Untapped growth potential in the CIS

When the Rossiya Hotel closed its doors on New Year's Day 2006, the Moscow skyline was relieved of one of its most infamous symbols.

Located just off Red Square and overlooking the Moskva River - it was commissioned and built in the late 1960s - the Rossiya was likened by many to a giant concrete box, home to travelling officials, snooping chambermaids and colonies of cockroaches.

With over 3,000 rooms, it had once been the world's largest hotel. It was also commonly referred to as Europe's ugliest; a byword for the Soviet ethos of 'bigger is better'. As a demolition team set to work ripping apart the granite edifice floor by floor, few Muscovites had cause for complaint.

Fast forward seven years and the site of the Rossiya still remains under development; recent reports claim it could be transformed into Moscow's answer to Central Park.

However, what is clear is that we are unlikely to see a hotel of its ilk again, especially given the spate of international hotel brands recently cropping up in the city. A report by Cushman & Wakefield, released in December, stated that Moscow's hotels ended 2012 with occupancy rates in excess of 75% and increased revPAR across all segments; this is expected to continue to grow over the course of this year.

However, Moscow's ascent to the acme of hospitality represents only part of a larger expansion effort that is currently taking place. In the face of the arrival of new foreign investors, attracted by a spike in both business and leisure travel, Russia and the Commonwealth of Independent States have emerged as Europe's most fertile regions for ambitious operators that are looking to extend their market coverage.

This was also highlighted in a recent KPMG report entitled 'International Hotel Operators in Russia', which forecasts that the number of international-branded hotel rooms in the country will more than double from 21,885 to 47,534 by 2018.

IHG targets Russia

InterContinental Hotels Group (IHG) is one such group to have thrown its hat into the ring, announcing in March a new franchise multidevelopment agreement (MDA) to introduce 15 of its Holiday Inn Express hotels in Russia by 2019.

The deal is set to double the size of IHG's estate - when signed, it will add approximately 2,250 rooms to the current development pipeline of 1,700 - and is yet another example of an operator declaring its intent to entrench itself in the region.

Due, in part, to its sheer size, the CIS isn't yet experiencing the levels of oversaturation that characterise many hotel sectors in more traditional travel destinations in western Europe.

"It's such an exciting market for IHG, because it's so under-served," confirms chief executive officer, Europe, Angela Brav. "There's huge growth potential. In Moscow alone, there are 11,000 branded hotel rooms, which is less than 15% of the branded rooms in London."

With most branded development focused on the upscale and luxury sector, operators are in the process of turning their attention to potential growth in the lower mid-market, providing a more affordable and large-scale option for travellers. This, Brav reveals, was the rationale behind IHG's decision to launch its Holiday Inn Express brand, a mid-priced chain.

"We conducted extensive research before making the decision," she says. "It showed an increasingly savvy domestic traveller who favours international brands and chooses hotels based on location, comfort and value for money."

Players are also shifting their scope beyond primary metropolises such as Moscow and St Petersburg to untapped secondary and provincial cities. For instance, the city of Sochi, situated on the Black Sea coast, close to the Georgian border - which will play host to the 2014 Winter Olympics - has emerged as an attractive location.

"Sure, occupancy rates will continue to grow in the bigger cities, but I would say that some of them are well covered right now," says Ivica Cacic, Marriott's vice-president of Eastern Europe and the CIS. "This means that operators like ourselves will look towards secondary cities such as Sochi with more affordable limited-service hotels."

Legal and cultural challenges

As with efforts to infiltrate the hospitality market of Russia's BRICS counterpart China, it is imperative that local behaviours and protocols are identified by players from the outset, and that they adapt their strategies accordingly.

In order to tackle such issues, IHG plans to open a managed service centre later this year in order to provide specialised additional support to its portfolio in Russia.

"I think that the decision to establish a managed service centre underlines our commitment to grow in the region," says Brav. "The centre is a bespoke offering for this region and will provide a dedicated, fully resourced office, staffed to deliver operational expertise for our future hotels, anything from accounting and reservations to sales and marketing or IT."

Another potential hurdle standing in the way of international operators concerns the byzantine legal framework found in many of the post-Soviet states, especially regarding the procurement and ownership of properties. In such cases, explains Cacic, operators would be wise to seek legal counsel.

"The legal environment is different with many local laws based on former Soviet legislation," he says. "This means that the rights and relationship between the brand and the owner is perhaps not as well supported or defined in other European countries, because it is still new. So, we are utilising legal counsel and finding ways to adapt our contracts and operational model."

Russia may be commonly cited as an economic powerhouse, but investors are also looking infiltrate other CIS states. IHG has already declared its intention to have 100 hotels across the entire region by 2020 - this will include introducing properties in Kazakhstan, Ukraine, Azerbaijan, Georgia and Armenia.

The same goes for Marriott. Last year, the group announced that it plans to double its portfolio in the region from 40,000 to 80,000 rooms by 2015. This will include the construction of properties in Kazakhstan (The Ritz-Carlton, Almaty), Azerbaijan (Baku Marriott Amburan Beach Resort), Ukraine (Renaissance Kiev Hotel) and Armenia (Tsaghkadzor Marriott Hotel).

However, while Russia and its CIS counterparts may share anthropological and historical ties - some fraught, admittedly - operators need to differentiate their approach and appreciate that each country has its own unique characteristics.

"Culturally, there are differences," says Cacic. "They aren't huge, but they do exist. I mean, Ukraine and Russia are pretty close, but they aren't identical. However, this is the same when entering any market - you can't make the mistake of assuming that there is perfect set formula. It requires a completely individual approach to create the perfect product."

Strategic investment

As alluded to by Brav, the region may still be "under-served", but at the current rate of property construction, this won't always be the case. With heightened competition, operators will need to develop new, more forward-thinking strategies to differentiate themselves. But what will this entail?

"Operationally, there still aren't enough experienced hospitality staff and leadership teams," claims Brav. "We are investing in the training and development of local talent in the region through the IHG Academy, which we opened in Moscow last year. This will provide a dedicated, fully resourced office, staffed to deliver essential operational expertise for our future hotels."

Marriott also has a department dedicated to creating a hospitality pipeline in the region.

"So as to adapt to the local specifics of such a large market, we launched a service department in Moscow last year," confirms Cacic. "We have also done the same in Astana, Kazakhstan. This has helped us address items such as legal regulations head on, while developers can receive creative solutions on how to utilise the brand to increase profitability. It adds value."

In spite of a slow-down over the last two quarters of 2012, the CIS continues to buck the trend of austerity, which continues to hamstring much of Europe. According to the report 'Brics and Beyond' by PricewaterhouseCoopers, Russia might even become the continent's leading economy by 2030, usurping that of Germany.

Such a prognosis will further vindicate recent moves by the likes of IHG and Marriott. Meanwhile, in Moscow, memories of the Rossiya Hotel grow fainter by the day.