CityBlue’s long leases spark midscale push in Africa
 
CityBlue’s long leases spark midscale push in Africa
04 DECEMBER 2018 8:33 AM

CityBlue Hotels is forging ahead in Africa with a combination of first-mover advantage, a little risk and long leases. Its strategy has made it one of Africa’s fastest-growing chains.

DUBAI, United Arab Emirates—CityBlue Hotels was born out of a frustration of the lack of quality midmarket hotels in sub-Saharan Africa, and executives now plan aggressive growth to further rectify that state of affairs.

To spur this, the Dubai-based firm is moving its headquarters to Nairobi, Kenya, in the next few months.

CEO Jameel Verjee, who founded the hotel chain in 2013, said CityBlue was created following a research trip around the continent to ascertain the best business model to use. That tour took a calendar year, he said.

“Looking back, it was a challenging time given that we were totally unknown in the African ecosystem and began in two of the lesser-developed markets at that time,” he said. “We suffered typical teething problems of every early-stage business. We started small and then grew quickly due to our unabated persistence and because we realized that the window of opportunity would not be ajar forever. We had to move swiftly in order to try to fulfil our ambition.”

CityBlue now has hotels in five African countries and approximately 300 employees.

Verjee said the brand is a trailblazer in Africa.

“Our ambition is to double in size every two years from 2019 to 2025,” he said. “We seek to do so while implementing strict standard operating procedures and remaining at the top of our digital game.”

That ambition is evident in its management. CityBlue has hired Zahra Peera, formerly VP of development, sub-Saharan Africa at AccorHotels; Neil George, formerly SVP of acquisitions and development at Starwood Hotels & Resorts Worldwide; and Vernon Page, formerly CEO at business advisory Hotel Partners Africa.

“CityBlue’s operations are today headed by Peera,” Verjee said. “Given that six or seven years ago, I was running all of these functions from scratch with a blank piece of paper, and we now have two or three world-class hoteliers on the team to support me, I think that we have come a long way. Our most important investment has been in our reputation, and we have to work hard to keep it that way.”

Mitigating risk
Risk is inherent in operating hotels in Africa, Verjee said, but the secret is to assess, manage and mitigate that risk.

“When we began, we took on smaller assets in markets where we felt that we could enjoy economies of scale, early-mover advantage and brand building, but we also focused on ensuring that each hotel had the standalone potential to waterfall (earnings before interest, tax, depreciation and amortization),” he said. “Our smaller properties had limitations, and when the appropriate time to terminate arose, we sometimes exercised options because the wider business outgrew the short-term plan.

“We now average 60 to 70 keys per asset, and we evolved into a range of business models, including franchises, leases and management contracts. Each (model) must still be profitable in its own right based on our assessments and sensitivities.”

What evades CityBlue at the moment in Africa is bricks and mortar ownership, Verjee said.

“We have not acquired any hotels yet in Africa as a PropCo, because the cost of money on the continent delays the financial returns. We have, however, taken over assets on long leases, and we continue to look for such properties,” he said, mentioning a 100-key hotel in Mombasa, Kenya, CityBlue acquired last December that was previously a Best Western.

“(The business model chosen) is very much case by case,” he added. “We know the markets well, and we want to be in all of them in time.”

Currently, CityBlue also has properties in Kigali, Rwanda; Kampala, Uganda; and Livingstone, Zambia. Added to those in 2019 will be Dar es Salaam, Tanzania; Lusaka, Zambia and another hotel in both Kampala and Mombasa.

CityBlue’s business model provides the platform to finalize the kind of deals unavailable to his management team when they worked for the hotel giants, Verjee said.

“Ninety percent of hotels in Africa are being constructed with less than 100 keys, and there are few, if any, African hotel brands to grab this market share, mainly because the international brands have minimum specifications and room counts,” he said. “Given the consolidation in the industry recently … there are now incredibly experienced and talented executives looking for the next brand to start or to join. Most are not entrepreneurs and … the likes ONOMO and CityBlue give them those opportunities.

“The rise of African domestic travel is one spur, but it must be recognized that there will be fluctuations and volatility as the middle classes of each country grow and travel more. There is also ever-increasing demand from international business and the rise of the (meetings, incentives, conventions and expositions) industry across the continent.”

Moving home
CityBlue’s intentions in Africa are quite evident as it moves its headquarters from Dubai to Nairobi, Verjee said.

“We began as an African hotel chain with a head office in the Emirates,” he said. “It worked tremendously well for us in the early years, but we have now grown and need a strong localized presence.”

The company’s regional competition includes Best Western, ONOMO Hotels, Hilton Garden Inn, Protea and Park Inn by Radisson, he said. There are some locally established brands, such as Sarova and Tamarind, which CityBlue is taking on, but generally the locals are all single-jurisdiction groups with no regional brand equity.

“Our (unique selling proposition) is that we are an African group with brand equity beyond jurisdiction and can compete both for new properties as well as for business with the international and local groups,” he said of CityBlue’s new status.

Verjee also says his firm’s flexibility, passion and long-term view will allow it to compete even with the industry’s largest players.

“We have outstanding operating procedures and a second-to-none reservations system, but the key element is our team and their accessibility to our counterparts,” he said. “We have learned that ethics is key. Contracts are not always respected to the letter, and we have to choose with care.”

Verjee said that a growing challenge for CityBlue is around its institutionalization of standards, values and consistency of execution.

“We have had to deal with rogue general managers, which can be toxic for the brand, and the choice of the top quality of human resources becomes increasingly important going forward,” he said. “In terms of opportunities, honestly, they are endless if a business’s approach is to work openly, transparently and speedily.”

He said CityBlue has a sound development strategy to grow in Africa.

“We see gaps in every market, even in the more developed ones of Kenya and South Africa,” Verjee said. “We also take a contrarian approach and will enter markets when we believe that we see opportunities that others do not, such as Kigali in 2013, Kampala in 2014 and, most recently, Mombasa in 2017. We definitely believe that the leases on the correct, long-term genre of deal make the best sense for a midmarket hotel group and can be very profitable.”

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