Russia is experiencing an obvious shortage of mid-range hotels, which makes most travelers choose between Soviet-style economy class rooms and overpriced four- or five-star accommodations. Why did this happen and what needs to be done to change the situation?
The hotel industry in modern Russia has been developing in unusual and unique ways. On the one hand, old Soviet accommodations were still available. But most of them were run-down and obsolete and could not offer their guests a high level of comfort. On the other hand, most investors focused on building four- and five-star hotels to be able to recoup their investments faster due to the higher price. As a result, high-quality medium-priced rooms are almost nonexistent at present. Establishments that more or less fit the description can be found in Moscow and St. Petersburg. In other cities, with rare exceptions, guests are almost always faced with choosing the lesser evil – either pay for upmarket accommodations or put up with various discomforts and inconveniences.
In order for the empty market niche to be filled, mid-range hotels have to enjoy demand among travelers. However, until recently, there haven’t been many customers for this type of accommodation due to undeveloped domestic tourism in Russia. The few mid-range facilities that were actually built – mostly, apartment hotels – were eventually converted to long-term or permanent forms of accommodation. However, there has been a surge in demand in the last four or five years, which spiraled even higher with shrinking opportunities to go on a foreign vacation. That led to an increase in tourist flows to Altai and Arkhyz, to the Golden Ring of Russia cities, as well as to northwestern Russia – Kaliningrad, Pskov, and Veliky Novgorod. Naturally, if enough people want to see Pskov but do not want to overpay or cannot afford five-star rooms, middle-class hotels will appear fast enough.
Take Arkhyz, a recent haunt for alpine skiing enthusiasts. As it turned out, there are quite a lot of them in Russia. Those who used to go to Austrian ski resorts and stay in the local mid-price segment, have found an affordable alternative here. The growing demand should lead to the emergence of more middle-class hotels. One example is Krasnaya Polyana, where a fairly large segment of three-star accommodations has been developed. There are few examples yet, but the situation is sure to change because this is the right and natural course of events.
By the way, it is worth noting that the five-grade system has become somewhat outdated; it would be more convenient and more flexible to measure the quality of hotels with three categories – economy class, middle class and high-end segments. In fact, the difference between four- and five-stars accommodations is insignificant, and certain four-star hotels are even superior to five-star ones. In turn, most three-star hotels are unpredictable – they can be honest middle class, or better, or worse. But be that as it may, the middle-class segment will grow and is growing already – such hotels are being built in Anapa, on the Caspian Sea, in Dagestan. Kaliningrad has become much more confident as a tourist destination. Earlier, most tourists viewed it as a replacement for Jurmala, but now it can be superior in many respects. The segment is driven by recreational tourism rather than business travel; this determines the scope of services that new hotels need to offer.
Investors are ready to build the type of hotels that customers want, but I would like to highlight one important point. Paraphrasing a classic, hospitality can’t be rushed: in this business, you should not expect payback in a year, or two, or even five. The hotel industry does not work like that; you need to think in terms of decades. This is the reason why, in many countries, a contract between the hotel and the management company is signed for at least 20 years. And during this time, the hotel will keep you busy; you’ll need to invest in renovations without scrimping, and it will swallow a significant share of your revenue. Good services certainly play a major role, but if your property is substandard, with cold draughts coming through windows and the smallest of noises coming through the walls, no service will save your business.
Old and obsolete hotels can and must be upgraded. After renovation, they may well become high-quality spaces that meet all modern requirements. We have more than one such case in our portfolio. Most projects did not involve structural renovations in one go; the process can be phased, like we did for the Tourist hotel project in Omsk. The establishment was renovated floor by floor. Until it was fully converted, the rooms that were not yet done could be rented as well, but cheaper. Unfortunately, not all of the old Soviet hotels are easy to renovate. Most of them are owned by municipal agencies, which means there are legal hurdles. However, technically, such hotels can still be turned into modern high-quality establishments.
Any hotel can be improved, as long as the lessee, the owner and the management company are ready to invest in it without expecting immediate returns. The hotel business is a long-term business; it requires recurrent investment and continuous work, but with the right approach, it will undoubtedly pay off – you just need to accept that it takes time.
By Alexander Gendelsman, Managing Partner, ZONT Hotel Group