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Hotel Business in Ukraine: Chances and Challenges

The hotel industry is one of the most attractive markets in Ukraine to make an investment in. Having survived the acute crisis of the nineties caused by structural, political and economic changes in the country’s economy the industry is currently characterized by a high level of business activity. Unsurprisingly the current situation in the hotel business market is highly interesting for potential investors: ever-increasing demand is accompanied by supply deficit. The inflow of tourists increases by 15-20% every year according to the promotion of new style Ukraine in the world as well as its accentuated European devotion. The occupation rate of hotels is unbelievable, e.g. Radisson SAS, a 4-star hotel in Kiev built in autumn 2005, has exceeded all expectations bringing its occupation rate to 82% within the first weeks following its opening. However, the general average level of utilized capacity of the hotel sector in the country is relatively low – 31% in Ukraine and 56% in Kiev. These contradictory data give grounds for assuming that the hotel business sector in Ukraine is far from being transparent and has to be thoroughly studied and analysed.

First of all, the hotel sector is a completely customer orientated sector which directly depends on tourist industry and business activity in the country. The hotel business and tourism develop in interaction which clearly displays itself in promoting each other as well as depending on each other. The number of customers staying in hotels is directly determined by the volumes of domestic and foreign tourism. At the same time development of the tourist business is orientated on the tendencies in the hotel sector. The volume of business tourism in the country increases every year due to the growth of the investment attraction of the Ukrainian economy.

Additionally dependence on the human factor makes this sector extremely sensitive to public opinion and reputation. A single case of poor servicing can result in losing customers. That’s why major hotel chains consider a strict control over proper quality standards to be one of their basic aims. ‘Odessa’, a 4-star hotel in the city of Odessa, can illustrate unreasoned investment with the expectation of attracting a famous hotel operator. At the very moment when the hotel had been built and was about to start functioning as a 5-star hotel within the world known Kempinski chain, it was discovered that low-quality construction works did not meet the Kempinski service level requirements. After that operator had left the project hotel was demoted to the 4-star category.

The market of hotel services also acquires additional, absolutely unexpected properties in the Ukrainian business environment. According to data of the National Tourism Agency there are 1064 certified hotels in Ukraine 5 of which are five-star hotels: 2 of which are in Dnipropetrovsk, 1 in Kiev, in Donetsk and Odessa. The rest of them are: 29 4-star hotels, 74 3-star hotels, 43 2-star hotels, 41 1-star hotel. The major part of the 4-star hotels is in Odessa – 9 of them, 6 in Kiev, 4 in Dnepropetrovsk region, 4 in Lviv region, 3 in Crimea and one in each of Donetsk, Zakarpatska, Poltavska regions. The situation arisen in this sector made the tycoons of the national hotel business take paradoxical decisions – instead of taking measures to re-construct buildings and improve personnel’s qualifications they just perform minor decorations and raise prices making an amazed tourist pay European prices for the rooms that do not meet any known star level requirements.

Currently, there are only two four/five-star hotels in the capital city that offer rooms for more than $250 per day and meet the Western standards. Besides the Radisson SAS hotel represented by an international operator, thirteen new minor business class hotels have been built for the last two years, including one 3-star hotel and six 2-star ones. At the same time, the number of tourists and visitors coming to the country increases every year, so the shortage of economy class rooms will also keep growing. Lower rates of building of new hotels made it possible to implement too high prices (higher by 30-50% compared to West European capitals’ hotel markets), though room conditions and quality of services in many of them are under generally accepted international standards. To justify high prices for rooms hotel owners use a traditional technique for developing countries – overrating. The hotel owners admit that prices depend on the demand-to-supply ratio. That’s why, taking into account the shortage of hotels of all categories in Kiev, the prices could be accepted as economically grounded, especially because the market tolerates them so far and there is no serious competition in either of the business segments. Thus the hotels often build their development policies not on service quality improvement but on further rising of prices. $300 per night is enough to enjoy the blue Danube from a window of Hilton, a 5-star hotel in Budapest. It will be even cheaper if you book in advance. The ‘five-star’ hotel in Kiev can hardly provide its customers with a similar view but staying in it will be more expensive - $400-450 per night.

The issue of low-quality service is quite frequently addressed in the Ukrainian hotel sector and owes its topicality to the steadfastness of the old Soviet approach and the absence of a new European skill policy as such. Thus a worthy investor decision will include not only financial investments but also investments in forms of service standards and personnel training policies. Franchising looks the most attractive hotel sector development strategy in this situation. It presumes implementation of an internationally known brand with settled conceptions of a famous company. Such decision will definitely be successful as it is based on a number of advantages: personnel training, style building, corporate rules, qualified management and development according to international standards, as well as attracting additional customers through the famous brand. As most hotels experience problems with high level management, the experts of such level in the hotel business have no right to make mistakes, as even a minor incompetence of management can cause unpredictable consequences.

When looking for a hotel business basis, it is necessary to research and assess the market of this industry. Businessmen often do not research because of expenses or underestimation of its importance. For example, the hotel market in the capital city is characterized by high saturation but at the same time potential consuming power of the market is much stronger. According to experts, it’s necessary to build at least 40 new hotels of different class to meet the demand in Kiev. Adding six more 5-star hotels will make it possible to meet the demand for first class hotels. The demand for business class hotel rooms is much higher – the market could accept more than 20 3-star and 4-star hotels. The same applies for the famous tourist centers of Ukraine – Odessa and Yalta could ensure crowding of high class hotels due to their tourist attractiveness. In other regions the market is also far from being saturated but building 5-star and 4-star hotels there might not be reasonable. A 3-star hotel could be the most adequate option there as the consumer of the hotel services at a regional level is determined by the domestic tourist flows which would not accept high accommodation costs.

Though remaining specific, the above listed challenges in general could be overcome by employing international business development standards, market researches, business planning and long-term investment prospects as any national peculiarity can be adequately responded by a thoroughly considered action. Unfortunately, an investor can start solving all these issues only after the main obstacle has been passed. And this one is ambushing the investor at the very beginning of the project - interaction with public authorities. First difficulties are waiting for the investor at the stage of selecting a land site. The land issue has not been finally settled in Ukraine yet. During first ten years the privatization processes were not supported by land sales which caused a disputable legal situation when an investor cannot be sure that the chosen land site will belong to him/her. Buying and re-constructing existing buildings can be an attractive option in this case but it’s advisable to keep in mind that more than 60% of materials and equipment for hotel re-construction should be imported from abroad. Because of high customs duties the materials are 40% more expensive than average in Europe. Additionally, most of the re-construction projects include the obligation to preserve the original front of the building which again brings the cost approximately 25% higher.

Solving the land issue is related to and followed by a lot of possible new problems connected with establishing a hotel business in Ukraine. According to Jorhe Intriago, a partner of the PriceWaterhouseCoopers Company, ‘if an investor comes to this country to buy a piece of land and build a hotel he’ll just find an endless list of permissions and approvals necessary to receive.’ And this speaks for itself. A bureaucracy abyss can easily swallow any promising project, especially a hotel sector one. Activities related to providing this kind of services will entail a great number of contacts with the bodies empowered to control the hotel business procedures (sanitary office, fire fighting unit etc.). What makes the process even more difficult is impossibility to present a complete list of all necessary certificates and permissions, many of them arise in the process of solving administrative issues. Important personal contacts and some slight ‘corruption supporting’ means may facilitate and speed up the process. This is another specific particularity of the Ukrainian economy: in the fields regulated by market mechanisms it is possible to select an adequate decision based on the market laws, but in the fields regulated by administrative methods it’s difficult to find any laws at all. After having settled all ‘paper’ issues and started construction or re-construction of a hotel an investor may encounter another unexpected problem – most of Ukrainian cities have no long-term general city building plans which creates even more challenging in conditions of ever-increasing building rates. There is a risk that buildings and infrastructure around the hotel might change which might change the hotel’s attractiveness or result in additional costs to preserve its status of attraction. To reduce this risk it’s better to build a hotel in a city that has a long-term plan of building up or to plan thoroughly the hotel construction taking into consideration possibility/impossibility of changes of surrounding buildings and infrastructure. Instability of the Ukrainian legislation must also be taken into account – new changes can be caused by the large-scale development of the hotel industry of Ukraine. Thus draft legislative initiatives should be also taken into consideration while planning an investment project.

All these problems can also be solved. It’s only necessary to study thoroughly the future business field and plan professionally every step. To do this you might need assistance of local consulting companies competent in national business specific. It’s obvious that Ukrainian hotel service market for the vision of a foreign investor is a strange and inadequate system of relationships between the business, state and consumer. But all problems are solvable and all obstacles are surmountable if the proper and correct decision is found. А road of a thousand miles begins with a single step. Besides, the Ukrainian markets approach European standards, slowly but irreversibly, and soon the specificity of the national hotel industry will get less and less distinctive and foreign operators will freely please tourists from all over the world with high quality services in Ukrainian hotels. Thus, investors who challenge the difficulties of the Ukrainian hotel business today will have a good chance to enjoy high profits from the currently unsaturated market of hotel services.