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The Russian hotel industry is full of optimism. With an increase in domestic trips, high occupancy rates, and increasing investments fromindustry giants such as Hilton, The Carlson RezidorHotel Group and IHG, it is easy to see why. After the huge success of the 2014 Olympic Winter Games in Sochi, Russian hotels expect to see further growth in inbound visitors during the upcoming 2016 IIHF World Championship and FIFA World Cup in 2018. However, are the optimistic expectations from Russian hoteliers justified, or is the long–term outlook for the hotel industry less rosy?
In 2015, the hotel industry has definitely seen some positive developments. For example, insights provided by industry contacts indicated occupancy rates of 80% throughout the 2015 summer in St. Petersburg. Previously, such rates were only seen in the peak season, followed by a fall in demand to 70–75%. Atypically high growth was also marked in Moscow and Sochi, where some hotels reached an occupancy rate of 100% during the peak season.
However, the industry’s success is not solely based on occupancy rates. Rouble depreciation amid tumbling oil prices, and the “aggressor” image that was stamped on Russia after the Crimea crisis, has impacted demand for hotel rooms. In many cases occupancy rates saw an increase on the back of hoteliers lowering room prices in order to attract guests. According to expert sources, room prices across the country fell by an average of 8% in 2015, providing an indication of the continuing poor health of the industry.
The current fluctuations in hotel performances can be explained by changes in Russian tourism flows. The review period registered predominantly strong inbound and outbound growth. However, from 2014 the situation started changing with more Russians deciding in favour of domestic destinations. Aforementioned developments, including the conflict with Ukraine, exacerbation of relations with Europe and the US, and the high volatility of the Russian rouble in 2015, are major reasons for these shifts.
The challenging economic situation, as well as restrictions on travel to Turkey and Egypt in 2015, promoted 30% growth in demand for domestic travel between 2014 and 2015, according to the Federal Agency for Tourism of the Russian Federation. An increased number of domestic trips compensated for the lack of foreign tourists and had a positive impact on the occupancy rates of Russian hotels in the short term. However, when we take a step back, it is unlikely that this trend will hold up in the long term.
There are a number of future developments and scenarios which will impact Russian travel behaviour in the long–term, which in turn will impact the Russian hotel market:
Thus, due to instability of exchange rates and a decrease in purchasing power, Russians will be looking for more affordable travel options offering better service. With the re–opening of Egyptian destinations, and possible improvement of ties with Turkey and EU countries, many Russian travellers are expected to return to the usual holiday hot–spots abroad. Alternatively, if the sanctions and economic downturn drag on, those harder hit might refrain from taking a holiday all together. And the current slow growth in inbound numbers, with a predicted surge of tourist inflow during the 2018 World Cup, is expected to offer only a short–term respite for Russian hoteliers. With an increasing number of local and international chains opening new hotels, the long–term future might involve oversaturation, and declining occupancy and daily room rates.
Due to the unstable economic situation and the unclear prospects of the tourism industry, in 2016, the Russian hotel industry will be marked by fierce competition among hoteliers. Price will be increasingly important as a key deciding factor for visitors. Therefore, the Russian tourism board needs to have a clear strategic plan to ensure that the Russian offer will attract travellers while maintaining profitability. In order to be successful and stay ahead of the competition, international hotels need to look at the longer–term prospects of their brands in this volatile market, while many Russian hoteliers should consider upgrading the existing infrastructure of their hotels, and invest in improving standards to meet consumers’ expectations.