltschug Kempinski, Moscow

How many hotels are there in Russia? Experts offer different estimates. “In Russia, according to the Russian Federal State Statistics Service, there are about 8,000 hotels and similar lodging facilities and 4,500 specialized means of accommodation. But what are they? Residence halls, hostels? It is not quite clear. Total inventory is nearly 600,000 rooms,” said IFK Hotel Management partner Marsel Izmaylov. However, according to Mr Izmaylov, statistical data do not give a full picture of the market, because “quality accommodation” accounts for only a small percentage of those thousands of buildings.

Regarding international business presence, there are 20 international operators managing 117 hotels with 28,000 rooms in Russia. All the largest chains are present in the Russian market: Rezidor manages 20 hotels, InterContinental – 18, Marriott –16, and Accor – 15. In their lines, nearly all operators have several brands of different price categories with different positioning designed for different customer groups. “But there are quite a few European, American, and Asian chains that are not yet present in Russia,” said Director for Hospitality In.Comm (a hotel consulting company) Yelena Lysenkova.

Regarding international business presence, there are 20 international operators managing 117 hotels with 28,000 rooms in Russia. All the largest chains are present in the Russian market

Most hotels managed by international operators fall on Moscow, Saint Petersburg and Sochi, where the 2014 Winter Olympics will take place.

“Fifty-five per cent of internationally operated hotels are in Moscow and Saint Petersburg. About 10% are in Sochi,” said Mr Izmaylov from IFK Hotel Management. And that is easily explainable. Moscow is the capital of the Russian business tourism, Saint Petersburg is a cultural centre, and Sochi is a seaside resort, which will also become a sports capital.

In addition, hotel business is developing fast in some regions of the Russian Federation. For example, Kazan, according to Nadezhda Makatrova, Director of Konkretika (a consulting company specializing in property marketing) has been successfully promoting itself in the tourist market under the brand “the third capital of Russia”, Yekaterinburg is being referred to as “the capital of the Urals Region,” and some central Russian cities are “sites of rich historical heritage.”

Stereotypes working for business class

The Russian hotel business is an industry facing numerous specific problems. International chains increasingly set their quality standards, on the one hand, while old Soviet hotels are still there, on the other. Most former Soviet hotels are still state-owned or owned by public and municipal companies. The business community evaluates their potential in different ways. “The situation with Soviet hotels has several aspects. Some of them are bought by large chains, while others develop independently. On the whole, public companies tend to get rid of their core assets. However, it is not always the case that these assets go to retail investors,” said Yelena Lysenkova.

According to experts, some part of public hotels and those owned by large state corporations will remain state property and be rehabilitated, while others will be sold at public auctions.

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Shalyapin Palace Hotel, Kazan
Shalyapin Palace Hotel, Kazan

In the meantime, while large chains erect expensive and medium-priced hotels in Russia and the state is pondering on the future of old Soviet assets, foreign tourists and Russian residents experience severe shortages of high-quality economy-class hotels. In Moscow and Saint Petersburg, they partially solve this problem by developing a hostel system. In Moscow, for instance, there are about 70 hostels, explained Daniil Mishin, a managing partner at hostel chain Bear Hostels. However, according to Mr Mishin, this does not help meet the demand for classic economy-class hotels.

In the meantime, while large chains erect expensive and medium-priced hotel in Russia and the state is pondering on the future of old Soviet assets, foreign tourists and Russian residents experience severe shortages of high-quality economy-class hotels

One of the main reasons why accessible economy-class hotel infrastructure has so far developed at a low rate is the seasonal factor. At Lake Baikal, for example, the swimming and sunbathing season is only two weeks long. Coming alive in the business tourist season, Moscow hotels have to reduce their prices in the summertime, because it is a slack season for foreign tourists so far.

According to Yury Barzykin, Chairman of the Tourism, Resort and Recreation, and Hotel Entrepreneurship Committee of the Chamber of Commerce and Industry of the Russian Federation, absence of accessible hotels is primarily caused by lack of competition. Why bother constructing several economy-class hotels, if one can build an expensive and profit making facility? In the opinion of Sergey Buzko, Vice President of the Yekaterinburg-based Ural Tourism Association, another reason is the persistence of stereotypes. “Russia is stereotypically considered to be a no-comfort territory. For example, when an employee is sent to Russia on a business trip, it is customary to use the services of some reputed airline company and stay at an expensive hotel for reasons of maximal safety,” said Mr Buzko, noting that these stereotypes also affect the mentality of investors who see their opportunities only in high-class segments and focus primarily on demand of the business community.

Russia is stereotypically considered to be a no-comfort territory

Another acute problem faced by the Russian hotel business is lack of skilled personnel. This problem is closely related to lack of distinct service quality criteria, which could develop if a hotel classification system is introduced. However, mandatory classification is in force only for Sochi in connection with the forthcoming Olympic Games. In this context, representatives of the business community note that having a classification system in place is no panacea. “This system is defective, for instance, certificates are issued by enterprise directors who, more often than not, do not visit facilities and have nothing to do their evaluation. So, it happens that a person in charge of awarding “stars” is out of touch with reality,” said Yelena Lysenkova, noting that customers’ main considerations are a range of services offered at a hotel and its location.

A hotel is no toy for your wife

Nevertheless, whatever the problems may be, the Russian hotel business is a promising investment destination. The primary reason is that this industry has enough space for development. At present, according to analysts, there are basically no specialized investors or owners operating in the market, so business-oriented projects are few and far between. “They tend to build a hotel because nothing else can be done, or one first has to build a hotel before doing something else, or just as a toy for the wife or a girl-friend,” said Yelena Lysenkova.

At present, Russian authorities strongly motivate Russian regions toward attracting investors to the hotel industry. In Moscow, for example, it is planned to double the number of hotels by 2025. Special emphasis is being placed on the so-called tourist clusters. Specifically, Russia heavily focuses on the development of tourism in the North Caucasus, with its rich natural potential and a terrain suitable for the development of mountain skiing tourism. The Altai and Baikal areas are intensely promoting themselves as tourist regions. Very promising are the Golden Ring cities, because most foreign tourists who visit Moscow and Saint Petersburg continue their travels in Vladimir, Suzdal, Pskov, Nizhni Novgorod, and other cities located in the vicinity of the Russian capital. A bright future can be expected for the Russian Far East, where an APEC forum will be held*. According to Nadezhda Makatrova, Russian regions are gradually learning how to position themselves correctly in the tourist market, which contributes to the development of tourism. Russian authorities are sure that nearly all Russian regions can to some or other degree become tourist destinations. This is a question of time, largely depending on the resolution of such problems as development of domestic economy-class air services.

Business people agree that at present Russia has basically no regions having too many hotels. “International companies operate only in 37 regions, but it will take years or even decades to cover the whole country. In Russia, a lot of time will pass before one can say: ‘No, this region is not for me. Its market is oversaturated’,” said Mr Izmaylov.

In addition, all hotel business segments are attractive for investors. The future definitely depends above all on the development of high-quality economy-class hotels and hostels. However, experts note that urban business hotels will not lose their relevance in the near future owing to growing business tourism. Besides, Russia has very few apartotels. Analysts expect that “family hotels” will also develop.

“In the following decades, all international operators will strengthen their market presence. Even those who underestimate the Russian market will come over here. Competition, excitement, and creative projects are in store for us,” said Mr Izmaylov, noting that from year to year Russian businesses are gradually approaching international standards.

Marina Selina, RIA Novosti
Exclusively for Russian Survey RS

Things worth knowing

Those who decide to invest in the hotel business in Russia should keep in mind the following. Minimal payback period is 8 years in Russia as compared to 15–20 years in Europe, explained Yelena Lysenkova, adding that money value is quite different in this country too. “On the whole, GOP—gross operating profit—in Europe varies from 3–4% to 10–12%, while in Russia it reaches 45–55%, although over the last 3 years it has steadily been going down against the background of growing salaries and taxes and decreasing incomes,” said the expert. According to Marsel Izmaylov, one should be careful about cost recovery matters. “Like in all markets, this depends on many factors, all the more so in the hotel market. There are no two identical hotels even under one brand and this will never happen. Surely, no super-fast cost recovery can be expected here, because this is not a fast food, hostel or retail market,” he said.

In addition, some specific operating conditions existent in the Russian market should be kept in mind.

“In Moscow, for instance, development of a balanced system of accommodation facilities is hindered by such factors as limited land allocation for hotel construction, terms and conditions of obtaining relevant permits and authorizations for the construction of accommodation facilities,” said Yury Barzykin.

Experts advise that the origin of land or buildings should be carefully checked. “It is worth knowing that some construction requirements are even more lenient in Russia than in Europe or America, while others are not logical and strange, but they should be complied with.

People should be taught at every stage of project implementation,” said Yelena Lysenkova. It is better to have a local partner who covers all aspects of market operations, or at least some experienced expert partners: managers, architects, builders, and so on. This way, you will have fewer problems,” advised Mr Izmaylov.

* The APEC Summit will be held in Vladivostok, a gem of the Russian Far East. Read more about this city