Sochi hotels jeopardized by rising competition
Sochi hotels jeopardized by rising competition
09 JULY 2018 7:27 AM

Sochi’s hotel industry performance has been relatively strong, but there is some concern now that region faces stiffer competition from Turkey and Crimea.

SOCHI, Russia—Operational performance in the Sochi hotel industry has seen improvement over the last few years, but the short-term future might be affected by the May 2018 opening of the new Crimean Bridge, the debut east-west road connection to the Crimean Peninsula, that might divert tourism away from Sochi.

Crimea has long been the favored winter destination for regional travelers, although Sochi, which has both beaches and mountains, has seen rising popularity since it hosted the 2014 Winter Olympics.

Domestic travel was boosted shortly after the games with the deprecation of the Russian ruble that resulted in overseas trips almost doubling in price, a factor that continues to drive Sochi’s operational indicators.

According to data from STR, the parent company of HNN, occupancy in Sochi’s branded hotels increased 7.2% in full-year 2017 numbers to 50.8%. Year-to-date 2018 occupancy is 52.9%.

Local analysts confirm this improvement.

“The situation in the Sochi hotel market is continuing to improve. Even the non-mountain cluster in January to May 2018 versus the same period 2017 posted a 1% occupancy increase, to 47.4%, in upper segments and an almost 2% increase in the middle segments to 39.6%,” said Tatiana Veller, head of JLL’s hotels and hospitality group in Russia and the Commonwealth of Independent States.

“Higher-level hotels have also been increasing rates, with (average daily rate) there increasing by 900 rubles ($14.33), to 8,100 rubles ($128.95),” Veller said.

“In the mountains, upper segments posted a small loss in occupancy year-to-date … although it is still high, at 69.4%, while their more moderately priced counterparts have sold 2.5% fewer rooms, ending up with 77% occupancy year-to-date,” Veller added.

Currency fluctuations
The ruble in 2017 increased in value by nearly 25%, which has added pressure on domestic Russian markets such as Sochi, according to Marina Smirnova, head of hospitality and tourism at business consultancy Cushman & Wakefield.

Smirnova said this has increased competition between the Sochi beach cluster and the sea resorts of Turkey and reduced the earnings of branded hotels in Sochi in local currency.

After a strong increase in constant currency of 30.8% in 2017, ADR has dipped slightly, by 1.1%, in the first five months of 2018 to $120, according to STR. In local currency, ADR posted a 14.8% increase in 2017 and a 2.8% decrease from January to May of this year to 6,888 rubles ($109.69).

The picture for revenue per available room is very similar.

In terms of constant currency, RevPAR jumped 40.4% in 2017 but increased by only 1.1% in 2018 year-to-date to 4,020.18 rubles ($63.74), while in local currency a 23.3% rise in 2017 was followed with a dip of 0.5% in 2018 to 3,639 rubles ($57.93).

That middling performance derives from the growing price sensitivity of Russian tourists, Smirnova said.

“Despite the general upwards trend, some hotels were forced to reduce ADR and have not even seen a rise in occupancy as the result,” Smirnova said.

“The beach cluster performed rather well in early 2018, managing to improve occupancy, although price sensitivity persists. So, in the first quarter hotels could not significantly raise prices but secured growth in occupancy. To some extent (results) have contributed to by the International Economy Forum held in Sochi in February,” Smirnova said.

Smirnova said mountain-cluster properties also saw occupancy growth coupled with weaker pricing power, but that region was able to capture stronger RevPAR growth.

“The growth in occupancy was stimulated by the price reduction, but the growth in RevPAR was much stronger, with an average increase of 24% (year over year). This was associated with a low base effect in the mountain cluster compared to the beach cluster, as it took more time to the mountain cluster to adapt to the market,” Smirnova added.

Rising competition
More price sensitivity might derive from the Russian government’s plans to introduce, immediately after the FIFA World Cup 2018 ends on 15 July, resort fees in Krasnodar Krai, the area that contains Sochi.

That likelihood has led some commentators to state tourists might prefer vacationing in Crimea, where ADR is between 30 to 40% lower.

Vadim Volchenko, Crimea’s tourism minister, estimates that in 2018 the region will draw approximately 6 million tourists, compared with 5.4 million in 2017.

The new Crimean Bridge will contribute, Volchenko said.

Currently, there are 409 hotels in Crimea estimated Volchenko’s ministry, which added it believed 2018’s average occupancy would be 52% and its summer occupancy would be above 70%.

In the first month of the bridge’s opening, more than 500,000 tourists visited the peninsula, Volchenko said, a flow that would increase when an adjacent rail component of the bridge opens, due in 2019.

Smirnova said that while the Crimean Bridge has already adversely affected Sochi’s economy segment, more than it has other segments, the infrastructure in Crimea is still behind that of Sochi, which has moderated the competition from it.

“At the moment, Turkey is still much stronger competitor for Sochi,” Smirnova said.

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