| MOSCOW HOTEL DEVELOPMENT | ||
With 16 million residents and preeminent role in the economy of Russia and the former Soviet states, Moscow is one of the most important cities in the world. It already plays host of 917,000 visitors per year, according to City of Moscow data, but by all accounts it is not tourist friendly and has not reached its potential as a tourist destination. The number of guests is very likely to greatly increase if Russia continues to enter the world economic system and Moscow develops the kind of hospitality facilities that will attract mass tourism. Although the Moscow hotel industry is rapidly developing to better accommodate tourists, it is far from being saturated with quality, safe and affordable inns. There are plentiful five star hotels offering high-standard accommodation at superb locations for $190-400 per night, but three star hotels offering Western-standard facilities are scarce and in high demand. Complicating the situation is a large supply of old Soviet hotels which offer cheap rooms but low quality of service. Specialists find that slightly more than 4,000 Moscow hotel rooms (out of over 20,000) are up to western standards. Recently, a senior corporate representative of the Russian Intourist Company recognized the lack of three star hotels as the Moscow's major handicap in greatly expanding the tourist industry. Many opportunities may also exist to provide the Moscow hotel industry with services and equipment for renovation and improved service. Financing capital costs is a major challenge, but may be becoming increasingly feasible in coming years. The Russian banking system and U.S. and European export credit agencies have not been offer financing in recent years, but there a number of alternatives sources of financing which could be put together by prospective hotel developers and operators. These include syndications of international private investors and Russia companies and individuals, entities which may now be more ready to invest in sound opportunities in the Russian market. International financial institutions such a the EBRD and World Bank could join in such financing groups as well. End Summary. THE MOSCOW HOTEL MARKET Consumers: According to the information released by the Tourism Committee of the Moscow City Government, 917,000 tourists visited Moscow last year, 70 percent were foreign travelers from countries other than the NIS. Two thirds were business travelers; the rest were people coming to Moscow for educational or recreational purposes. Old Soviet Hotels: There are approximately 16,000 rooms in hotels built before 1992 under the Soviet regime. Budget-wise business travelers and tourists from provincial Russia and the NIS as well as some western business people stay in them, but most travelers used to Western standards would not consider them acceptable. Soviet hotels were developed around Soviet organizational tourism, in which people traveled in groups, and trade unions partially covered their travel expenses. Hotels were fitted to host large numbers of tourists who were not particularly selective in services provided and had no voice in selecting accommodations. With the advent of the market economy, the hotel business became more competitive, leaving existing hotels uncompetitive and in poor condition. The average occupancy rate in Russia for such hotels is 33 percent. Yet today, these hotels constitute 60 percent of the Moscow accommodations. Although the room prices as low as US$ 10-25 might seem attractive, this would not be sufficient to overcome the hotels deficiencies. For example, decoration is dingy, beds are uncomfortable and plumbing is obsolete and partially working, some even offering only shared bathrooms. Staff is not trained to modern standards and do no know foreign languages. The best of Moscow Soviet hotels offer reasonable accommodations, but are not considered quite up to Western standards. Some hotel managers have succeeded in gradually renovating such hotels as Ukraina and Rossiya, which offer prime locations, historical flavor and reasonable good renovated rooms. According to Business Review, non-renovated single rooms in Rossiya could be priced as low as US$ 40, while prices of renovated rooms as well as Ukraina rooms range from US$ 70 to 160. With time, these accommodations, renovated by enlightened management and with improved services, will advance into a more competitive category. Most of the remaining hotels would need major reconstruction and new management to become competitive with Western-style hotels; however, industry experts do not consider these hotels to feasible candidates for such investments. Western-style hotels are subdivided into premier (Baltschug Kempinski, Marriott Grand and Marriott Royal, and others) and secondary tiers, where premier hotels fare better than later. Most of these four and five star hotels are located in centrally very near the Kremlin (National, Baltschug, Metropol) or Tverskaya Street, which connects the Red Square and the Sheremetievo International Airport (Grand Marriott, Marriott Tverskaya, Marriott Royal, Pekin, Savoy, Marco Polo Presnja, Sheraton Palace, Aerostar). There may, however, some future development potential in sites outside Mocow's congested inner core to take advantage of cheaper real estate and capture new niche markets. The Olympic Penta, the only foreign-owned five star located a little away from the center on the Prospekt Mira; business class Radisson Slavyanskaya that is currently renovating its facilities, chose its location near Kiev train station. Novotel Hotel is situated immediately next to the Sheremetievo International Airport and does most of its business accommodating connections. Pioneering development in Moscow's growing periphery, the Holiday Inn at Vinogradovo is sited 30-40 minutes away from downtown Moscow, and accommodates largely conferences, conventions, seminars and their participants. Three Star Hotels: Although in high demand by business travelers, quality three star hotels remain very limited in number. A few recently built three-star hotels are almost always filled with mid-management, engineers, construction workers, and independent entrepreneurs. As Nikhail Kornyshev, the Marketing Director for Intourist, pointed out to Business Review Magazine, "the first issue in incoming tourism is the lack of three-star hotels in Moscow." The following summary of hotel rooms by class and price illustrates the absence of low priced and very limited availability of moderate priced Western-style accommodations on the market. (These numbers are an interesting profile of the market, but they miss some Soviet-built hotels in Moscow were not considered significant by the source publications.) Successful moderate price hotels are already making a place in the Moscow market. A notable example is the Katerina Hotel located next to a major foreign business center. Its published rate is $165 per night, generally half or less of upper tier hotels, and it provides clients with modern rooms and quality service. The German-built Sport Hotel, midway from the center to the airport, is extremely popular among the German travelers. The Best Western-operated East-West Hotel, near but not at the city center, is another recently built, high quality three star inn. Based on the dire need for such hotels and little more than "word of mouth" advertising, these hotels are usually operating at or near capacity. Long term residential facilities are also needed as moderate priced alternative to the expensive hotels, but these are also practically nonexistent in any form. Currently, vacant up-scale apartments serve this function at the extremely high rents prevalent among Moscow's short supply of modern renovated apartments. OPPORTUNITIES FOR COMPANIES Although there are many difficulties, the market still offers multiple opportunities for firms. These opportunities stem from the difficulties that hotels experience: low effectiveness of using the existent resources, lack of quality personnel and lack of professionalism. Through research, CS Moscow discovered a strong market for hotels services and construction of new three star hotels. Developing Three Star Hotels The strong demand for inexpensive, quality accommodation, is creating an opportunities for the development and operation of three star hotels and long-term full service housing. Potentially high occupancy rates and lower construction and real estate costs contribute to this situation. According to the October 2000 issue of Hotel Magazine, construction cost for three star hotels are only $60,000-80,000 per room compared to $200,000 - 250,000 for a five star hotel. Some industry specialists believe such costs would also prevail in Moscow. On-going development of the up-town infrastructure and improvement of connection between the outskirts of the city and downtown in the near future will open many less expensive locations for hospitality facilities. Following usual world practice, the name-brand hotel operating company is not likely to develop and own the hotel property itself. Arthur Andersen Consulting company recommends that a U.S. hotel company entering the Moscow market, form its own Russian corporate entity and develop its property independently of a public body like the city. A reliable Russian partner is a valuable asset and the least risk would be in having a private Russian developer build the hotel. This was the route followed by the Marriott in establishing its successful group of three hotels in partnership with the Mospromstroi Company, Moscow's largest privatized construction trust. Other corporations which have developed hotels include Lusines and Gazprom, the huge natural gas monopoly. However, such strong Russian partners are likely to be in short supply. A new group of U.S. or Western developers will probably be needed that can organize smaller Russian partners and multiple sources of investment. Financing Possibilities: Up to now the collapse of Russian bank lending and the withdrawal of U.S. and other export credit agencies from Russian lending, appeared to effectively limit new hotel development in Russia. However, now that Russia that is growing economically and showing signs of increase political stability and advancing reform. Many potential Western operators, developers and investors are likely to be more interested in investing in viable Russian investment projects. Recent indications also show that much Russian money invested overseas may now be invested back into Russia through outside investment through Cyprus. The European Bank for Reconstruction and Development (EBRD) and the World Bank claim to be ready to expand their lending to Russia and have reportedly shown some interest in the hotel sector. Hotels have historically been known to offer high return on investment, approximately 20 percent according to some industry professionals. Therefore, U.S. hotel developers and operators ought to have some ground for optimism in pursuing the financing of new hotel projects in Russia. Services to the Moscow Hotel Market. A growing and upgrading Moscow market should offer many opportunities for supplies of goods and services to the hotel industry and restaurants. Professional Training Programs: The most urgent need faced by many hotels is quality, trained personnel. Hospitality is a labor-intensive sector, and while the local labor is cheap, speaks foreign languages and is well-educated, it is not up to professional standards demanded by western hotels. According to the study conducted by McKinsey&Company, the average labor productivity in the hotel sector (for lodging services) is at 18 percent of the U.S. level. Four and five star chain hotels in Russia scored better reaching 60 percent of the U.S. labor productivity level. Western-managed hotels offer systematic training to their personnel, , but outside of these in-house programs, the Moscow market does not offer adequate opportunities for professional education and training in the hospitality sector. Some Russian schools exist but they do not offer the actual practice at hotels. Many hotel companies are keenly interested in foreign training schools and programs. Equipment and Supplies: Hotels under construction or renovation require quality, long-lasting equipment ranging from security systems to kitchenware. According to the McKinsey study, over 60 percent of the equipment and materials used in hotel reconstruction in Moscow were imported. Russian architects and contractors are often highly familiar with European products but largely unfamiliar with American products and suppliers. However, Commercial Service representatives at recent trade shows have encountered strong interest in exploring U.S. alternatives from Russian wholesalers and contractors. This suggests that time may be ripe for U.S. companies to begin showing at Russian trade shows, identify distributors and seek to more aggressively enter the market. Sources of Assistance The City of Moscow Department of Foreign Economic Relations has a tourism division which is prepared to assist hotel developers with information and governmental contacts. In August 2000, the city adopted a "Basic Plan for the Development of Tourism through the Year 2010" which contains much useful information of the shape of tourism to Moscow and outlines the city's future concepts to develop the industry. Some consulting companies such as Arthur Andersen and McKinsey&Company closely follow the situation of the hospitality market in Moscow and can render an advice on development issues. |
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