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. Last Updated: 07/27/2016

Moscow's Hotels Thrive in 2 Parallel Worlds

MTWith high prices and occupancy surpassing 70 percent, demand for quality rooms is overflowing to well-located Soviet-era hotels like the gigantic Rossiya.
It was a last resort, so to speak, for the three desperate visitors from America.

Unable to find three single rooms at any of the city's high-class hotels, so the story goes, the businessmen resigned themselves to one of downtown Moscow's gray and crumbling Soviet-era hotels -- only to be charged $1,000 each for a block of five nights, although they planned to stay only three.

The story, which has been making the rounds among market watchers, may be apocryphal, but it illustrates an idiosyncrasy of the Moscow market: Even as occupancy rates and revenues go through the roof, the crumbling Soviet-era hotels are prospering.

According to Ernst & Young, in April Moscow's four- and five-star hotels recorded their highest-ever average room rate of $253. This is 70 percent higher than in 2001 and 40 percent more than only two years ago.

With high prices and occupancy surpassing 70 percent, demand for quality accommodation overflows to less expensive, chiefly Soviet-era hotels, even though they appear to be catering to completely different markets.

"The Western elite hotels cater to the top segment, while the Soviet hotels mostly to mid-range tourists and CIS business travelers," said Stephane Meyrat, a senior consultant at Hotel Consulting & Development Group.

"Most businessmen who can afford to stay at the Ararat Park Hyatt will do so in the name of their image rather than save substantially by sleeping at the Rossiya or the Ukraina," he added.

Scott Antel, a partner and head of hospitality services at Ernst & Young, agreed that it was often a matter of prestige to stay at a top-notch hotel. It was not uncommon for price-sensitive representatives of smaller foreign companies to stay at Russian hotels, such as the Arbat or Ukraina, he said.

"There is no longer a distinction between hotels catering to Russians and hotels catering to foreigners, as was the case in the early to mid-'90s, when locals weren't even allowed into some hotel lobbies," he said. "Today, as much as 50 percent of hotel guests are Russian, and the high-paying people, who would rent a suite for a weekend, tend to be Russian."

Meanwhile, foreign tourist groups are usually accommodated at inexpensive Soviet-era hotels. "Their prices of $50 to $60 are more competitive than Marriott or Sheraton's $200 to $300 and can be more easily incorporated into [vacation] packages," said Meyrat.

However, the growing gap between Western-branded hotels, such as the Marriott, Sheraton, Hyatt and Kempinski, on the one hand, and non-branded hotels on the other, is forcing the latter to undergo expensive refurbishment. The 293-room Golden Ring hotel, for example, underwent a multimillion-dollar renovation in 1998, and the 320-room Orlyonok had to upgrade its facilities in order to cater to a wider audience and is now known as Korston Hotel & Casino Moscow.

But general managers of Russian hotels were unanimous in dismissing a suggestion that in the not-too-distant future, non-branded properties could be pushed out of the market by their Western competitors.

"Western-branded hotels still largely benefit from their image of well-established standards, but one must not underestimate the capabilities of Russian hotels," said Patrick Gueguen, general manager at Korston Hotel & Casino Moscow.

"Russian hotels can compete successfully when marketing their services to Western business travelers, blending Russian hospitality with the expected international standards," he said.

As long as a hotel has a marketing concept and employs qualified managers familiar with Western hotels' operations, it can successfully compete with Western hotel brands, said Olga Pasechnuk, general manager at the Golden Apple boutique hotel.

Alexander Uryupin, general manager at the Golden Ring hotel, said that unfamiliar brands found it difficult to compete with well-established ones, but stressed that in the last 15 years a generation of local hotel professionals had appeared, which was capable of maintaining high service standards.

"One may ask: Why do I need to pay high management fees to an international hotel operator [and change brands] if occupancies are good regardless?" said Marina Usenko, vice president at consultancy Jones Lang LaSalle Hotels. "However, in a few years' time the situation will change, and branded hotels have a much better track record of performance under less favorable market conditions," she said.

But taking into consideration the current lack of supply in all hotel categories and very few new hotels in the pipeline, existing hotels have nothing to fear for years to come -- with a well-established brand, or without one.