Accor Group Positioning Stars Within Former USSR

26.02.2010 — Analysis

In the middle of February 2010 Accor Group jointly with Kesco, a Russian investor, has opened in Ekaterinburg the first in the Urals, eight in Russia, hotel. In the nearest future the international hotel operator is planning to open 3 to 5 hotels within the former USSR borders annually. The Operations Director of Accor Russia and CIS Alexis Delaroff told RusBusinessNews in an exclusive interview about the development strategy in relatively new region for the company and about his vision of the peculiarities of hotel markets in Russian cities and towns. 

- Mr Delaroff, what strategy has the Accor Group selected for the development in the post-soviet area? Will you, as you have in Ekaterinburg, participate in the project from the inception stage and later manage a hotel? Or are you planning, like in Europe, to act as an investor?...

- For a long time we have been developing using exclusively our own money. We invested into hotels which we then managed. This, unfortunately, is very costly. This is why about a year and a half ago a decision has been made to switch to a new development strategy. First of all we began getting rid of some real estate belonging to Accor. In France, for instance, we sold 180 hotels to a portfolio investor. However, we managed to keep the management contracts. Secondly, we are now assessing more rigorously when, in which regions, and into which brand projects we are prepared to invest our own money and which we can develop as franchises and management projects.

As far as Russia and the CIS countries are concerned we selected the management contract development strategy. So far Accor does not have enough experience of engagement with Russian authorities, we have no knowledge of the specifics of the markets. Local investment companies feel more comfortable in the political and economic environment of the regions.
Having the support of their knowledge, experience and contacts we will be able to establish our network faster. In the last 3-4 years we signed more than 30 management contracts in Russian and the CIS countries. There is now doubt that the construction, the preparation for opening and the development is a very lengthy process. The start has been made, however, we began working in the post-soviet market which is virgin soil for international hotel operators. In the nearest 4 years the company is planning to open 3, 4 and 5 star hotels in Krasnodar, Novorossiysk, Saint Petersburg, and Ufa. Now we are working, jointly with investors, on the 3 star 150 room complex in Chelyabinsk.

- Is it a fundamental principle that you participate in the project from the inception stage and manage only new buildings? Or are you prepared to consider existing hotels or those being renovated, for instance, as Rezidor Hotel Group does?

- We are always in the project from scratch. In our view this is the most effective way to achieve the hotel being constructed correctly which will make it easier to manage not only from the point of view of working with the staff and adherence to international standards but the building maintenance and security as well. When we enter a project at the same time as signing the management contract we also sign the maintenance contract. Then we work in close cooperation with designers, architects thus having an opportunity to implement our own standards at every stage of development of a complex.

Coming into the management of existing sites does, beyond doubt, give the opportunity to faster develop the network geographically. However, this is pregnant with misapprehensions. For instance, it often happens when the building proprietor takes upon itself some obligations to carry out structural or cosmetic renovation within a certain timeframe. And everything is postponed further and further. As a result the hotel works under an international brand while remaining "soviet" through and through. We do not want to work like that.

- What are the conditions of your management contracts?

- The management contract assumes that all costs involved in the hotel start up are covered by the investor. In Ekaterinburg, for instance, Kesco invested 30 million US dollars into the construction of the hotel. Further 1-1.5 million will be spent for the preparation of the hotel for opening - staff training etc. Which means since all costs are met by the investor, it is the investor that gets the profits. We have 7-10% of the annual turnover of the hotel.

- In 2008 the Accor Group turnover amounted to 7.74 billion Euro, profits - to 575 million. How has the company performed in the difficult 2009? Which regions of the world demonstrated higher profitability and which showed a drop in revenues?

- In 2009 the AG's revenues have dropped by 8% globally. First of all it depends on the European hotel market as 70% of our business is in Europe.

- How far has the European hotel market dropped? The Urals hoteliers, for instance, the whole year running have been complaining about the drop in occupancy rates and revenues of 10% and some even 50%.

- This can be explained. In the Urals as soon as the crisis and problems with industry started all business processes have slowed down. There was no such drop in Europe. In Europe even 3% is a sharp change. In the post-soviet space, however, even 20% is considered a minor change.

- In your opinion, what is the cause for these great diferences in the development of markets?

- Obviously business depends on the political and economic situation in regions and countries. The new management system in Russia and the CIS countries is only 20 years old, it is not very well developed yet, mechanisms of economic market regulation are not ready yet, there are no laws regimenting business processes. Here is an example. When you loose your job in Europe, you get benefits of up to 80% of your wage. You do not have to quickly change your lifestyle and reduce spending. You continue spending as before, travel, stay in hotels. Accordingly, economic processes do not cease as abruptly.

Another thing, many Russian entrepreneurs prior to the crisis were convinced that the mad dynamic of growth in the market of 10-20% annually will never end. Counting on this they took out loans, drew development plans. The development has not been real, however. Everything has been spinning too fast and virtually in vain. The bubble could not but burst. It has. Since everything is new here, many markets are not regulated as well as in Europe, there have been rapid and lamentable consequences.

- You are opening in Ekaterinburg just at the time when the hotel market is down and not moving. Moreover there is a strong competition in the city in the 4 star segment. The Park Inn hotel and local operators work in the same segment. What kind of occupancy rates do you expect to get? What level would get the hotel in the black?

- I think that the hotel with the occupancy rate of below 50% would not be able to stay afloat for too long. This is the figure we will be trying to reach. I think we will achieve this within 2 years.

- How? What schemes are you planning to employ to attract clients?

- We are working with all companies supplying to the clients - corporations, tour operators, travel agencies. It all depends what region we are talking about. Resort hotel business is not the same as the promotion of business hotels. Here we use various means of attracting customers. In Egypt, of course, we give special treatment to tour operators sending chartered flights there. In Ekaterinburg we are planning to count on corporate business, multinational and Russian companies whose employees frequently come to the Urals on business. We are also going to work with travel agents organising business tours.

In general, when selecting a Russian city for the opening of our new hotel we assess, first and foremost, the business activity of the area. Unfortunately there is not a lot to do in large cities from the point of view of tourism which is why it is not worth taking usual tourists into account here.

- Why is it that you have this kind of perception?

- In any corner of the world developed from the point of view of services, you come to the airport, jump into a hire car and go on your travels. Where do you see a rent a car in Russian airports? When you come out of an airport the first thing you hear is "taxi?" This feels like extortion, harassment. Another question is where to go. Where are signs in Latin script which would be understandable to any traveller? Where is infrastructure enabling you to travel comfortably from city to city? And then in many Russian cities and towns the "old cities" are disappearing. This is what people like in Europe, you come to a city and there is always the central kernel where you can go and see how people used to live.

Of course, in recent years in Russia people are beginning to understand that the lost values must be restored. However, it has not become the priority for the state. When people are cold, when there are no benefits, when there are problems with medicine social and economic policies are much more of a priority or authorities then culture and tourism.

Interview prepared by Yevghenia Yeryomina