• Russia feels the love despite uncertainty

InterContinental Hotels Group has launched its Holiday Inn Express brand in Russia, alongside local partner the Regional Hotel Chain.

With the rouble continuing to fall on the back of weak oil prices and NATO reporting that Putin’s troops had entered the Ukraine, the news came as Russia’s future looks increasingly unsteady.

IHG’s decision to take Holiday Inn Express into Russia came only months after it launched its Hotel Indigo brand in the country, with the opening of Hotel Indigo St Petersburg – Tchaikovskogo. The group is now set to open the Holiday Inn Express Voronezh – Kirova shortly.

The hotel is the product of a franchise multiple development agreement signed last year between the two companies, a significant step towards IHG’s ambition to be market leaders in Russia, the CIS and Georgia with 100 hotels open or in the development pipeline by 2020. There are currently 220 Holiday Inn Express hotels open in Europe and 41 in the development pipeline.

Robert Shepherd, CDO Europe, IHG said: “Russia, the CIS and Georgia is a priority market for us and we want to be number one there. In line with our strategy we are expanding our portfolio of brands in the region and in March this year we brought our upscale boutique brand Hotel Indigo to Russia.  We have also identified a gap in the market for quality, affordable mid-market accommodation and our Holiday Inn Express brand meets the needs of our owners and our guests perfectly.”

Dmitry Schuetzle, managing director, VIY Management, which owns RHC, added: “Some question whether now is the right time to be investing in Russia. At VIYM, we are pleased that the world-renowned hotel group IHG shares our view on the attractive long-term investment potential in Russia’s fast-growing hotel market.”

IHG was not the only hotel operator to take a long-term view on the country in recent weeks, with The Four Seasons Moscow opening on the site of the former Hotel Moskva, a hotel dating from the height of Stalin’s power. Its idiosyncratic design, with an asymmetric exterior, has been attributed to architect Alexei Shchusev giving Stalin plans for two possible versions for the facade on the same sheet of paper. Stalin scrawled his signature over both, and Shchusev, too afraid to contradict him, simply combined the two styles.

For Four Seasons, GM Max Musto, commented that it was “our mission to write the next exciting chapter in the storied history of this building, and this city”. The opening is the second in Russia for the company, alongside a site in St Petersburg and one of more than 60 projects currently in development at the company, including hotels in Dubai, Florida and South Africa.

While Four Seasons looks to clientele willing to spend big on its marble bathrooms with complimentary custom amenities by Roberto Cavalli, Russia’s domestic market is suffering while the rouble drops alongside the price of oil. The country’s central bank had pursued a strategy of non-intervention with the currency, preferring to focus its efforts on inflation, but, as Hotel Analyst was going to press, the bank’s first deputy governor said it had altered its interventions strategy to “reduce speculative pressure on the rouble”.

The currency was placed under further pressure earlier the same week when NATO reported that Russia was sending fresh convoys of troops and tanks into eastern Ukraine, putting the country’s ceasefire in doubt. General Philip Breedlove, NATO’s top military commander, said: “It is our first guess that these forces will go in to make this a more contiguous, more whole and capable pocket of land, to then hold on to it long-term.”

The claims led to an emergency meeting of the UN Security Council at which assistant secretary-general Jens Anders Toyberg-Frandzen said: “We are deeply concerned by the possibility of a return to full-scale fighting.” Russia denied NATO’s findings.

The tourism sector is already suffering as fewer Russians leave the country. The European Travel Commission has downgraded its forecasts of growth in arrivals from Russia to Europe from 10% this year down to 3%. ETC head of research, Valeria Croce, remained upbeat, commenting: “The underlying fundamentals of outbound travel from Russia remain strong and the market is expected to deliver pent up demand in the medium to long term, especially to those destinations which maintain their presence in the market.

“In the past, the European tourism sector has proved remarkably resilient to different types of shocks, including political unrest, economic recessions and even terrorism.”

For IHG and Four Seasons, the news is mixed. A weak rouble means more money in the pocket of overseas guests.

 

HA Perspective [by Chris Bown]: IHG will have to go some way to catch up Rezidor, currently claiming top spot in Russia and the CIS. Combined with partner Carlson, its open portfolio includes 13 Radisson hotels and 18 Park Inns. In the last quarter, it opened two hotels in Moscow, and has plenty more in the pipeline. Accor, however, has the strongest pipeline and by the reckoning of consultants Ernst & Young, could dislodge Rezidor from the lead in the country by 2017; at which point, IHG and Marriott are expected to be neck and neck for third place honours. Russia’s hosting of the FIFA soccer world cup in 2018 will also focus minds on getting branded rooms open.

As it has usefully done in Germany, so IHG is looking to MDAs to get hotels built. In a part of the world where western styles and standards of business cannot be expected, building a pipeline through building trust with local partners is a safe route to go. Building the scale IHG talks of will mean doing deals and constructing hotels in Russian cities most westerners have never heard of, nor can even pronounce.

However, Rezidor is also currently experiencing the pain of the Russian downturn, with revpar in Russia down 33% in Q3 of 2014, compared with the same period in 2013.

But the potential of the Russian market is huge, and as visitor visa restrictions ease – which they surely must at some point – then inward visitor numbers are bound to rise. Meanwhile Russia’s outbound market is the fifth largest in the world, and growing at 26% per annum – giving more and more Russians exposure to international hotel brands.

 

Additional comment [by Katherine Doggerell]: Those of a superstitious nature may wish to ignore one portent hanging over the new Four Seasons, however. In addition to its lively political history, the hotel is also famous to vodka drinkers – a line drawing of the old Hotel Moskva features on the label of the Stolichnaya brand. Operators betting on a stable future for Russia will be hoping they aren’t given cause to drown their sorrows too deeply in the bottle’s contents.

 

Additional comment [by Andrew Sangster]: At the Russian Hotel Investment Conference this October, most native Russians were convinced that sanctions would be over by Easter. The few Westerners that made the trip to Moscow were more pessimistic about this specific date but still, perhaps not surprisingly given their presence at the event, said there was a long-term opportunity.

Chris Weafer, senior partner at Moscow-based Macro Advisory, said that a continuation of sanctions would mean GDP growth of just 0.5% for Russia next year after stagnation this year.

But he did believe that the crisis was a “side-step” in Russia’s development and that things should be back on track by 2016, geopolitics permitting.

Dani Thorniley of DT Global Business Consulting said that in the past 20 years just two stood out as difficult years for business – 1998 and 2009.

Thorniley admitted business was tough for his clients but pointed out that the Russian central bank had intervened much less during this downturn (so far) when compared with 2009.

Wolfgang Neumann, CEO of Carlson Rezidor, said that although Moscow was becoming crowded in terms of hotel development the Russian regions were still crying out for branded hotel supply.

The position for Rezidor as a Stockholm-listed entity is tricky given the outspoken nature of the Swedish government in terms of Russian relations and support for sanctions. But Neumann told Hotel Analyst that he had the full support of the board for Rezidor’s ongoing growth in Russia where it was the leading international player.

Hilton’s head of development for Europe and Africa, Patrick Fitzgibbon, was similarly phlegmatic about the current political climate. Hilton will have opened 10 hotels by the end of 2014 and Fitzgibbon said he expected to remain busy in the country “whatever politics goes on”.

Vladimir Puddubko, head of hotel business at AND Corporation, said that the current crisis should not affect the investment decision making process as hotel development is a long-term business.

On this latter point, Puddubko is particularly accurate given the unusually extended development process for hotels. The Four Seasons in Moscow, which opened in the same week as the conference, took, for example, a decade to complete.

Despite the brave face put on events since the start of the Ukrainian situation by the conference attendees, there seems little doubt that Russia is no longer the go-go hotel market it had been until a year ago.

The long lead times mean openings will continue for several more years but unless there is a significant thaw in relations between the West and Russia, hotel development has gone into the slow lane. Given that such a thaw looks unlikely – the huge disparity in outlook on Ukraine between Westerners and Russians at the conference supported this view – then the undoubted potential of the Russian hotel market will remain unfulfilled for some time yet.

 

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