Money-Growing: Motel Business Inertia

The point here is not that the true number of motels in the city has little in common with official figures released by the State Statistics Committee (Goskomstat), according to which Russia has as few as 53 motels. Quite often, despite soaring rates, those facilities are in such poor condition that not even long-distance drivers, never mind tourists, would risk spending a night in those roadside hotels opting for a nap in their cab at a parking lot instead.

However, sometimes travelers have no choice. And while the Russian Federation stretches thousands of miles more than the United States – the world leader in terms of motels – one can drive through Russia’s plains for hours on end without a single motel in sight. The Moscow Region, too, is short of them, although, the authorities have plans for about a dozen motels and camping areas near train stations, airports and the Moscow Ring Road (MKAD).

By U.S. Standards

Motels are believed to have originated in the United States, evolving from auto camps – an alternative to expensive hotels – shabby makeshift cottages that mushroomed westwards from the Mississippi. At first, towns and villages welcomed auto tourists and their vacation cash. However, it didn't take long for locals to complain about the mess, the commotion, and even the loose morals of traveling folks from out of town. Residents were tired of drunken brawls and the damage done by those who often traveled "with one shirt and a $20 bill."

In the east, tourist homes provided another alternative to hotels. If you look around in dusty attics or antique shops, you can still find cardboard signs that advertise "Rooms for Tourists". The Tarry-A-While tourist home in Ocean City, Maryland, advertised, "Rooms, Running Water, Bathing from Rooms. Special rates April, May, June and after Labor Day". Because tourist homes were frequently located in town, they differ somewhat from the contemporary vision of a motel -- found on the highway, away from the city center. However, each home was as unique as their owners. As such, they contributed to a central tradition of motel Americana: "Mom and Pop" ownership.

The post-war years saw a real motel boom, as General Dwight Eisenhower, the then-president of the United States saw it necessary to establish a highway system similar to Germany’s autobahns. All highways got a rich roadside infrastructure with filling stations, police precincts, telephones, auto repairs, retail centers, toilets, snack bars and motels. Traveling the U.S. by car became comfortable.

1952 saw the emergence of a new motel standard set by the Holiday Inn Hotel established by the energetic entrepreneur Kemmons Wilson. That was the beginning of the famous Holiday Inn chain, widely popular due to its affordable rates, quality service and the convenient location of its hotels commonly built near airports, highways and outskirts of cities.

By the year 1972 as the Wilson empire prospered Holiday Inn Hotels were opening across the globe every 72 hours. Today, in the U.S. alone Holiday Inns number over 1,000; the chain’s motto, announced in 1975, is: “The Best Surprise is No Surprise”.

Increasingly strong competition on the Western motel market is prompting motels to upgrade their services, while at the same time their rates remain comparably affordable. Competition forces them to offer their guests the amount of amenities expected of an upscale resort hotel. The largest motels, especially those that belong to famous chains, are built to provide maximum comfort for travelers: swimming pools, tennis courts, solariums, videos in each room and even coffee-machines.

Motels Heading for the Provinces

Motels in Russia are built along federal highways, mostly along the Moscow-Brest motorway and highways linking the capital to Rostov, Krasnodar Region, Sochi and Krasnaya Polyana, according to Marina Smirnova, deputy director of the Hotel Consulting and Development Group.

Areas with a relatively high number of motels include the Moscow, Leningrad, Tver, Vladimir and Yaroslavl Regions. The Central Federal District accounts for 48% of all Russia’s motels; the Southern Federal District 24%; Siberia 12%; the Northwest 12%, with the remaining 4% scattered across the other regions, according to the State Statistics Committee.

Russia’s motel sector is developing slowly, for the most part as a complementary business, Smirnova says. Sometimes an entrepreneur secures a plot of land near a motorway, develops the area the way he likes without commissioning any marketing research beforehand. Travelers, meanwhile, are rarely able to find a motel on the map.

Maksim Karapetov, public relations director with Vesco Realty, believes that the true reason for that is the low demand for motel rooms: “Motels have their specifics, or, rather, philosophy. A motel is a temporary accommodation, rented for one night and catering mostly for road tourists, mainly for long-distance drivers. For a motel to prosper its owner must be sure there is a large number of potential guests – auto tourists. But there are not very many of them in Russia.”

Besides that, a motel development project pays back after at least six years while construction costs can easily exceed $100,000. So far investors have shown little interest in such projects, and Goskomstat has official statistics to prove that. According to the agency, Russia has as few as 50 motels, compared to hundreds of thousands across the United States.

It should also be noted that the United States has a long history of family road tourism with a variety of accommodation facilities and attractive destinations across the country whetting Americans’ appetite for travel. U.S. travelers willingly visit large cities during the Christmas break or on Independence Day. Russia, on the contrary, is still too centralized, Vesco Realty’s experts say.

Despite the appeal of cities like Moscow, St. Petersburg or Sochi, poor road conditions and security concerns scare off potential tourists. Besides, one should not forget that Russia’s cold climate makes lengthy travel possible only in the summer months.

At the same time though, many Russian regions, especially those popular with tourists, incur substantial budget losses as a result of the dire shortage of decent hotels. To remedy the situation authorities in the provinces are trying to involve domestic and foreign investors in the development of a hotel infrastructure.

Three years ago Valentina Mazur, head of the priority territories development department in the Crimean government, told the Krymskaya Pravda newspaper that as many as 70 investment projects worth $230 million were to be implemented on the peninsula. The hotel and restaurant business still attracts the lion’s share of investment. Latvia, with 35.3%, and Switzerland (29.5%) account for the biggest share of the foreign investments.

Authorities in Yalta focused on the development of a chain of camping areas and motels after they realized that the problem of the influx of road tourists in summer months could not be solved by bans alone. Yalta’s third largest project in terms of the volume of investments – after the Oreanda Hotel and a water park – is the $800,000 reconstruction of the Polyana Skazok motel and camping site.

Russian companies with links to the oil sector, too, have shown an increased interest in the development of motels. Back in 1997 two companies affiliated with VNK (Eastern Oil Company) – OAO Novosibirsknefteprodukt VNK and OOO Torgovy Dom VNK – won a bid to develop filling stations along the Novosibirsk section of the Baikal motorway near the towns of Barabinsk, Yurga, Moshkovo and Kochenevo – the busiest parts of the Novosibirsk road network.

The report, citing VNK’s press-service, was published on the Internet. Bidders were required to ensure a guaranteed supply of oil products to filling stations at volumes sufficient for at least 250 refills per day, and to build motels with guarded parking lots. Furthermore, the winner had to build over 20 new filling stations offering a wide range of services, including auto repairs, car washes, cafes and shops.

Motels: What Are the Costs?

In terms of availability of decent motels the situation in the capital and the Moscow Region is, perhaps, even more deplorable than in the provinces. For many years Soviet-era Solnechny and Mozhaisky, built ahead of the 1980 Olympic Games, were considered by experts to be Moscow’s best-known motels. Today, both are more frequently mentioned in crime reports.

As a rule, most of Moscow’s motels – Minsky, motels in Butovo and on Varshavskoye Shosse – cater for truck drivers and workers. Motels like Baltia, at the 10th kilometer of Novorizhskoye Shosse, Motel-Avto on the Moscow-Crimea motorway, 20 kilometers from the Moscow Ring Road, Otdokni in the town of Khotkovo in the Sergiev-Posad District, and some others, are believed to cater for more sophisticated guests offering accommodation of a higher quality.

And still, even those motels fall short of U.S. standards. To begin with, motels in Moscow and in the country often fail to provide guests staying in their rooms or cottages with personal parking spaces. Most motels have a common parking lot on their premises. Quite often, what is proudly presented as a ‘motel’ is, in fact, a gathering of small wooden huts with a restaurant or a caf? built nearby to attract additional custom, according to the Hotel Consulting and Development Group. Car repair services are rarely available. The construction costs of such ‘motels’ are about $150 per square meter.

To save on construction costs investors may focus on redesigning existing facilities. Moscow and the Moscow Region have a large supply of such buildings; developing a new motel building can cost from $50,000 to $250,000 with a payback period of 3-7 years.

That approach is characteristic for the small fry, says Marina Smirnova, considering that the motel sector rarely attracts big players, and those who are involved are travel agencies and carriers. Once, HCDG consulted a businessman who planned to open a motel in a vacant plot near his restaurant. The man did not seem in the least bothered by the fact that the would-be motel had no windows or ventilation, Smirnova recalls. HCDG rejected the project, but the businessman ignored their advice and carried on with his plans.

Usually entrepreneurs opt to develop new facilities, as new construction, in the opinion of Vyacheslav Plakhov, first deputy chairman of the tourism committee for the Moscow Region, is far more profitable than redesigning existing properties. Moreover, investors who plan to develop new properties under the regional program “Development of tourism industry in the Moscow Region in the years 2004-2007” can lay down their conditions before their projects are agreed upon and endorsed by the authorities.

It should be noted that such a compromise is very reasonable, because the program stipulates the construction of only two motels before 2007 – in Mozhaisky District and in the town of Lukhovitsy. But investors will have to spend 96 million and 64 million rubles respectively on their implementation.

Of course, when developing a motel one should calculate its future vacancy rate and set prices according to the real situation on the market. Russian motels usually have from six to 50 rooms; motels with a larger number of rooms are rare. The average accommodation rate is $8-10; rates for VIP-rooms (deluxe) may fluctuate between 800 and 4,000 rubles. Additional services may include a sauna, restaurants, auto repairs, though they are rarely available.

Of course, it would be na?ve to think that a 100-room motel with only 15 rooms filled at any one time could make a profit, or that potential clients – long-distance truck drivers – would be willing to pay over the odds for accommodation. Ideally, a motel owner should develop a competent sales strategy cooperating with major travel agencies who sell bus tours. A motel project could be successful if built on a modern highway similar to Europe’s motorways, and not passing through any villages, says Marina Smirnova.

The TRIM development company that owns the Otdokhni motel confirmed to Vedomosti that the building of such properties is a complicated and troublesome affair. It can be profitable, however, provided a developer has useful connections and is able to organize business operations competently, and to build the additional infrastructure.

In this way the company invested its spare cash in the development of the motel Otdokhni (‘Have Some Rest’ in Russian) seeking to ease the shortage of good hotels in Sergiev-Posad. Initially, the motel owners did not expect huge revenues. With their title to the plot of land – previously occupied by the company’s store for construction materials – already registered, they managed to minimize the development costs.

One can only guess at how expensive motel construction is for oil and gas companies. The LUKOIL-Tsentrnefteprodukt company, that runs Baltia Motel on the Novorizhskoye Shosse [Motorway] refused to answer our questions concerning the amount invested in the development of the property, and its profitability. However, the project seems to be far from unprofitable. In addition to a convenient location on a busy motorway, the hotel, with a Mercedes dealership on its premises, also has a filling station, a tire repair shop and a supermarket.

Does Moscow Need Motels?

Given the various risks mentioned above, chains of affordable motels are unlikely to emerge in Russia in the foreseeable future, believes Maksim Karapetov. Most likely, individual projects catering for well-off travelers will prevail. Such motels will be developed together with filling stations, beauty parlors, auto repairs, shops, cafes, bars and restaurants, bowling alleys and pool halls. Some may feature saunas, swimming pools and conference halls for meetings and corporate events. The rates in such motels will fluctuate between $50 and $100 per day.

There were plans to develop a chain of motels in Moscow, along the Moscow Ring Road and the Third Ring Road, according to the Hotel Consulting and Development Group. Those plans were drawn up by Moscow’s town-planning authorities who have little if any understanding of business operations. That is why they failed to reckon with such factors as time spent behind the wheel – 6 to 8 hours, and the distance a driver would normally cover before stopping for the night at a motel. Truck drivers and tourists are hardly likely to stop and waste cash on a motel situated in the suburbs of the city.

Visitors to Moscow, in particular foreigners, who have failed to find a hotel room in the city, are unlikely to consider a motel as an alternative. Marina Markarova, managing director at Blackwood, says that most Russian motels fall far behind their foreign analogues in terms of quality and service, and cannot compete with the more comfortable apartments available for rent in Moscow.

Meanwhile, Moscow’s 3-star hotels sometimes charge their guests as much as 3,000-4,000 rubles per night – for deluxe and VIP-rooms – which is too expensive for a lengthy sojourn. In comparison, according to Blackwood experts, country houses in Moscow are offered for rent at $4,000 per month for a house of up to 150sqm, while a 2-room apartment (up to 80sqm) in an upscale newly-built residential compound may be rented at $3,000 per month. Thus, it turns out that staying in a top class motel for a month is comparable to renting a modest flat in a top-class estate or a country-house.