Just about time: Why this year offers good opportunities to open hotels in Russia

In the past three years, the Russian hospitality industry has been thrown out of its comfort zone several times, inevitably leading to a transformation. International travel caved in for some destinations; however, due to restrictions, domestic travel experienced a boost. How long will the trend last and how can businesses adapt to it and reap biggest benefits?

Changes for the best

Since 2020, Russian tourists have been increasingly choosing in favor of domestic vacation. The demand creates supply and the market started to grow. For example, according to the Association of Russian Tour Operators (ATOR), the number of companies organizing trips around Russia grew 7% in 2022.

The departure of international hotel operators and services from the Russian market has not resulted in a disaster. On the contrary, a window of opportunity has opened up for both hotels (direct sales via hotels’ own websites has significantly increased to exceed 50%) and hospitality professionals.

This year, market players are seeking to expand further and hope to benefit from resuming tourist traffic from China. Before the pandemic, Chinese tourists ranked first for visits and expenses. We may expect a positive effect from delayed demand.

As the demand for Russian trips grows, the number of hotels in Russia is on the rise as well. Some are under construction and others are in development. The government is also stimulating this process by offering an attractive subsidized lending program to investors and abolishing VAT on hotel reservations.

The industry’s development catalyzes further demand by both local and foreign tourists. However, hotel management is a long-haul venture and to ensure success of a business, all details must be considered from the get-go.

No need to reach for the stars

When developing a concept, the majority of prospective hotel managers respect nothing but five stars. It is largely an emotional vision: after all, five stars look so appealing and prestigious.

In reality, every case is unique. A hotel’s category is solely based on its location and the supply/demand ratio on a specific local market. For example, five-star hotels have the highest CAPEX, or capital expenditure, and very high fixed expenses. PFM once handled a case that involved a non-core investor who wished to build a luxury hotel with high-end facades and interiors. However, once the concept was sized against the market, CAPEX was calculated and a financial model was developed, it turned out that in the desired location, a hotel would not be able to pay off the necessary loan. In other words, you either build using your own funds or choose a concept that corresponds with the market reality.

The number of prospective rooms can and should be calculated. There is actually a method specifically for this purpose, based on analyzing the existing and foreseeable demand and supply.

A more complicated case is restoring a historical building to turn it into a hotel. The number of rooms is determined by a specific project based on the floorplan of the building or its remaining structure. Therefore, professional architects and restoration artists are the first to conduct a feasibility study and estimate the number of prospective hotel rooms. Subsequently, consultants will compare expert data with market demands and determine if the hotel can reach an appropriate ADR (average daily rate) and capacity. If it is not feasible, investors should take the conclusion lightly. It is better to become aware of the problem before the facility is launched into operation.

What matters most when selecting a team is not experience or congruence but compatibility of goals. Unfortunately, sometimes it is the case that all other participants in a typical investment project will profit from it but its owner. For example, some architects get carried away artistically and attempt to realize an idea that has nothing to do with the hotel itself. As a result, at the detailed design stage, the project has to be redone completely. Hotel management companies earning their major fees from accommodation sales will never run out of profit. But the contract with a utility company may be signed for 10 to 20 years with very strict termination terms. Therefore, it is important to remember that a hotel is a labor- and capital-intensive business that demands a high level of competence, including that of the owner.

Such a lovely place: Seeking experience

Many industry participants fear that, when borders re-open, the situation will change again. However, this prospect should be considered an opportunity rather than a threat. The traffic of Russian tourists may indeed decrease. On the other hand, Russian tourist service providers will be able to attract and serve foreign tourists again.

This is where emotions become a priority. The economy of memories trend has taken over the entire world and there will be no rebound. If a hotel can create a positive unforgettable experience and memories for its guests, the hotel will find its unique niche – and will have no problems with guests or capacity.

By Alexei Pryaslov, founder and Managing Director, PFM, hotel business consulting and investment expert, member of the IBCS

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