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. Last Updated: 07/27/2016

City Sets Sights High for Hotel Industry Revamp

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Visitors to the capital no longer find traditional Russian hospitality a strictly private affair, as in Soviet times. Highly trained staff now greet guests to the city's gleaming new hotels.

And as the industry becomes more professional, it also grows in size and profits. Moscow's 177 hotels employ approximately 30,000 people and posted sales last year of some 10 billion rubles ($344 million).

The city is not only the gateway to Russia, but also its commercial hub. Fifty-seven percent of visitors from outside the former Soviet Union visiting Moscow come on business trips, 31 percent come for tourism, 10 percent come for private reasons, and 2 percent on staff exchanges and other reasons, according to Moscow city government data.

City Hall wants the sector to grow even more until it contributes 10 percent of the city's budget revenue in 2010. It's not clear what portion of budget revenues come from the sector now.

To fuel the hotel explosion, the city wants to increase the number of foreign guests from last year's 917,000 to 5 million in 2010.

Catering to Mass Tourism



But before mass tourism can begin, the city will need to provide a wider selection of hotels. The only good choice offered is to business travelers by the high-end international hotels, whose business is starting to pick up again this year after being heavily hit by the 1998 financial crisis.

The average tourist faces a stark choice of either paying top dollar to stay in one of the about 4,250 Western-standard rooms that consultants Arthur Andersen estimate are available in the city or the uncertain prospect of staying in a hotel built in the Soviet era and staffed by people who sometimes can appear hostile to guests.

Industry insiders note that it is not only foreigners who want Western standards but also Russians, many of whom have experienced them overseas and do not want to stay in a hotel run along Soviet lines again.

U.S.-owned and managed budget hotel Travellers Guest House says Moscow has become one of the most expensive cities in the world to visit.

"The choice for accommodation is often between the four- and five-star Western-run hotels, at hundreds of dollars per night, or the old Intourist-type hotels," it says on its web site (tghmoscow.hypermart.net).

In Soviet times, Intourist had a monopoly on foreign tourists and channeled them into often imposing and costly hotels that had a reputation for sloppy service.

Yulia Nikulicheva, research analyst at Jones Lang LaSalle, said Moscow suffers from having no well-established big local groups operating hotels.

"Tourists are afraid of coming to Moscow and living in a lower-class hotel, managed by some unknown company, where they don't know what kind of standard they will have, what the level of services will be, and how secure they will feel there," Nikulicheva said in an e-mail interview.

In addition, many cheaper hotels are "located rather far from the city center, far from metro stations or major roads, making it very difficult both for tourists and people traveling on business to reach the city center."



Worth Cost of Renovation?



Many of the Soviet-era hotels are in such bad condition and ill-suited to today's hospitality industry that few people would want to invest in them, said Pyotr Medvedev, manager in Arthur Andersen's hospitality and leisure practice.

He said labor laws are also an impediment to improvement, with any operator obliged to maintain a full staff even when the hotel is closed for reconstruction or renovations.

"I don't see much movement there," he said. "Some of these hotels may need to be converted into something different."

Nikulicheva agreed. "Only a few of those hotels are worth spending money on renovations, as most of them lack either a good location, or it's too expensive to redevelop them, or both," she said.

Deputy Mayor Valery Shantsev announced last month that City Hall is planning to develop by 2010 a budget-hotel network of 40 two- and three-star hotels, in some cases by reconstructing old mansion houses.

The work is apparently to be financed by the private sector.

"The city government will this year issue 150 million rubles in tax credits dedicated to the reconstruction and modernization of hotel stock," Vedomosti newspaper quoted Boris Averyanov, deputy head of City Hall's office overseeing hotels, as saying.

However, attracting investment may not be easy.

"The returns in the hotel segment, especially three-star hotels, are lower than in any other real estate segment, such as residential, retail and offices," said Jones Lang LaSalle's Nikulicheva.

Arthur Andersen's Medvedev disagreed, saying that the one Moscow hotel that has expanded in the last two years and that is regularly full is the Swedish-owned and operated Katerina.

Mid-range hotels typically charge $70 to $100 per night, but earning $100 a night from 100 rooms is just as good as earning $200 a night from 50 rooms, he said.

"If [three-star] hotels are done well, they can be profitable," he added. "It's a competitive market and price is a very important factor."

Medvedev was cautious, however, on the prospects of huge tourist growth, warning that it was not simply a matter that tourists will come if rooms are provided.

Western Experience



Many other things need to be done to make Moscow attractive to the mass tourism market, including easing the tortuous visa application process and simplifying procedures for individual tourism, as opposed to group tourism, Medvedev said.

He said investment in the hotel business tended to be haphazard.

Companies investing in hotels should understand that running them needs expertise and that they should hire experienced managers to do it for them. Although many hotel owners understand the benefits of such a system, many local hotel owners can not resist the temptation to meddle.

Medvedev said while regular financial reports should be supplied to the hotel's owners, the most successful enterprises are those where the operators make their own decisions.

International operators have brought vast experience of the hotel business that can make significant differences in a hotel's economic performance, he said.

They bring international reservation systems and economic management systems that deliver quality service to the guests while still making sure that costs are tightly controlled, including through control of purchases, he said.

"It's a very, very thorough financial management," he said.

Jones Lang LaSalle's Nikulicheva agreed. "If an owner of the hotel manages to sign a management contract with a Western company, it gets, first of all, the name, then a well-trained staff, quality services, and, finally, experience," she said.

By comparison Soviet-style hotels have nothing to compare their performance with and often are restrained by personal obligations to staff and suppliers. This does not mean that all such hotels perform badly, but they stagger through rather than manage for success, Medvedev said.

Top-Notch Staff



One aspect of the hotel industry that is flourishing is the number of highly trained local staff, who in many cases are more educated than the guests they serve. Employment in a hotel offers them unique opportunities to mix with foreigners and speak foreign languages.

Yelena Ilyina, director of the international hotel management program at the Plekhanov Russian Academy of Economics, said graduates of the program earn an average of about $400 a month in Western-managed hotels, but sometimes less than $200 in other hotels.

About 100 people are taking the academy's four-year course conducted in English and some 120 others are taking the course for Russian hotels, she said. She estimated about 500 graduates with higher education in the hotel business enter the Moscow market each year.

Ilyina said demand for hotel staff meant graduates easily got jobs as the local hospitality industry develops.

"It keeps growing from year to year even after the [1998 financial] crisis," she said.

The institute conducted a study of what she called the "Soviet approach" and the "modern approach" to hotel management and found the modern approach much more effective.

"Soviet-style management was very regimented," she said. "The modern approach is more people-oriented. We try to [encourage] a feeling of the real necessity to serve people, to express their hospitality, to try to help other people in any way."

And although almost all hotels start their local staff in low positions and expat staff dominate the highest positions, Russian staff have entered into the next management level. Hotels no longer need to look abroad for chief financial officers or personnel managers.

Irina Kulagina, 33, a senior marketing director for Interstate, which operates the Marriott Grand, Aurora and Tverskaya hotels, is one of those who has risen through the ranks.

Like many hotel staff, her training was in languages, but she said this training also gave her an understanding of Western culture that helps her in her daily work.

Kulagina got her start in the industry in the Aerostar Hotel in 1990. She said that in Soviet times, Russia had no hospitality industry at all. There was no such thing as sales or marketing departments in Soviet hotels, she said.

"The concept has changed, the country has changed, the business has changed," Kulagina said.

She said the introduction of new systems of management had not only changed the hotels run by Western companies, but had also influenced other hotels, which are adapting their management styles and hiring staff who had experience in the Western-run hotels.

A graduate of in-house training courses not only in Russia but also in the United States and Canada, she said training was a key to success in the industry.

"A hotel is not just a brick building. The people who work in the hotel make the atmosphere in the hotel. If you care about your staff, they will care about your guests, so everybody will benefit."