Luxury hotels hope for more hospitable market after two tough years

Gone are the performances achieved by Bucharest’s luxury hotel industry prior to the economic crisis. Strongly affected by the collapse of business travel, the capital’s four- and five-star hotels have seen their business shrink dramatically in the past two years. While continuing a price war begun in 2009, hotels redistributed market share among themselves and in many cases saw revenues decline. So far, 2011 has seen no concrete signs of an upturn and no new major international operators announcing plans to enter the local market.

Simona Bazavan

The hotel industry was among the first local industries that felt the full blown effects of the economic crisis, thinks Tinu Sebesanu, CEO of Trend Hospitality Consulting & Management. The first impact came as early as the end of 2008, but the market took a turn for the worse starting 2009. “The four- and five-star hotels in Bucharest were especially affected, as their main business source, foreign business travel, fell,” Sebesanu told Business Review. 2009 turned out to be a tough year, he says, as the industry experienced a sharp decline both in the number of guests and the average length of stay. “There were several factors behind this. On the one hand companies reduced their travel budgets as one of the first cost-cutting measures. On the other hand, the strong penetration of low- budget airlines made it possible for many businesspeople to arrive in Bucharest in the morning and to leave the same day,” he says.

Faced with this collapse, hotel operators immediately reacted by drastically reducing the rates, the worst possible option, Sebesanu reckons. “2009 was a chaotic year, because most of the operators, both international players and independent ones, panicked and waged a price war, which in this industry has devastating effects on the medium term,” he adds. In the past two years and a half the average daily rate has fallen by 45-50 percent. While back in 2007, guests would pay an average rate that reached EUR 120 and even more in some cases, for a night in a four- or five-star hotel, current average rates are EUR 60-70.

This created a vicious circle and players were pressured to follow suit. “Price cuts were definitely not part of the strategy on the upscale market, but rather an effect of the downsizing in travel budgets and of the hotels’ need to retain guests and to maintain business volumes,” Sonia Nastase, GM of Howard Johnson Grand Plaza Hotel, told BR.

Reducing the daily rates had an immediate impact on revenues, bringing many hotels under the breakeven limit and, in the end, failing to generate an increase in demand. “Price is not the determining factor for this industry. What happened is that the players simply redistributed the market share between themselves but it didn’t generate any new clients,” says Sebesanu. This trend ended only in the summer of 2010, when rates reached a minimal level.

Only after cutting rates did hotels apply restructuring and cost control strategies, but this also should be addressed with caution, Sebesanu believes. “Cutting costs can only go so far. When we are talking about a five-star hotel, a EUR 5 price difference will never be as significant as the impression made by bad service,” he adds.

Overall, the last two quarters of 2010 saw a recovery in occupancy rates, but not enough to make up for the losses reported up to that point. As for 2011, Sebesanu thinks it will bring more unpredictability. “The limit has been reached both in terms of reducing rates and cutting costs. This creates uncertainty as there are few options left for hotel managers if the market doesn’t recover or economic conditions worsen,” he adds.

This year, hotels will also face pressure to raise prices. “Let’s not forget the effects of the VAT hike which will most likely stabilize this summer,” says Sebesanu. “2011 should be a year of stabilization and we should see a one digit increase for all indicators. My opinion is that in absolute numbers the results will be similar to the figures reported in 2010,” he says. In his opinion the inflation rate and exchange rate will have a strong say in the industry’s overall evolution.

And even if all goes well, the performances reached in 2007 and 2008 are not likely to be repeated any time soon. “Everyone agrees that we will not see the same results as in 2007 and 2008 anytime in the near future. I would say not even in the next ten years,” Sebesanu predicts.

No new names for 2011

International hotel operators are always interested in entering any market and Bucharest is no exception, Sebesanu says. It all boils down to the quality of properties that the market offers and the Romanian capital is not very appealing in this respect. 2011 will not see the arrival of any big international names, which are already few and far between on the local market, but rather sub brands of already existing players, such as Hilton with Hampton and Ramada with the Days Inn. And as developing a four- or five-star property projects takes on average two to three years and no major projects have been started so far, this will also cause a delay in the market’s development.

Bucharest knows only business

Well over 50 percent of the guests of Bucharest’s four- and five-star hotels come here on business as the city is not perceived as a leisure destination. “This ratio between business and leisure travel is very atypical for a European capital,” adds Sebesanu, stressing that the authorities’ involvement in the matter is crucial.

“Almost nothing has been done over the past 20 years. Consider the fact that we don’t have a city tour, any city break offers, a museum circuit or other basic and not necessarily expensive facilities.” Hotels could well benefit from an increase in leisure travel as their occupancy rates fall as low as 10 percent during weekends. So far, no more than 5 percent of the overall guests come to Bucharest for leisure, a figure that Sebesanu thinks could go up to 15 percent with the right strategies. “Bucharest has nothing more or less to offer than Warsaw or Sofia. Tourists would come here, as an alternative to other destinations,” the CEO concludes.

This opinion is shared by hotel owners too. “Bucharest still lacks proper promotion as a weekend destination and as a reliable holiday destination. We see a lot of effort put into promoting and supporting Romanian destinations that are difficult to reach, such as the Valea Prahovei, the coast and rural tourism destinations (…)The difference between Romania and other countries is that we promote undeveloped and unprepared destinations for advanced and competitive tourism while the others are promoting something they can really offer for a good profit and business,” Adrian Catalin Petre, owner of five-star Carol Parc Hotel, told BR.

There are 11 five-star hotels in Bucharest and another 20 units country-wide, containing roughly 3,600 rooms. Coming back to the capital, the majority of hotels belong to the four-star segment. In 2010 room supply in Bucharest grew by 0.5 percent with many projects being abandoned or put on hold. “If all planed projects for 2011 are realized the market will see 170 rooms become operational and 400 more in 2012,” reads the Bucharest City Report put together by Jones Lang LaSalle.

With few new projects being announced, many of the investments made last year went into refurbishment. Athenee Palace Hilton underwent a EUR 2 million facelift which involved the upgrading of various facilities inside the hotel. This included renovation works for Roberto’s on La Strada terrace, the restaurants Brasserie and Le Bistrot, the hotel lobby and Le Collonnade. Cafe Athenee opened last September, marking the completion of the renovation works scheduled for 2010.

Athenee Palace was affiliated to the Hilton chain back in 1997. More than ten years later four more units joined the ranks, one more hotel in the capital and one each in Sibiu, Oradea and Brasov. The second DoubleTree by Hilton unit, which joins the one in Oradea, should open this year in the capital on the grounds of Bucharest City Unirii hotel, the former Tulip Inn. Hilton worldwide representatives announced last year that they were either considering or negotiating contracts with other hotels in Cluj, Timisoara, Ploiesti, Iasi and Craiova.

Hotel representatives are cautious when making estimations about the market’s evolution this year. “We don’t expect any major changes on the market as the potential to see a rise in the number of tourists to Bucharest is limited by the infrastructure and the business travel segment isn’t showing any signs of recovery. A lot depends on the general economic and political context which is not yet looking like it is back in positive territory,” Georgeta Grecu, director of sales & marketing at Capital Plaza Hotel, told BR. The four-star unit was opened in 2009 and Grecu says that the priority is to increase the hotel’s market share and to retain existing clients, by focusing on various promotions and additional services. “So far we have registered increases both of the occupancy rate and that of the average daily rate. For 2011 we are also looking to increase our performance indicators,” she added.

While the overall market is decreasing, the demand for highly personalized luxury services is on the rise, representatives of five-star Carol Parc Hotel told BR. The boutique hotel, which is owned by the Petre family, reported an increase in its occupancy rate for 2010 and there are plans to further increase the number by 10-15 percent this year. Last year the hotel had about 2,500 guests, 60 percent of whom were Romanian. The number of leisure tourists was also on the rise, Petre says.

“While in 2009 approximately 98 percent of our trade was generated by business tourists, in 2010 we believe the figure was only 65-70 percent. We expect this trend to continue in 2011 and that leisure tourists, both foreign and Romanian, will not only increase as a percentage but also contribute to the increase of our business volume in general compared to the previous year,” said the owner.

In 2010 the hotel reduced its rates by about 20-30 percent but Petre says that the drop was compensated for by an almost 15 percent increase in the occupancy rate and a higher volume of sales in the F&B sector.

The most important new opening last year was that of five-star Epoque Hotel in November. D&M Perfect Real Estate invested EUR 8 million in the unit, which is located close to Cismigiu Park in downtown Bucharest and targets free independent travelers (FIT), having been developed as a luxury brand. The management of the hotel is provided by Trend Hospitality. The same month the boutique hotel became a member of the Worldhotels international network.

Another player active locally is the five-star Howard Johnson Grand Plaza Hotel, which reported a 55 percent occupancy rate for last year, a slight increase on the previous one against a background of much fiercer competition, Nastase said. The share of foreign guests reached 85 percent of the total. In spite of a slight increase in the number of Romanian guests over the past two years, their share doesn’t exceed 15 percent, the general manager said. Last year the company invested in refurbishment and redesign projects.

The hotel reported an EUR 8 million turnover in 2010, a similar result to the figure in 2009. “In most European countries, especially in capital cities, business is starting to show slight but sure signs of recovery on the upscale hotel market. Add to that the fact that we worked on improving our product and services throughout 2010, for 2011 we foresee a slight increase in both turnover and profitability,” Nastase predicted.

The Howard Johnson brand is owned by the Wyndham Hotel Group, which is also present locally with the Ramada brand. For 2011, the Ramada Plaza Convention Center, a four-star complex consisting of Ramada Parc and Ramada Plaza, announced a EUR 2 million investment budget.

“During 2011 we plan to open two new meeting rooms in Ramada Plaza, direct indoor access for our clients between Ramada Plaza and Ramada Parc, and an indoor semi Olympic pool with a fitness room,” Madalina Belous, public relations manager, told BR. The two hotels reported a 5 percent increase in occupancy for last year and an overall decrease of 15 percent against 2009. “The aim for this year is another 3 percent compared with 2010,”she added.

So far, 2011 has brought positive signs. “From the beginning of 2011 we have felt cautious optimism. The trend seems to be positive, the average rates remain similar if not slightly higher and occupancy is definitely better,” Belous added.

In addition to Howard Johnson and Ramada, another Wyndham brand will join the fray this year. The first local Days Inn hotel is scheduled to open in the first half of 2011.

2010 was a challenging year for all local players. “Last year did not improve much compared to 2009. The last quarter was a bit over Q4 2009 and we could feel the recovery of the Western Europe markets on the Romanian scene. But this was only in terms of occupancy and number of events, as the revenue was still negatively impacted by the average rate, which was much lower than in 2009,” Medeea Vasiliu, director of sales & marketing at JW Marriott Bucharest Grand Hotel, told BR. 2011 should bring a single digit increase, she thinks.

”For 2011 we target a slight increase over 2010, 8-10 percent in total, but this will depend on what’s happening in our source markets, as well as the social and political stability at national level,” she added.

The hotel’s occupancy rate went up by 5 percent last year, with JW Marriott Bucharest Grand Hotel hosting 110,000 guests. Top visitor sources are the USA, Western Europe and Middle Eastern countries.

Last year the hotel also invested over EUR 1.2 million in renovating and upgrading its main conference and event space, Grand Ballroom, and Vienna Lounge as well. “Renovations continue this year with the new restaurant JW Steakhouse, which will open in March and which took another investment of over EUR 1 million,” concluded Vasiliu.

The increase in occupancy rates seen last year is no guarantee that the market will see a boost this year. “We noticed a positive trend in the market in 2010, especially in occupancy, but it is very difficult to predict if it will continue,” Adrian Adam, marketing and sales director at Radisson Blu Hotel, told BR.

About 85-90 percent of the guests are foreigners, mostly from other European countries, and roughly 30 percent of the guests arrive at Radisson Blu through the Rezidor hotel reservation system. A similar proportion, 80-85 percent, is represented by business travel. In 2010 the occupancy rate reached 70 percent. “This is because, following the affiliation of Centre Ville to the Radisson Blu chain at the end of 2010, we currently offer two different products: accommodation for long and short stays, at four- and five-star levels. This allowed us to enlarge our client segmentation; therefore we expect a higher occupancy rate this year,” said Adam. He added that last year the hotel didn’t make price cuts, but rather offered more for the same sum.

In 2010 the site reached its set target of EUR 25 million for the whole complex, including both the Radisson Blu hotel and Centre Ville complex, both of which are operated by Radisson management. “We had an operational profit of 45 percent of the total turnover and this year we expect a growth in revenues and turnover plus a 5-7 percent higher profit,” concluded Adam.

Other five-star hotels in Bucharest include Alexander Hotel, Casa Capsa Hotel, Crowne Plaza Bucharest, InterContinental Bucharest, and Grand Hotel Continental.

simona.bazavan@business-review.ro

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