Money-Growing: A Handful of Boutiques

Shopping Standards

“First boutiques opened in luxury hotels in the mid-1990s when the market suffered an acute shortage of prime retail space,” Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global, recalls. Marina Smirnova, deputy head of valuation and consulting department at Colliers International, says that hotel shops are hardly a novelty. Soviet-era Kosmos and Ukraine hotels operated small shops and kiosks on their premises.

Most hotels run shops to meet the government standards effective in Russia, Smirnova says. “Hotel shops are a compulsory requirement set by the Russian state standards (GOST R 50645-94) and the international standard 28 681.97 on travel services and hotel classification, applied to first class and luxury hotels (4- and 5-star hotels). However, Smirnova says, national regulations do not specify what kind of shops exactly must be available in hotels. International standards are more detailed. “In line with the requirements set forth in the recommendations by the World Tourism Organization, hotels are to operate newspaper stands, photo shops, shops selling stationery, cigarettes, beauty products and souvenirs,” she says.

“A hotel guest may buy some item, which he knows well [in a boutique], or a souvenir from Russia,” says Alexander Skobkin, head marketing analyst at Doki Realty. Hotel stores should offer accessories of well-known brands, for example, Montblanc pens or stationery items Lerche and El Casco.

Four to Five Star Ranking

Most luxury hotels in Moscow operate boutiques on their premises. Konstantin Kovalyov, managing partner at Blackwood, says that “the presence and makeup of hotel shops depend, first and foremost, on the size and rating of the hotel.”

“Boutique zones are available chiefly in large hotels such as Radisson SAS Slavyanskaya, Marriott, Sheraton, etc. Those hotels operate a large stock of hotel rooms – at least 100 – and offer top quality service. Such hotels runs shops selling goods by world’s leading brands, which meet customers’ requirements,” says Alexei Samsonov, development director at the ITF investment and consulting company.

“Shops are rare at smaller hotels rated as three star properties and below, with a stock of 100 to 200 rooms, situated on the outskirts of Moscow,” Kovalyov says. “Most provide a store selling newspapers and souvenirs, sometimes a drug store; rarer are stores selling leatherwear, as for example at Warshawa Hotel.” The 4-star Radisson runs the largest number of shops in the city, with a shopping arcade measuring a total of 1,000sqm. That feature, undoubtedly, adds special flavor to the hotel, he says.

The 5-star Renaissance Moscow hotel operates a retail zone that comprises a sports goods store at the entrance to the fitness center, souvenir shops, cigar boutiques, an optician’s and a newsstand. Marriott Grand Moscow, also rated as a 5-star hotel, also runs a sports store. “Newsstands and souvenir shops are available at any first class or luxury hotel,” says Kovalyov. Marina Smirnova says that an average Moscow hotel usually has two or three boutiques, for example, jewelry and watches stores, clothing shops, etc., measuring a total of 100 to 200sqm. A watches shop, for example, operates at Marriott Tverskaya Hotel. “Resort hotels also feature shops selling beach and sports wear,” she says.

It does not matter whether a hotel’s rating is four or five stars, the size of a retail zone is practically the same everywhere, however, it is the hotel’s rating that shapes the profile of a future tenant. “Of course, there is a sort of a face control for tenants,” says Vladimir Zhuravlyov. “As far as 4-star and 5-star properties are concerned, shops operating there are, for the most part, world’s famous brands of exclusive clothing and accessories, elite alcohol and jewelry, souvenirs. The class of retail operators should correspond to paying capacity of hotel guests,” Alexei Samsonov explains.

In particular, Alexander Skobkin notes, “youth-oriented brands are more appropriate at hotels focusing on outdoor activities,” while more conservative brands blend in well at centrally located luxury hotels. “The concept of a retail chain should correspond to the concept of the hotel and preferences of its guests,” he agrees.

Vladimir Zhuravlyov explains that the majority of 5-star hotels feature luxury brand shops, selling expensive watches, accessories and stationery, designer clothing, whereas some economy-class hotels have grocery stores on their premises. For example, the former Moskva Hotel had a Sedmoi Kontinent supermarket on its ground floor. But, given the specifics of the Moscow market, the latter example is rather an exception. “Over 70 percent of hotel shops are mono-brand luxury boutiques or antique shops,” Zhuravlyov says. “Chain brand shops are common in Moscow hotels - Canali, 007, Fashion Continent, S.T.Dupont, Wolford, Mercury, Brioni, Cesars, Korloff, and others,” Skobkin reports.

Placement Tactics

The placement of boutiques at Moscow hotels is governed by certain rules, experts say. “Most hotels allocate not more than 5 percent of space on ground floors in immediate proximity to the entrance. As a rule, the retail zone features no more than five stores,” says Vladimir Zhuravlyov. Konstantin Kovalyov believes that hotel shops occupy only 1 to 3 percent of hotel space.

“The size of a retail zone depends on the total area of the hotel and the concept of the property. Especially popular are boutiques operating in centrally located tourist-oriented hotels where commercial activity is high and customer flow is well organized. Usually boutiques are situated on first floors of hotels, in the lobby and bar area. Those are, for the most part, small shops selling expensive watches and vintage travel accessories,” says Nikolai Shekhovtsov, the president of Bonita Group. According to Shekhovtsov, there are two special approaches towards organization of a hotel retail zone. While some hotels operate within multifunctional complexes that provide retail space, others have shops and other community-oriented facilities operating not on the hotel promises proper but in immediate proximity to the property.

“Quite often a boutique zone is situated on the territory of a multi-functional complex, which comprises retail space, offices, a food court and lodging facilities,” the expert says. Shekhovtsov cites two mixed-use projects launched by Bonita Group in St. Petersburg and Cherepovets, both featuring accommodation facilities. “The mixed-use concept is based on the local market situation and lengthy payback on hotel projects. Multifunctional projects ensure a sooner payback on a hotel. After the project is completed we plan to retain the title to hotel facilities while the rest of the space will be transferred to co-investors,” Nikolai Shekhovtsov explains.

Another approach towards organizing a retail area is commonly practiced by housing developers who usually develop public amenities in immediate proximity to residential estates but not on their premises. For example, schools and shopping malls are developed within several kilometers’ distance from a countryside compound. “Boutiques may operate outside the hotel building. Four-star and five-star hotels are usually prestigiously located and shape the development of a certain infrastructure in the area. For example, several 5-star hotels in Moscow are situated in the area of Kuznetsky Most Street where a large number of premium brand boutiques are available, at Petrovsky Passazh mall and in Stoleshnikov Side-street,” says Nikolai Shekhovtsov.

Some experts believe that is the reason why Moscow hotels run so few shops on their premises, for hoteliers see no sense in vying with large stores. A hotel shop simply would not pay back even if it is open for outsiders. Yulia Dalnova, head of retail real estate at Knight Frank, says that even if hotel shops are open to outsiders the attendance is not likely to grow considerably. In particular, launching clothing stores on hotel premises is hardly profitable at all as “guests are more likely to do their shopping in malls where a wider range of goods is available.”

Remarkably, some foreign hotels do not run retail facilities on their premises either, as retailers operating in the vicinity offer a wide choice of shopping opportunities. For example, Berkeley Hotel in London runs only a gift shop. The hotel is situated in a prestigious locality famous for its exclusive boutiques and luxury shops at Sloane Street and Knightsbridge.

Developers of Ripamonti Hotel in Milan followed the same principles. Ripamonti has no shops on its premises at all. But hotel guests are able to shop at several boutiques adjacent to the building. Foreign developers often practice original approaches towards placement of boutiques. For example Landmark Hotel in London has a boutique of the same name - the Landmark Boutique – located on the mezzanine floor of the hotel, built especially for the purpose.

Profitable Symbiosis

“A luxury boutique on hotel premises constitutes a symbiosis, beneficial both to the hotel and retailer, but beneficial rather in terms of prestige and reputation, as sales at hotel shops are low, of course,” says Konstantin Kovalyov. Hoteliers rarely mention hotel shops in their ads, as retail facilities do not constitute a serious competitive advantage, he says. Offices, cafes and restaurants, movie theaters are advertised far more often.

Most experts agree that hotel operators rarely sign long-term leases with retail chains. That is why the choice of a certain brand is determined by its reputation on the market rather than established partner relations between hotels and retailers. “The Moscow hotel property market is still quite young and so far we see no established tandems of hotels are retail chains,” Alexander Skobkin claims.

But, in the opinion of Marina Smirnova, there is one exception to the rule. “There are joint projects by hotels and high fashion houses, for example, a hotel chain established under the Versace brand. Rezidor Hotel is set to launch a new project in St. Petersburg, under Missori brand,” Smirnova says. “It is hard to name other retail operators cooperating with hotels though,” she adds.

Despite low proceeds at hotel shops, hotel developers try to boost their takings, on the one hand, and to attract premium brands, offering them excellent advertising opportunities. “We examine retail chains who already have their presence in the area, analyze the level of competition and brand awareness. A popular retail outlet considerably boosts attendance,” says Nikolai Shekhovtsov.

To that end, developers make boutiques operating on hotel premises or within residential estates accessible both for hotel guests and outsiders. “In most cases where a hotel is open not only for hotel guests shops cater to customers, who are not staying at the hotel, for example, those who hold meetings there or attend other events held at the hotel,” says Alexei Samsonov. “Today boutiques often have a separate entrance and are accessible from the street,” Alexander Skobkin agrees. Vladimir Zhuravlyov cites an example of S.T. Dupont boutique at National Hotel.

Those two factors – the role of the brand image and the opportunity to boost attendance – may affect rental rates, one of the key market indices. “If a hotel is able to provide a boutique with a storefront facing a retail corridor, the rent may be comparable to rates charged on that street. For example, items available for sale at a watch boutique at Marriott Tverskaya are on display in a shop window facing the street, which boosts attendance at the shop,” Marina Smirnova says.

But as few hotels are able to offer retailers such opportunities, rental charges there are often below the average. “Rental rates for such shops conform to the average level of rental rates in the area, but they may be lower as buyer attendance at hotel shops is not as high as at luxury shops on the same street, for example, on Tverskaya ($4,000 per 1sqm per year),” holds Alexei Samsonov. “The size of rent depends on location and class of the hotel. In each case the rate is set individually as rental charges and takings depend on potential attendance rate, which is of special importance,” Alexander Skobkin confirms.

Yulia Dalnova believes that even if shops are open for outsiders the number of visitors is not likely to grow considerably. In particular, launching clothing stores on the hotel premises is hardly profitable at all as “hotel guests are more likely to shop at large retail centers offering a wider range of goods.”

On the whole, retail space at upscale hotels is let at rates, which are comparable to the rates charged at prestigiously located shopping malls or detached shops, Vladimir Zhuravlyov reports. “For example, five-star hotels on Tverskaya let retail space at $2,500 to $3,400 per 1sqm, depending on the distance from the center. The minimum rate stands at $1,900 per 1sqm, within the Garden Ring,” he says.

Analysts do not anticipate any changes in that segment of the market; boutiques zones operating on hotel premises are not likely to grow or attract more visitors, given the specifics of that sector. The only thing that may be expected is that the professionalism of operators will grow. “Boutique zones in hotels are a promising sector for retail operators, first and foremost, considering the rapidly expanding presence of international hotel operators in this country. Running an outlet at a top class hotel enhances retailer’s image,” claims Yulia Dalnova.

“The development of that sector is possible in business hotels, provided though that measures to increase attendance are taken, for example by holding exhibitions and conference,” holds Alexei Samsonov. “Top class hotels need boutiques but their share of space is unlikely to grow. Their profile is not likely to change, either,” says Konstantin Kovalyov.