Alexis Delaroff: “Working with owners is always based on compromise”

– Today on Russia’s hotel real estate market, there are several famous international operators represented. Could you briefly state what in particular distinguishes you form all the rest?

– We alone have that particular brand that our competitors lack – that’s ibis…

– Really they don’t?!

– No! Because this product was created in Europe and for Europe. And that’s its competitive advantage. All the brands created in the U. S. are very specific, and in order for them to work in Europe, the brand must adapt to the conditions here, while ibis doesn’t need adaptation.

– How would you describe what is currently happening on the hotel real estate market in Russia? What are the key trends?

– Whereas the European market is currently characterized by a certain stagnation, the situation in Russia is much more positive. It was said during a recent hotel congress that within Russia and the CIS there are slightly more than 90 hotels operating under international brands. Meanwhile, in Paris alone Accor has about 150 hotels under management. Russia is capable of growth, so all the hotel operators are entering Russia with great exuberance. For us, the 2012 result proved one of the best (excluding 2008). Not only because our hotels performed well, but also because many new contacts and agreements were formed. We have good numbers for the projects being developed, which portends stable development of the Accor brands across the region.

What can be called a key trend? Whereas it was previously the case that all owners sought to open a “super‑5‑star” hotel, they’ve now started to realize that such hotels aren’t suitable everywhere. Even if you have an incredible ego, in certain regions/cities it’s better to open 3* hotels. The key trend is that people are growing nearer to reality. And in these conditions – in conditions where partners and investors have learned to more soberly assess the situation – it’s far more convenient and effective to develop business.

– What will be most memorable about 2012 for you – what were you able to achieve and what new hotels were opened?

This year we opened the first Mercure hotel in Russia – the hotel is located on Arbat Street near Smolenskaya square. The operating results proved higher than the presumed numbers – in terms of both price and occupancy. Also this year, two more interesting projects were opened. I’m referring to hotels built with our Turkish partners in Samara and Yaroslavl – hotels under the ibis brand. As an aside, these are the first hotels that we took under lease rather than management. It’s interesting that the hotel in Samara during the first year of operations achieved approximately 70% occupancy.

Several interesting hotels are planned for opening next year, for example Pullman hotel in Sochi. So far approximately ten management agreements have been signed, including, in addition to Russia, properties in Belarus, Georgia and Kazakhstan. In Moscow, if I’m not mistaken, about 5 management agreements have been signed. On the whole, we’re quite pleased with the results, especially if we compare them with our colleagues’ results in Europe. It’s far more difficult for them, since they’re working in crisis conditions.

– Please rank the Accor group brands, first by price, then by concept.

– Our portfolio includes several famous brands. I’ll begin with MGallery. This brand is represented by small, exclusive boutique-hotels, which are well blended with the histories of different cities. For example, in the city of Carcassonne, France, our hotel is located in one of the old castles.

Our flagship, deluxe brand is Sofitel. Up until 2007, this brand was slightly blurred – it was represented by both luxury hotels and 4* hotels. Afterwards, it was decided to fully reposition it in the luxury segment. Of 250 hotels, only about 130 are left. Therefore, all the hotels that didn’t correspond to this category exited Sofitel.

Today Sofitel has two sub-brands.

Sofitel Legend is an exclusive selection of hotels with history. Many of the hotels are more than a century old and are historical monuments and legendary places. Every Sofitel Legend hotel is unique, because it is a journey into luxury and history. Sofitel Legend – these are hotels where famous historical personalities have stayed. There are just 7 Sofitel Legend hotels. The first one was opened in Hanoi (Sofitel Legend Metropol Hanoi, which operated back in the 19th century), Sofitel Legend Old Cataract Aswan in Egypt (A. Christi stayed there) and others.

The second sub-brand is So Sofitel – these are the so-called life-style hotels – modern, designer luxury hotels with unique individuality. The interior for each hotel was created by a famous designer. Sofitel So Mauritius on Mauritius was created by Kenzo, while Sofitel So Bangkok combines the talent of Thai designers in cooperation with Christian Lacroix, who brought a “French Touch” to the hotels’ design.

Also representing the five-star hotel category is the business-brand Pullman. The four-star brands are Novotel and Mercure.

These are followed by the “ibis family” – standardized three-star hotels, which in turn are split between ibis (maximum comfort and modern design at a reasonable price), ibis Styles (maximum comfort and vibrant design), ibis Budget (comfort of living and basic services). These are our main brands.

– Which of the brands you listed aren’t yet represented in Russia?

– Not yet represented in Russia is Sofitel, although I think that in a few years this brand will appear in Moscow. Also unrepresented are Pullman and MGallery. With regards to the latter – there are practically no properties in Russia suitable for this hotel format. It’s quite difficult to search for small buildings with history and individuality. The Grand Hotel Europe in St. Petersburg could be suitable in terms of caliber, but there are about 300 rooms there, and this doesn’t fit with the concept of boutique hotels.

– As far as I know, in Europe you’re also developing the apartments format?

– Yes, we have apartments under the Adagio brand rated 3+ 4*. In Moscow we will open the first such hotel in 2013–2014 on Bakhrushin St. Under construction there is a hotel complex totaling 35,000 sq.m, which will include a Mercure hotel with 160 rooms, ibis with 190 rooms and Adagio with 100 apart-rooms. This format is quite suitable for specialists on lengthy business trips in Moscow, for foreign business travelers in Moscow and those arriving with their families for extended stays who haven’t found an apartment. The Adagio units will include their own kitchen and several rooms for comfortable living.

– How is such a format combing several hotel concepts justified for one building? Are there many such precedents already on the market?

– Europe is full of such projects. So far in Russia there are few, but this is a matter of time. In such projects the flows of different hotel brands aren’t combined, and each hotel has its own entrance. This is quite difficult to design, but if everything is done correctly, the project turns out quite diversified. If you have several brands represented at a single property, in crisis conditions you can “play” with your offerings. In instances where only a five-star hotel is represented in 35k sq.m, in a crisis it will be very difficult to work with it. The project developer on Bakhrushin St initially planned to build a Hilton there, but we convinced them that this format is more effective.

– What is the most difficult thing in relationships with owners in Russia? You once acknowledged that communications with developers in Russia takes up more time than in other countries…

– The format of hotel management agreements is an uncustomary agreement format for owners in Russia. The owner usually leases the property or transfers it to custodial management. But the hotel management agreement is essentially an agreement for rendering services. Of course, these are uncustomary, complicated agreements – with very complex interpretation – and owners are quite averse to them and spend a long time reading them, disputing. The owner frequently has no idea about how all this works. There are no previously prepared guidelines as to who is responsible for what. And to top it off, the hotel is more complicated and expensive than residences, retail or offices. Therefore, owners frequently decide against us.

– What in principle is the owner’s influence on the operator’s hotel business which, while not belonging to the owner, is still “happening” at his property?

– Today hotel operators no longer invest in real estate or hotel furnishing. Hotel operators bring their know-how, their reservation systems, their brands that they developed, their standards and procedures. We sign agreements with owners for technical oversight, and according to these agreements, we give to the owner and architects all of our standards. Our employees working in the construction division accompany the architects and builders through the process of building the property. Unfortunately, Russian architects no longer know how to draft hotels, let alone drafting modern hotels. Therefore, the entire zoning system, particularly the location of the reception area, trajectory of guest and personnel movements, spacing and location of the restaurant-bar and conference hall; the number and location of elevators and more – all this is dictated by us as part of accompanying the project in the first stage. What happens next is the creation of the pilot room – jointly with the designer. We help the owners find designers, as a rule recommending our own, since few Russian designers are able to realize such difficult projects. We compose for the owner a list of what needs to be purchased in order for the hotel to function in full. We frequently offer the owner a selection of several providers. If they want, they may choose their own provider, but either way, every detail in the hotel must conform to the standard. Next we have to agree a project budget with the owner, costs and revenues, how many people will be included in the hotel’s operations, what their salary will be, etc. This is the process where the owner gets involved, and this is correct, since at the end of the day it’s their money.

The owner pays us remuneration for the services we provide to them – through the revenues generated by the hotel. On average, operators receive from 8 to 10% of the hotels revenues. If we’re dealing with a franchise, it’s close to 6%.

– As far as I know, you don’t work in Russia under franchising. Why?

– We haven’t yet worked in Russia under franchising. The market wasn’t developed; there wasn’t a culture of hotel management or specific knowledge about this market. Therefore we, as the operators, faced a large reputational risk – the party who bought the franchise form us might not handle the task. The market is currently changing; it’s becoming more professional. We are also changing. We presently have a large number of hotels in the pipeline, so we made the decision to enter into talks with partners on the topic of franchising. Our work in this format is quite developed in Western Europe, and we hope it will soon be developed here as well.

– How do you align your corporate standards with local legislation and the local specifics? What key challenges exist with this in Russia?

– The key challenge we face here regards the SNIPs. I’ll cite a simple but vivid example. Kitchen space in a European hotel with 150 rooms will equal 50 sq.m, while in Russia this will be at least 250 sq. m. This is likely the main irritant for us and for investors – after all, they’re investing their money in construction. The second one regards the challenging and sometimes contradictory accounting and tax reports. They’re different from the standards we work by in Europe.

– Do you in any way compensate for these challenges in your reports? For example, by making the kitchen 250 sq.m, but at the same time reducing space in other areas?

– We try to do this, but it doesn’t always work out. On average, spaces for hotels in Russia are 20–25% bigger than in Western Europe due to the fact that norms and SNIPs don’t meet the modern world’s requirements.

– As far as I know, for hotel owners in Russia, recoupment timeframes total 7–10 years on average. How soon does the operator begin seeing profits after entering a new market?

– Operators begin receiving earnings from the first day of hotel operations, since part of the remuneration they receive depends upon the revenues of the hotel itself.

But with profits the issue is more complicated. This will depend upon the number of hotels under management, the operator’s personnel, and the general cost of operations. For Accor it has always been beneficial to work in Russia; we’ve always increased personnel and capabilities when the earnings from the hotels we operate allow us to do this. In Russia we’ve always been in the black. Accor arrived to Russia in 1992. Over 20 years we’ve never lost money.

– Could you please tell us how construction is progressing on the hotels in Sochi for the Olympics?

– On December 10 we’re opening the first of the Olympic hotels under the Mercure brand in Sochi in the alpine resort complex Rosa Khutor.

In 2013, at the mixed use complex RMOU (Russian International Olympic University) we will open a Pullman hotel with 150 rooms and Mercure hotel with 200 rooms, while also managing a conference center as part of this complex.

We signed an agreement with the company Profestate, which consists of the development projects of Vladimir Potanin’s Interros holding, for the management of these hotels. Following the Olympics, the 4th hotel (under the Mercure brand) will be opened at Rosa Khutor in the “Plato” zone.

– How do you usually approach the owners? Or do they approach you?

– We worked with Vladimir Potanin’s development structures back in Moscow – under the project Novotel Moscow Center. Therefore for us Sochi served to further the cooperation. Incidentally, the owners we previously worked with are increasingly expressing their desire to continue working.

– You have precedents where you have leased real estate – for example, the hotel in Yaroslavl. How commonplace is this practice for you? Why did you opt for this?

The ibis hotel in Yaroslavl, just like many of our other projects (Samara and Kaliningrad), is the property of our Turkish partners, with whom we’re jointly opening a hotel chain in Russia, Ukraine and Turkey. Our project with them is for 40–50 hotels. According to the agreement, we take the hotels under lease, because the Turkish company’s charter obligates them not to transfer hotels to management.

– How in this case do you earn remuneration? Is it possible to say that the non-core investments will be offset by higher fees?

– This is a commercial secret.

– When contacting an operator in whose portfolio several brands are represented, does the owner participate in choosing the particular brand?

– As a rule, the owner chooses the operator. And the operator tells the owner which particular brand is most suitable for the property.

– Do conflict situations with owners occur frequently on this market?

– For political correctness’ sake, of course I can say they don’t exist, but, of course, that’s not true. But I would call this either disagreement or misunderstanding. We haven’t had any actual conflicts.

– How prepared are you to exit a project if the owner, for example, is unwilling to fully observe all the operator’s standards?

– We haven’t experienced this. And for my part, I will do everything possible to forestall such precedents. I believe it is always possible to reach agreement. Contracts with owners are signed for 20 years, and it would be a shame to exit the project after two years. Of course, it sometimes happens that everything is agreed, the contract is signed, but then real life begins, where everything isn’t that simple. No matter what, working with owners always means working on the basis of compromise.