Just a few years ago, it would have been difficult to call Russia a very hospitable country, as people would come only when necessary and could not count on special comfort. However, today the situation has changed, as the country is becoming more open and attractive for visitors. This is first and foremost connected with the increase in business activity, not to mention a rise in tourism, which as a business is quite attractive. When a competent approch is taken this business can generate a stable income. Accordingly, international hotel operators have already turned their sights on the promising Russian market, and, after gaining a foothold in Moscow and St. Petersburg, they are beginning to take to locations in the country’s regions.

Hotels are necessary for the development of tourism, and hotel operators are a prerequisite for the successful management of these hotels. Today there are not many companies that are capable of professionally managing hotels in Russia, even while the hotel real estate market itself gains momentum. Not very long ago, only Moscow – and a stretch at that – could boast of the presence of hotels corresponding to international standards and capable of hosting foreign guests with high demands in terms of service and quality. However, today many distinguished hotel operators no longer exclude the possibility of opening their hotels even in other large Russian cities.

Quality projects are necessary to develop international brands. Indeed, these projects must correspond to standards of each particular hotel operator. However, today the hotel real estate market lags the office and commercial real estate markets in development because of the large payback periods, which, according to various estimations, range from 6 to 14 years. Therefore, not all investors are ready to invest in this segment. Furthermore, hotel management is a problem area, as, indeed, the success of a project depends not only on successful arrangement and intelligent design but also on the quality of services. Therefore, the construction of hotels does not attract investors wishing to rapidly realize a return on investment, as the hotel business is for those who are inclined to earning money over the long-term. But such players do exist on the Russian market, and therefore the hotel market is currently developing rather successfully.

Chains Are Starting and Succeeding

The Russian hotel market is completely random, as Soviet times have put an indelible mark on the market and will remain visible on the brow of the domestic hotel business for some years to come. Indeed, the quality of service varies considerably, even in one hotel category; therefore, tourists, especially those from abroad, find it difficult to adjust to the selection of rooms. Due to the lack of a set classification system, even a guest who has selected a hotel in the upper price category risks experiencing the severe Russian reality.

The development of international hotel chains in Russia is a force capable of making the situation on the local hotel market far more transparent. Indeed, an international brand guarantees a specific standard of service for guests, and this is a relative rarity for Russian hotels. In fact, market experts note that it is characteristic for hotels managed by internationally-known operators in Russia to operate at an even higher level than their Western equivalents. This is due to the lower competition in comparison with large foreign cities and the immaturity of Russian market. Overall in Russia, Western management of hotels reflects on the high quality of services rendered characteristically in the four- and five-star segment.

The regions have thus far not drawn the attention of foreign hoteliers, although there are examples of international operators entering the market, and each year this situation improves. International brand hotels are opening in the cities of the Ural region.

In Russia, as throughout the world, Western companies choose to manage hotels independently or select a local management company to do this.

Entrusting Stars

Franchising in the hotel business is popular throughout the world. For example, in Germany, a substantial number of hotels with global brand names (82%-84% of all hotels) are managed on a franchising agreement.

Also, franchising is an area where a relatively small investment makes it possible to become a member of a world-known international operator network. Indeed, well-known brand names, having signed contracts for franchises, just recently began to appear in Russia, although it is still too early to talk about the widespread use of this scheme.

“The rightful owners of a hotel brand name open other hotels throughout the world by transferring the right to use its trademark to an independent operator or to the direct owners of the real estate facilities,” explains Alexander Zakharov, general director at Hotel Technologies.

This system is attractive also for the acquirer of a franchise, who, via a relatively small investment, becomes the owner of an international brand name, making it possible to count on a steady flow of clientele. “A known trademark offers a specific quality, thus, accordingly, an international network increases the confidence of prospective guests in the quality of the hotel,” says Tatiana Tumarkina, sales and marketing director at Sheraton Palace Hotel.

“Franchisers gain access to the global system of reserving rooms created by the operator, they also participate in client programs provided by the chain throughout the world. Accordingly, a franchise increases the customer loyalty to the hotel brand name and directly influences the occupancy rate of the hotel,” adds Damir Kaftaranov, general director at City Hotel.

The presence of an international brand also raises the capitalization of a hotel for its sale.

However, this system also has its disadvantages. Indeed, the need to adhere strictly to the standards of design, equipment, opening and the operation of hotel, which increases total expenditures of hotel project, is one disadvantage to franchising. Moreover, a sufficiently high commission must usually be paid out to the owner of the trademark, although this can be reduced with the right negotiating.

Furthermore, there is the possibility of a lowering in service standards to clients, resulting in a violation of corporate quality standards.

Prospecting for Franchising

Today there are only a few hotels in Russia operating on the principle of franchising, and most are located in Moscow, such as the Marriott hotels on Tverskaya Ulitsa, the Royal and Grand Hotel, which are managed by Interstate Hotels & Resorts, the largest hotel operator in the Marriott Group. Furthermore, Holiday Inn Moscow – Lesnaya and Holiday Inn Moscow – Suschevsky operate according to a franchise agreement. These are the first instances of giving a franchise to a Russian operator, specifically to the Mospromstroi hotel management company, which acquired the rights from Intercontinental Hotels Group to the use the Holiday Inn hotel trademark (two other hotels, Holiday Inn Moscow – Vinogradovo, on Dmitrovskoye Shosse, and Holiday Inn Moscow – Sokolniki are under direct management of Intercontinental Hotels Group).

In the regions, however, there are practically no such examples, as Western operators are not in a rush to entrust the management of hotels under their brand names to Russian partners. Indeed, they fear a drop in management standards as a result of local management companies not being able to support the brand name by adhering to proper control over the quality of services.

“There are not that many specialists on the market today, especially among developers, who are able to understand all the risks involved in not only construction but also in the management of a hotel as a piece of real estate and as a service,” says Zakharov.

“A franchise contract is a relatively easy means for operators to expand there presence, and this system is indeed widespread on the developed markets,” says Marina Usenko, head of Jones Lang LaSalle Hotels in Russia. “However, so far there are only a few examples of hotels operating as franchises in Russia, as there is not enough professional management companies in which international operators would have confidence to represent the hotels’ names. International operators still find the Russian market risky, and they prefer to manage the hotels independently.”

It is worth noting that an increasing number of Russian facilities are being developed as franchises, and one could expect that with market development, international chains will be the more willing to allow for this possibility. Overall, specialists reckon that the franchising market will gradually gain momentum; however, its development today is in many respects impeded by the scarcity of professional teams capable of developing projects in the area of the hotel business.

Direct Management

Another more widespread means of Western operators gaining a presence on the Russian market is via the conclusion of a management contract. In this instance, the owner of a building hires a professional company to manage the hotel entirely – not just managing technical and engineering infrastructure, but also renting out hotel rooms and servicing clients. It is also worth noting a developer must hire a hotel manager as soon as possible.

For the most part, Western hotel chains present a specific set of strict requirements for the buildings in which their hotels operate. Certainly, an exception is sometimes made for Russia, as there are examples of the late hiring of an operator on the local market. In this case, the discussion is about a compromise when an operator acquires a less-than-ideal building, thus the owner does not obtain the ideal return on the project, as it cannot impose strict requirements on its Western partner. This is why international operators are more frequently hired prior to the beginning of the building design, and all works are conducted by taking into account the requirements of the operator.

As already mentioned, Western chains have only just begun operations in Russia outside Moscow and St. Petersburg. Indeed, the Ural region is not an exception, as the first hotel in the region built with foreign investment, Park Inn in Yekaterinburg, was opened for the guests in March of this year. Park Inn is a brand of the international hotel operator Rezidor Hotel Group. This operator owns five brands of hotels throughout the world, while the most well known in Russia is the Radisson SAS chain, which has hotels in Moscow, St. Petersburg and Sochi. Park Inn in Yekaterinburg is the first hotel under this brand name in Russia.

However, investment in the construction of a hotel is not typical for Rezidor Hotel Group, as combining this with management is not effective, thus the company prefers not to own hotels but rather to manage them. It is worth noting that this is the general viewpoint of most international hotel chains. “As a rule, operators are more frequently concentrating their professional activities on management, as this is more profitable versus investing in real estate,” notes Usenko.

Other international hotel operators planning to enter Yekaterinburg are Hyatt International, which will manage five-star hotels being constructed by Ural Mining and Metallurgical Company. Moreover, toward the end 2007, the opening of a four-star Novotel is planned. The hotel will be managed by Accor. A hotel managed by the South-Africa-based Protea Hotels chain will open in the first half of 2007. Analysts say that the Park Inn’s appearance and positioning will strengthen competition in the three- and four-star segment.

Large foreign chains are also entering the market of another Ural region city, Tyumen. Marriott plans to open a hotel here, as does France-based Ibis of Accor, and Italy-based Domina Hotel Group (investor and operator), and Rezidor Hotel Group with its Park Inn brand name also plans to be based in Tyumen. The company is jointly constructing a public center with a business-class hotel with the Tyumen-based Partner.

The hotel market in Perm is also said to be attractiving the interest of foreign players, although there are not any specific projects yet. As in most of Russia’s regions, there is almost not competition here.

Prospects

Overall, it is possible to confirm that in the near future the number of international chains opening hotels in Russia’s regions will grow significantly, as the European market is close to saturation and competition will increase year after year on the Moscow and St. Petersburg markets; therefore, the unclaimed Russian spaces are very promising. However, as previously, the development of international chains is impeded by the insufficient quantity of quality hotels for management.

Regional markets remain risky from the perspective of constructing new facilities, as there are still substantial problems with bureaucracy and the weak observance of property rights, as well as the frequently uncivil means of conducting business. Nevertheless, the situation is gradually changing for the better, and the development of the commercial real estate market as a whole throughout Russia will ensure the continued development of tourism infrastructure.