The collapse of the Soviet Union in 1991 set the stage for an unprecedented shift in ownership of the hotel and resort industries - which has taken place in a broad privatisation initiative involving significant investment by international organizations. In excess of 4,500 international-level rooms were developed in the Commonwealth of Independent States (CIS) during the period 1991 to 1995. Future investment also is expected to be strong. Supporting that potential is the new land reform proposed in Russia, which is currently being debated by the Russian Parliament and the President - combined with a new decree recently signed by President Boris Yeltsin concerning mortgages and central registration of these in connection with real estate.
Since 1991, growth of the CIS hospitality industry has occurred primarily in two markets - hotels and casinos - while only a limited number of projects have been developed in the resort, country dub and golf market. The casino market has boomed during the last three to five years with casinos opening in almost every city with a population of more than 100,000. Currently, Moscow alone has more than 250 casinos. With the exception of Golden Palace Casinos, however, the internationally known casino companies have deliberately stayed out of the CIS casino market, in part due to speculation that it is a front for organised crime. In contrast, the hotel industry continues to offer broad opportunities for international hospitality companies. Prior to the fall of the Soviet Union, the industry was a closed market to outside players with most hotels managed by the state through Intourist. With changes wrought by the fall of the former Soviet Union, hotel demand - especially properties that meet Western standards - has escalated.
Privatisation of an Industry
As the capital of the former Soviet state, Moscow posted the highest development and demand in the hotel market with approximately 70 major hotels and 45,000 rooms. Government statistics indicate that only 10,000 meet minimal Western standards. St. Petersburg, Russia's second most important hotel market, has less than 9,000 rooms - an estimated one half of which are of Western quality. During the Soviet era, other large cities normally had one or two main hotels managed by Intourist and a few local hotels of lower standards managed by the local authorities. Only the Crimean coast and the Russian Black Sea coast had a developed tourism industry under the Soviet system. In these two areas, hotels with a total of approximately 5,000 rooms have been built.
Following the Soviet breakup, the ownership of hotel properties was
privatised in two ways:
| (1) - During the Soviet period, approximately 20 percent of the hotels in the CIS were managed by various ministry departments and large state enterprises, such as Aeroflot, the Soviet Ministry of Foreign Affairs, the Ministry of Internal Affairs and the Committee for State Security (KGB). These hotels were closed to the public, and guests were admitted only through these state-run organizations. Hotels previously managed by ministries and state enterprises either remained affiliated with these organizations after the Soviet breakup or were privatised with their management and employees as the new shareholders. Ultimately, a number of these properties - including Novotel, Moscow Aerostar Hotel and Sofitel Moscow - were renovated to an international level by foreign investors. Austrian owned Marco Polo partially owns and manages six hotels of this type - making it the largest chain of international level hotels in the CIS. These types of hotels have recently become attractive to foreign investors, and a number of future developments of Moscow properties are expected to fall within this category. | (2) - Local and regional authorities were allocated the majority of hotels during the privatisation process, and ownership was further given over to the management and employees of the individual properties. Joint ventures with foreign partners were formed - in some cases with the foreign companies as managers for a 10-year period providing expertise and supervision of significant renovation programs. During this process, the Moscow City Government was allocated full or part ownership of a very large number of the hotels in that city. Today, these hotels include fully renovated international level hotels such as the Radisson Slajanskaya Hotel, National Hotel (Forte Hotels), Renaissance Moscow Hotel (formerly Penta), Hotel Baltschug Kempinski and Hotel Metro pol Moscow (Inter-Continental Hotels). other properties also fully or partly owned by the Moscow City Government include Hotel Rossia, Hotel Cosmos, Hotel Moskva, Hotel Ukraine and Hotel Intourist. These hotels are all in need of either significant or complete renovation. Recently, the renovation of the 3,080-room Hotel Rossia was put out for tender for complete renovation - either one wing at a time (USD $60 million) or the whole hotel (USD $200 to $250 million). |
Since the fall of the Soviet Union and the subsequent changes in ownership and management, more than 20 new four- and five-star hotels providing services on an international level have celebrated their official opening in the CIS. Of these properties, only three have opened outside of Moscow and St. Petersburg. Demand continues to exceed supply in both of these cities, and the hotel industry has taken note. At the same time, the international level three-star market remains almost undeveloped. It is the common view that many of existing hotels in this category do not deliver value for the $75-to-$125 room rates they charge, and the three-star market is expected to involve the largest number of future developments.
The Moscow office of Arthur Andersen recently initiated the first study
of the international hotel market in Moscow. The findings of the study
confirm the profitability in the market:
|
|
|
|
|
| Average Occupancy Rate |
72%
|
76%
|
70%
|
| Average Room Rate in USD |
$217
|
$221
|
$231
|
| Average GOP % |
56%
|
51%
|
NA
|
| Revenue per Available Room (REVPAR) |
$156
|
$168
|
$162
|
Challenges in Hotel Development
Problems that can best be described as structural have confronted the
hotel industry in Russia as investors have renovated existing properties
and embarked on new developments. These problems fall into two areas:
Training and expectations of existing management -
The management of former Soviet hotels was typically reduced to a modest
"host" role as marketing, sales, reservation, purchasing and control over
payments were all controlled centrally by the head office of a government,
ministry or state owned organization. As a result, management of the hotels
outside Moscow today often lacks the experience required to operate a successful
enterprise. Adequate training programs have not generally been developed
for the industry. The hotels are burdened with increasing salaries and
energy prices, while lack of adequate management information systems has
further added to the challenge of upgrading and "internationalizing" the
hotel sector.
The Resort Industry
The resort industry in the former Soviet Union was, if possible, even more closed to the public than the hotel industry. Resort properties generally fell into two categories. First, a number of resort hotels were developed to host workers invited by special invitation of their companies for a summer vacation. The second category of resort hotels catered exclusively to the elite of the former Soviet Union. The majority of these resort hotels have been privatised over the past four to five years.
In general, the resort hotels originally developed to serve as vacation sites for workers are experiencing significant financial difficulties. As with other former Soviet hotels, it is not uncommon for management to have insufficient experience in areas such as sales, marketing and purchasing. They are not as well maintained or equipped as the second category of resort hotels developed in the former Soviet state, and consequently have difficulty being marketed as modern resort hotels. Unless industries in these local areas develop, thereby generating a need for more hotel rooms, these resort hotels face an uncertain future.
The second category of resort hotels have identified new customers who are among the elite in the new Russian society. Better equipped to survive, these resort hotels have begun to market themselves as vacation possibilities to affluent Russians and the occasional foreigner. They are somewhat more modest than their competition in the West, but have survived because of the lure to visit places closed just a few years ago.
In addition, a few resorts in the four-star international standard have opened their doors in the CIS during the last few years. These include a helicopter skiing resort in the Caucasus in Georgia opened by Marco Polo on the mountain Gudauri. Another international level property is the summer resort, Radisson Lazurnaya, located on the Russian Black Sea Coast in Sochi.
Conclusion
While the hotel and resort industries face significant challenges, it is clear that the opportunities in the hospitality sector for both domestic and foreign investors will remain strong, particularly in Russia. Such investment is dearly welcome. Russian President Boris N. Yeltsin faces a test of his leadership in the national elections this June, while new Communist candidates are expected to do well in a resurgence of support for the party. But this does not necessarily reflect a vote against the evolution to a market economy, but rather a response to the aftershocks of severe measures to make the transition. There is wide recognition that the support of international investment is essential to renew the health of battered economies in Russia and the other nations of the CIS.
Lars Gudbergsen is Director of the hospitality Practice in Arthur
Andersen's Moscow office, which consults with and provides auditing services
to many of the leading hotel organizations in the CIS
The report also features:
Cuba - Tourism as a
Replacement Industry
Vietnam
- An Emerging Hospitality Market in Transition.
©Arthur Andersen