People In The Know: Hospitality Is a Business

Everything is much easier and more pragmatic. “Gostepriimstvo is simply a translation of the international term “hospitality,” he says. “We are in the hotel and resort business. This is an inseparable part of any state’s infrastructure.”

UMACO opened its first hotel – the first building of the Katerina-City hotel complex, with 30 rooms and 3 apartments, in a renovated 3-story mansion, built in the second half of the 19th century, at Shlyuzovaya Naberezhnya [embankment] on the Moskva River. The building, owned by the Parizhskaya Kommuna footwear factory, is rented by Sweagent AB and operated under a contract with the latter by UMACO.

-What prompted you to opt for the hotel business?

A business evolves from the need to achieve or to do something, which is especially typical of Russia. In the mid-1990s Moscow had not business class hotels. Several projects of the Swedish company Sweagent AB [where Udalov worked as the head of the representative office at that time. – Vedomosti] demanded the participation and presence of Swedish architects and engineers in Moscow. But they simply had nowhere to stay.

They were forced on the one hand to choose between the Baltschug, National or Intourist, where the rates were astronomical, and fleapit hotels with terrible service on the other. In 1997 we launched a project to construct a 30-room hotel that opened a year later. It is a nice, clean corporate hotel with a homely atmosphere. Despite that certain “homeliness”, our guests do not come to have breakfast in their slippers.

Seven years have passed, but our first hotel has not lost its relevance as the niche and the timing were initially correct. This is a hotel for people who come to Moscow on business. Incidentally, 1998 saw IKEA’s arrival on the Russian market, and its top managers stayed for 18 months in Katerina.

In 1999 we began construction of the second, 90-room building and today Katerina-City is a business class hotel complex with 120 rooms. Nothing is in excess there. As for the star rating, we, for example, do not have a swimming pool and that is why formally we cannot claim to be a 4-star hotel, but then our guests do not really need a swimming pool.

In Russia, as well as abroad, there are no absolutely rigid criteria for classification; that is why we have established a standard of our own. We promote our format of business class hotels.

There is still another reason why I opted for this business. I was born and grew up in Sochi, and that is where the best hotels in the former Soviet Union were – our Nice, our Cannes, our everything. The entire life of the resort was focused on those hotels. Then, [I saw] Sweden, Europe, the entire world. I had a chance to compare and see what a hotel is and what it should be like.

-How would you evaluate the present state of affairs in the hotel sector in Moscow and across Russia?

Stable development of the hotel sector usually begins after all the other niches, such as office and retail space have been thoroughly developed, and at the same time, hotel construction is of vital importance for the infrastructure. Today this business is developing rapidly in Russia. Plenty of hotels are being erected across the country, in Moscow and in St. Petersburg.

-It seems that in Moscow hotels are demolished more often than they are built…

This is absolutely normal. Only landmarks, such as the National Hotel, the Ritz in Paris, live forever, they are timeless. But all the other hotels have their service life, and when it expires they grow obsolete and fall into decay.

And then they have to be replaced with new ones; interiors, engineering equipment, materials have to be changed. Let’s say, 70 per cent of all the hotels in Sochi are impossible to renovate – they ought to be demolished and replaced with new ones. And we should be glad that old hotels are being demolished, that there are investors entering this market.

-What do you think the prospects are for the construction of a chain of small and inexpensive 3-star hotels in Moscow?

Nobody is arguing about the need to build these kinds of hotels because there is a dire shortage of hotel rooms in Moscow. In Moscow there are 4 to 5 hotel rooms per 1,000 residents, while in Europe there are 18 to 25 rooms. On the other hand, Moscow is an expensive city, the business center of the entire country. Land is expensive and, of course, investors seek to make the highest profit possible by building higher-class hotels. Building an inexpensive 3-star hotel requires certain government support.

-Major hotel chains still operate only a few hotels in the Russian market, and some world hotel operators, such as Hilton, are in no hurry to start working in Russia. What, in your opinion, is the reason for that?

This question should be directed to Hilton. Actually, almost all the world’s hotel chains are represented in Moscow today. But so far they consider the opening of a hotel in Moscow to be a matter of prestige, explained largely by the enthusiasm of Russian entrepreneurs, who bring international chains to our market.

They will grow genuinely interested in our market when there are some 10 to 20 domestic chains with 5 to 10 hotels each. This is what happened in Sweden. Hitlon bought Skandic, an excellent Swedish hotel chain of over 100 hotels. Building a chain of 20 hotels requires $300-350 million – someone has to take the risk of putting up such money. Also, a good operator is needed.

-How many hotels does UMACO operate today?

Six; three of them are still under construction.

-In what parts of Russia do you plan to develop your business?

We have concentrated our efforts on the south, Krasnodar Region. We are carrying out specific projects under contract. We are working on a concept for Nizhnekamsk, we have prepared the interesting Russky Les project for the Novolipetsk Metallurgical Cooperative. We did several projects for St. Petersburg, but for me that city is a mystery, because for some reason our projects are never implemented there.

-UMACO is one of the few Russian companies involved in developing resorts in Krasnodar Region. How is the resort business developing in Russia?

Sochi, the Black Sea coast and the Azov Sea are the only resort zones in Russia with a population of up to one million. Sochi alone accounts for 150 km of the seashore; altogether, the total length of the Black Sea and Azov Sea coasts is 1,000 km. It is the only place in Russia where the sea is warm.

Our potential clients, mass consumers, crave a warm sea more than the windy Baltics. That is why the number of tourists grows 10 to 15 per cent each year: last year some 5.5 million tourists visited the [Black Sea] coast, at Sochi, Gelendzhik, Anapa; this year it will be some 6 million. Our tourists spend as much money in Turkey as they do in Sochi, which speaks for the popularity of the resort.

Sochi is a unique, landmark resort. It occupies 3,500 square kilometers – three times as much as Moscow. There is room for everything there – for very expensive hotels, health resorts, health clubs; we have the wonderful Matsesta baths [prepared from the concentrates of the famous Matsesta mineral water]. Spring and fall in Sochi are wonderful, unlike in other regions of Russia where those seasons are cold, rainy and altogether miserable. People will gladly go to Sochi in the low-season, as long as the business is correctly organized and presented.

Downtown Sochi is a venue for congresses, corporate events and exhibitions – 70 exhibitions are held in the city each year. Sochi offers better conditions than Moscow for work and relaxation; it is cheaper and easier to bring together 1,000 people here. Sochi has an excellent transport network, including an airport, railway links and good roads.

There is also an area of expensive resorts here, in particular, Krasnaya Polyana. Alpine skiing is an expensive sport. But on the other hand, in summer plenty of tourists, tired of sunbathing on the beach, go there on excursions. This is why I say that the resort is unique. The entire world wracked their brains over how to make winter resorts stay open all year round, while we did not even have to think up anything – nature has taken care of everything itself.

-UMACO has drawn up the town-planning investment concept for the design, construction and operation of new hotels in Greater Sochi. Was that your own initiative?

The most serious problem our resorts are faced with is the lack of understanding that a resort is single mechanism. Every company or organization involved – be it transport companies, city transport networks, hotel owners – pursues its own goals… Once they all realize that this is a single mechanism it will help to improve the quality of service, reduce accommodation costs and attract more visitors. This is the key to success.

We have prepared a plan for the strategic development of infrastructure in Sochi on our own initiative. I was offered the post of the director of the JSC Krasnaya Polyana, set up by the administrations of Krasnodar Region and Sochi, which means the authorities appreciate our efforts. (Udalov was appointed director general of JSC Krasnaya Polyana in April 2004. – Vedomosti).

As a commercial organization we cooperate with the federal, regional and city authorities. Altogether, Krasnaya Polyana has no grounds to complain about a lack of attention from the government.

A modern motorway, worth some $150 million, has been built at the expense of the state. It takes only 30 minutes to get to the resort from the airport. Presently, we are tackling a complicated task – it is necessary to build power lines without damaging the local environment. It was decided against building transmission towers, instead we opted for an underground power line. It is more expensive, but then no damage will be done to the environment or to the resort itself.

-Does your approach towards resort development in line with the practice accepted internationally by the well-known Hotels & Resorts operators?

There can be no unique approach in this business. This is another problem of our country – we keep on looking for ‘our own way’. World experience shows that top class ski resorts are successful when there are people who live there permanently, who can provide those who service those resorts with jobs all year round.

Our project Katerina-Club is focused namely on forming a market for club resort real estate at the mountainous resort Krasnaya Polyana. In November we will commission three buildings of the Katerina-Alpik complex. The construction work is not very straightforward. In Moscow it took us seven months to build a hotel, but considering Moscow has an enormous construction market there were no problems with materials. In Sochi even sand has to be transported from Rostov Region. Hopefully, by the end of this year the first phase of the complex will be commissioned.

Hotels only appear at resorts provided there is a certain infrastructure, and if events take place there, something that attracts tourists. In summer people arrive on excursions, in winter they ski. So far there is only one ski lift. But we have already prepared a project to build an extensive ski lift network on the northern slope of the Aibga range – 350 hectares of ski runs, some 20 ski lifts to be used all year round – by skiers in winter, some 10,000 people at a time, and in summer – by mount-bikers, people arriving on sightseeing and walking tours.

-How much money was invested in Krasnaya Polyana?

The road construction cost $150 million; the ski lift network alone will cost some $120 million. But comparing the scale of investment in Krasnaya Polyana with, say, the cost of demolishing the Rossia hotel in Moscow and construction of a new hotel complex on the vacated site… That project will cost at least $500 million.

If we invest $500 million in Krasnaya Polyana today, those investments will be much more effective than the investment in the Moscow project. (Altogether, the Krasnaya Polyana resort will require an investment of $1.5 billion over 15 years, according to the Ministry for Economic Development and Trade. – Vedomosti.)

The road and the ski lifts are a part of the infrastructure and their construction will create a multiplier effect. Everyone, who goes there will ski, drink mineral water, buy souvenirs, spend money on all the other recreational facilities, and so on. Imagine how many new jobs will be created!

-In other words, the payback period will be shorter?

Not shorter, but the investment will be more effective. The funds that have to be put up are incommensurably small as compared with the effect the resort will bring. The efforts needed for organizing the infrastructure and tourist numbers are much less than the efforts and funds spent on creating that infrastructure.

The number of visitors will grow considerably if the city is promoted correctly. For instance, you go to Turkey and say: “How good it is in Turkey and how bad it is in Russia, on the Black Sea.” If we invest $500 million in Krasnaya Polyana, in Sochi, you will come to Sochi and say: “How good it is in our country!” This is very important in terms of governmental and social policy. Developing one’s own country, one’s own home is, in my opinion, the best national idea.

-Who will invest in Krasnaya Polyana?

We are working on a program that would enable us to attract quite a few investors. It is too early to name specific companies yet, and there are reasons for that. Practically all of our financial and industrial groups have voiced their interest in the project. Krasnodar Region is developing rapidly and is in second place in Russia in terms of investments attracted in the region, excluding the energy sector as money is very different there.

Gazprom, by tradition, pays a lot of attention to Sochi, as well as Interros, but for them those projects are not as significant. Theirs is a different business and investing in resorts is not a part of their core activity. As for institutional, portfolio investors, unfortunately, those are not yet properly represented on the market. There are good prospects for real estate investment trusts.

Unit funds, I believe, may bring about a breakthrough in financing such projects. Otherwise, we will have to either attract direct investments or to borrow from banks, which is too expensive for such projects.

Long-term and relatively cheap money may be provided only by a special real estate fund. There are many investors in the country that have maybe not billions but tens of millions of dollars and they may find such projects interesting. We are working on that, and by the end of the year the Krasnaya Polyana real estate fund will be registered. Besides, we are preparing to issue bonds.

Investors directly involved in the development of resorts and the construction and operation of hotels, will arrive on the market. They are the likes of travel agencies, hotel chains, and companies that build ski lifts across the globe.

As the territory is restricted and one cannot build, say, 100 ski lifts, he who builds the first ski lift will make a profit on it for the rest of his life. That is a good long-term business. Perhaps, the return cannot be compared to the oil industry, but quite comparable with the real estate business. The real estate market in Sochi is growing fast because it is restricted. This growth is being fuelled by expectations.