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As the largest hotel market in Eastern Europe and host to both the 2014 Winter Olympics and 2018 World Cup, Russia is garnering a lot of attention from global hotel chains, many of which have significant pipelines in the country.  However, there are three Eastern European countries which are often overlooked but also present opportunities for these same companies:  Croatia, Czech Republic and Slovenia.  Despite their relatively small size (collectively they only account for 30% of Eastern European hotel value sales), their proximity to Western Europe means that they receive a lot of foreign tourists with high purchasing power.  Furthermore, these hotel markets are highly fragmented and have above average sales per room.

Magnets for high spending foreigners

Because of their proximity to Western Europe, the three countries attract a significant amount of high spending foreign tourists.  For Croatia and Slovenia, foreigners accounted for over 90% of spending on travel accommodation, while that contribution was 76% in the Czech Republic in 2011.  As a result, these markets boast the highest travel accommodation spend per arrival for the region.  Global chains could charge higher prices, possibly more in line with Western European rates, while taking advantage of relatively lower costs.

Travel Accommodation Spend Per Arrival (US$)


Travel accommodation spend per arrival

Promising hotel markets

These markets remain highly fragmented, with chains only expected to account for around 6% of outlets in both the Czech Republic and Slovenia and 13% in Croatia in 2016 (compared to 77% in the US).  Additionally, hotel value sales and sales per room are expected to grow over the next five years.  This gives the global chains the opportunities to steal share from independents as well as grow organically.

Key Hotel Metrics


2916 hotel sales-growth-sales per room

Economies of scale pose challenges

Because of the small size of these countries, it might be difficult to achieve the economies of scale required to ensure cost efficient operational support.  While it is likely that these countries could support the minimal amount of hotels needed for scale (8 to 10 outlets), industry players might consider hedging their bets by having a central office responsible for this cluster of countries or use existing central European offices in larger markets, such as Poland, because they because they share similar languages and cultures.

A plan of attack

The easiest way for the global hotel chains to step up their presence in these markets is to sign up independent hotels to their consortia brands, e.g. Pullman and DoubleTree.  Given that these markets have multiple local chains, a global chain could simply acquire a local company instead of starting from scratch – and a bolder move would be to acquire several to create a regional brand.  Indeed Marriott stated that it has a war chest of US$1.4 billion that could be used to acquire small hotel chains.

There may be limited opportunities for new builds in the largest cities, but all three countries have regions that are popular with domestic tourists and local governments keen to promote them to international tourists.  Another geographic opportunity for global hotel chains is along the borders of the wealthier Western European countries, which receive a lot of cross-border traffic.

The global chains can develop their select service brands, such as Holiday Inn and Hilton Garden Inn, in these areas.  Although these brands aren’t typically known for conversions, this could be a pragmatic way forward in addition to new builds, especially as second-tier cities renovate and rebuild their former industrial sites into multi-use developments.  Because annual disposable income per capita is higher than the regional average and expected to grow, these brands would be well suited to attract domestic tourists.

 

 

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