Market know-how: Operating Brands
Operating properties and projects on the drawing board stake, primarily, on highly solvent audience undeterred by daily rates of several hundreds dollars. Major developers are filling up the niche of first class and luxury hotels, hiring international hotel operators who have been promoting their luxury brands for many decades. The plans of fostering their own managers remain just plans so far, as developers watch performance of a handful of Russian hotel operators.
Not In Russians’ Favor
Hotels are believed to be long-term and stable projects, generating regular, if modest income in the course of 20 to 25 years, until new investment is required for refurbishment or capital repairs. Hotel investments are worthwhile and reliable provided a hotel is run by a professional operator. Redeveloped or newly built hotels in Moscow, St. Petersburg and other parts of Russia opt for international operators, as their choice is larger, the quality of service is higher and opportunities for attracting clients are wider. “Historically, international hotel operators dominate the hospitality sector in Russia. While in the West, the sector took decades, if not centuries to be formed, here it began to take shape scarcely more than a decade ago. All new operators have emerged only recently and differ greatly one from another,” says Usenko, vice-president at Jones Lang LaSalle Hotels.
Most international hotel chains began 30 to 50 years ago on average, hotel property analysts report. For example, Holiday Inn was established by a group of a small hotel operators in the middle of the last century. The chain’s hotels catered chiefly to traveling salesmen, or, in today's vernacular, business travelers. It was then that first weekend hotels were launched. Russian operators could follow the same path. Moreover, the market has already seen such attempts whereby groups of hotels were formed, for example, Best Eastern Hotels. But within their framework each hotel owner minded own business and those groups failed to achieve any substantial results.
Another example of an organization charged with operation of hotel properties is GAO Moskva. At the end of last year its functions were transferred to the Unified Hotel Company (OGK), with a controlling stake held by Nafta. But on Jan. 23, Moscow deputy mayor Iosif Ordzhonikidze said the city hall had had to scrap the OGK plan. A decree to the effect was issued by Mayor Yuri Luzhkov, the official explained.
“To speed up the payback on a hotel one has to hire a professional managerial team and adopt an adequate marketing policy,” says Dmitry Sazanchikov, marketing director at GVA Sawyer. “Hiring an international operator is seen as a means of boosting revenues and securing a sooner payback."
All hotel owners seek to minimize costs, notes Vladimir Poddubko, head of hotel projects at the bank Rossiisky Kredit. Another challenge is the shortage of skilled staff. But a hotel owner who hires an international operator to run his property does not need to worry about that. “After an agreement with a foreign operator is signed the latter ushers in his staff - the so-called "launch team" with international experience,” Poddubko says. “The line-up usually includes a general manager (a good professional may be worth up to several hundreds of thousands dollars a year, that is why later on he or she is to be replaced by a locally hired manager), marketing experts, financial controllers and chefs. Training is held regularly for local staff.”
“Along with a recognizable brand the international operator introduces his own standards and gets the property included in the global hotel reservations system. Russian operators pale into insignificance against that background," Usenko says. “High-price hotels are obliged to offer top quality of service for their clients and bring good returns to owners," says Konstantin Romanov, partner at the company Knight Frank. “Unlike domestic operators, Western companies can guarantee quality up to international standard and stable occupancy rates throughout the year.”
Russia’s hospitality industry has its own specifics, which tells on their operation, namely, Russian hotels are extremely multifarious, Marina Smirnova, deputy head of valuation and consulting at Colliers International, says. Russia has post-Soviet privately owned hotels, municipally-owned properties as well as projects co-owned by the government and private entities. Where hotels are co-owned by several entities who often pursue absolutely different, conflicting goals, such state of affairs tells on operations. Besides, ever since the Soviet era hotel workers' status is believed to be low, she complains.
“Russia of today still has virtually no learning centers or schools for training professional hotel staff. There are no courses for hotel managers either,” she says. “Although, if needed one can take a training course abroad or attend courses at work. Russians attach much attention to material issues (acquisition or construction of hotels) while service standards, development strategies and marketing including marketing research fade into the background,” Smirnova concludes.
“It would not be fair to say that international hotel operators reign over the Russian market. It is just that Russian operators are still too few and far between and they fail to vie with their western rivals," says Dmitry Stepanenko, vice-president at Heliopark Group. “Given the lack of experience of the majority of Russian operators many hotel property owners and investors have assumed a wait-and-see attitude and look into the prospects of cooperation with them, examining the quality of services offered and their financial performance. Proceeding from our experience, we can say that a professional management company needs at least 4 to 5 years to get established on the market.”
“Russian operators are still few, indeed, and they are losing out to international rivals both in terms of brand strength and quality," Poddubko admits. But, he believes that standards could be easily adopted, it is also quite easy to draw up and support a program of incentives for clients (by offering bonuses and discounts). The main challenge is boosting brand awareness. “Russian operators do not have an established reservations system, the main reason being that they operate a small number of rooms," Poddubko says. That was why Rossiisky Kredit has invited Intercontinental to run its hotel Minsk and considers hiring an international brand operator for Tsentralnaya (Central Hotel).
“Both properties will be rated as luxury (5-star) hotels. Minsk Hotel will target business travelers, while Tsentralnaya will become an exquisite luxury hotel," Poddubko says. "We toyed with an idea of launching a management company of our own to run both properties but after making economic calculations we gave up the plan. Today it is quite possible to build a hotel and offer rooms there under some well-known brand, with an occupancy rate of no less than 60 to 70%. Setting up one’s own chain of hotels is time-consuming, costly and fraught with difficulties; that will require at least 20 years and $50 million and over."
The demand for hotel rooms is growing rapidly although recently the supply has increased too. Property consultants admit that hotels that will be launched in 2007 and 2008 will pay back sooner. That means, developers have no time to lose. “We plan to launch Minsk in 2009 and Tsentralnaya in 2011,” Poddubko says.
Moscow city hall ruled as early as in 2003 that the 1963-built hotel Minsk failed to meet modern standards and required refurbishment, Poddubko says. The Soviet-era hotel is to be replaced by a state-of-the-art mixed-use, in line with the city government's decree No 420RP of March 12, 2004 and No 812RP of May 14, 2005. The plan for Tsentralnaya is to renovate the hotel property restoring valuable (facades and interiors) and lost elements.
The company BEL Development, is currently negotiating deals with eleven well-known hotel operators for its hotel under construction of the former site of the Moskovskiye Novosti publishing house, BEL CEO Igor Zhukov says. “Our plan is to build a boutique hotel. That is why the key criterion is the luxury brand," Zhukov says.
Where Could Russians Dare
"Western operators are more experienced, with an established know-how, name and stable reputation. But young and ambitious Russian firms have good prospects. I am certain that in the future the Russian market will be dominated by domestic operators,” says upbeat Stepanenko. Royalty fees due to foreign hotel operators usually make up 3% from gross sales plus 10% from gross operating income. Other conditions are negotiable. Russian operators charge less but they, too, seek to make profits. Although, time is yet to come for domestic firms to become haughty. To begin with they need to accrue experience, build up their brands, increase the number of rooms in their management portfolios and take on more staff.
Among the problems that arise for international brands entering the Russian market, Russkiye Oteli (Russian Hotels) CEO Stanislav Kapinos names the specifics of Russian mentality: operators are required to obtain tons of permissions from municipal governments and find a reliable Russian partner for their investment projects.
“Investment companies, with Russkiye Oteli among them, who have a certain number of own properties, are set to establish management firms of their own," Kapinos says. “The move is justified if there is more than five properties to run. Very soon Russians' deference to international operators will wane and the latter will face more problems in this country.”
“Russkiye Oteli have chances to become a hotel operator if they buy a franchise,” Smirnova says. “The company that has been talking of plans to build a hotel chain but still has not launched a single project –s unlikely to wake up from slumber and overcome all problems.” “I remember Russkiye Oteli’s public relations manager rebuking me after I had referred to them as a management company,” she continues. In those days Russkiye Oteli was not such a company and refused to be known as such.”
On the whole, hotel property analysts admit, Russian operators are yet to reach a stage where they will be able to enter international markets but they will need a lot of time to secure a foothold at home. So far consumers have no trust in them. But then, experts believe that they do have prospects, after all.
“The easiest of access for Russian operators could be the segment of lower- and medium-price hotels with 2 to 3 star rakings,” Romanov says. “Competition among those properties is not as so strong as international brands operating in Russia focus largely on first class and luxury hotels."
Experts’ conclusions agree with statements by government officials. Alexander Kuzmin, chief architect of Moscow, notes that the majority of hotels planned in the capital fall into the 2-3 star category. “We target not only foreign tourists but also count on our fellow-countrymen and Moscow-based nationals of former Soviet republics, who work here. Therefore, the plan is to build a large number of 2-star hotels and Formula I hotels where our compatriots could stay during their business trips to Moscow,” Kuzmin says.
“Moscow is visited daily by people who do their business or work elsewhere. They make up an enormous group of business travelers who need accommodation. As a rule, visitors cannot afford expensive hotel rooms, they stay here for a couple of days and they need to be put up somewhere without having to pay $1,500 per day,” adds Yelena Malakayeva, president of the company MAK.
Today, Russian operators are so few you could count them on the fingers of your hand. Those are Azimut, Heliopark Group, Amaks and several other companies. They build on different principles of operation but all of them call themselves hotel operators.
"Azimut is the firm that has brought together properties in which it holds ownership," Smirnova says. “Before it was established its founders had gone through a certain latent stage during which they were purchasing hotels, built their company management structure and their brand.” In 2006 they announced their arrival on the market. “The idea to build a chain of hotels first emerged in 2003; in 2004 the first acqusition was made and by the end of 2006 Azimut had been operating over 3,000 hotel rooms across Russia, from Murmansk to Vladivostok," says Sergei Lysenkov, Azimut CEO.
For the time being the company runs hotels in its ownership but beginning 2008 Azimut plans to take over the management of other properties. Talks are already underway. Azimut hotels target mainly business travelers. Lysenkov says that his company, currently focused chiefly on moderately-priced 3-star facilities, is ready to run first class hotels as well. As early as now Azimut properties offer rooms of various categories. “Our plan is to increase the number of hotel rooms the company operates; we are set to become a leading Russian brand on the market," Lysenkov says. “We are building a brand that would come across to our guests; our corporate motto is "Azimut - your cozy companion."
“The market saw arrival of a major chain (on local scale), united under a single brand, a single governing body and a single owner (in most cases)," Smirnova concludes. “Formally, they've done everything right. But they had had no hotel management experience. There is nothing left to do but to wait that in the future that experience will be accrued and this will tell positively on the company's capitalization."
Heliopark Group entered the market as a hotel proprietor and only after the company had been successful in operating one health resort (Heliopark Country) and building another – Heliopark Talasso, it took up operation of other properties, Smirnova says. “At first they focused on countryside leisure resorts segments but gradually they began to offer management services to urban hotels,” she continues.
Nowadays, Heliopark Hotels & Resorts encompasses 15 hotels including 11 operating properties and four at various stages of construction or refurbishment in Moscow and other Russian regions, as well as Ukraine and Germany. In 2006 the chain Heliopark doubled the number of properties in operation and now runs over 1,600 rooms. The company is 100% domestically-owned, with over $200 million worth portfolio of assets.
Heliopark’s strategic goal is to expand the chain to 25-40 properties both in and outside Russia, Dmitry Stepanenko says. These days the company mulls construction and refurbishment projects in St. Petersburg, Nizhny Novgorod and in Ukraine. Among Russian cities where the group has established its presence are Yekaterinburg, Chelyabinsk, Kazan, and others. Heliopark Group’s weak point, Smirnova believes, is the company’s determination to augment its portfolio of assets and their value and failure to pay due attention to quality standards, staff training, strategic market planning, etc. In the future this may impede further growth, she warns.
“Certain Russian operators may enter the first class hotel segment in the future," Romanov suggests. –
“However, to attain that goal they are to meet international management standards and get their properties included in global reservations systems." Another niche where Russian firms could be successful is the segment of designer hotels, if they followed an example of hotels of the chain Golden Apple. “Owing to exquisite design of external facades and interiors those properties produce an impression of a expensive, luxury boutique. “Such hotels may count on patrons with a taste for luxury and comfort. I think that in near future that concept will enjoy high demand in Russia," Romanov says.
For the time being, foreign operators dominate the first class and luxury hotel sector whereas Russians control the segment of moderately-priced 2-3 star hotels, holds Usenko. “To begin with, Russian operators have yet to build well-known brands in the upper price segment; secondly, a large number of their guests are ordinary business travelers, who opt for medium-price hotels,” she continues. “Moscow market needs a “popular brand”. Some of the local companies already nurture such plans. The idea has good chances to be realized as it may appeal to the Russians’ nostalgia for the past.”
Russian investors still shun the hospitality sector, Usenko says, but there are many foreigners who would gladly put up funds for hotel projects. Admittedly, for the time being the local market has nothing just as safe and rewarding to offer. “I think developers who build and plan to run hotels in Russia simply do not understand what they are getting mixed up in,” Smirnova says. “The majority of them harbor certain illusions. They see that the province is short of good hotels and it seems to them that this shortage spells good and easy money. But when it comes to practical decisions it transpires that even building a single hotel is not an easy task, while running it is extremely difficult, suffice it to mention the problems arising when hiring top managers.
Besides, a considerable share of receipts is used to cover soaring operating costs.” “In my opinion, developers do not have to be versed in hotel management, as there are professional operators who could do the job," Malakayeva says. “The developer’s task is to hire a professional company to operate the project, who will calculate costs and take active part in the project, and help secure desired returns."