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. Last Updated: 07/27/2016

A Plan for a $500M Hotel Chain

For MTIMES envisions a chain of 100 budget hotels nationwide, with the first to open in 2006.
A plan to create a $500 million chain of more than 100 economy hotels across Russia may be funded by Western or Middle Eastern investment, said Geoff Smith, general director of IMES Consulting (Russia), which is developing the plan.

"The strategy for this project is that the top end of the market is basically covered, especially in Moscow," Smith said Monday. "Therefore the market needs lower-range hotels for the price-sensitive guest, especially in provincial centers.

"They will be able to know that if they go to somewhere in the provinces they can buy quality at a price that will not hurt them."

Smith said priority locations will be those that market studies show will have an assured occupancy rate of 65 percent, with few seasonal fluctuations. The main target market will be Russians, including business people, "but not those who have a chauffeur-driven BMW."

Russian Gold, the holding that initiated the project -- named Intersetotel -- just over a year ago, is in discussions with unnamed investors who could finance the entire project, and are quite likely to be Western or Middle Eastern, he said.

IMES, which opened its Moscow office in October 2002, is a subsidiary of British company International Marketing and Economic Services Consulting Ltd. and has extensive experience in the developing markets of the Middle East, he said. It acted as a consultant on Kingdom Academy, a state of the art college in Riyadh funded by Prince Alwaleed bin Talal, whom Forbes magazine says is the richest man in Saudi Arabia and No. 11 on its global list.

Russian Gold, headed by Alexander Tarantsev, is a local holding that grew out of the management of the Mitino market. Tarantsev was named as the nation's 48th most influential entrepreneur by Nezavisimaya Gazeta in February.

The project envisages 150- to 250-room, two- to three-star hotels costing some $5 million each. No sites have been obtained yet, but discussions to obtain them are under way and the first hotels are to open in 2006, with the investments to be recovered in about five years. The hotels will have a target price of $40 to $70 per room per night.

Stephane Meyrat, senior consultant at Hotel Consulting & Development Group, said Intersetotel's expansion scheme is feasible, but that in terms of consumer spending power Russia is still a far cry from the economic prosperity and demographic growth enjoyed by the United States in the 1950s, when successful mid-range hotels such as Howard Johnson and Holiday Inn were launched.

"One hundred hotels is nice on paper, but have one or two work well and then announce an expansion of a proven product," Meyrat said.

Scott Antel, a partner with Ernst & Young's hospitality consulting group, agreed and said the new project is similar to many others that have barely advanced.

Projects had suffered equally from a lack of funding and the difficulty of obtaining sites, but today funding seems to be largely solved. Middle Eastern investors would likely find Russia more welcoming than the United States since the Sept. 11, 2001, attacks, and the returns would be higher, Antel said.

"Sites still seem to be an issue," he added. "Can you buy the land? Can you get a lease? Does the local administration insist on a 50-50 partnership in the venture?"

The Intersetotel project contrasts with a plan announced earlier this year by Delta Capital Management, two European funds and Rezidor SAS, the parent company of the Radisson hotel chain, to develop up to 50 Country Inn branded hotels that would cost $70 to $90 per room per night.

Asked how Intersetotel would address competition from these and other groups that intend to develop national chains, Smith said most of these are aiming for a different target market, but those cities catered to by competitors will not be priorities for the chain.

Discussions are under way with half a dozen potential operators, including Accor and Holiday Inn, he said.

The Russian tourism market is artificially depressed, largely because of a lack of infrastructure, including affordable hotels, and the market has great opportunities for long-term expansion, Smith said.

Hotel Consulting & Development Group's Meyrat agreed that the market suffers from lack of infrastructure, especially of roads, meaning that most of the income Intersetotel is seeking to tap will come from airline or rail travelers. Generating a 65 percent occupancy rate from these people is overly optimistic, he said.