Five-star hotels in Sofia reported a drop of seven per cent in revenue in 2008, blaming the encroaching global financial crisis. It is surprising then that at least four of the world’s top hotel brands are interested in the local market and are now in talks with potential partners.

Their reasoning is that the crisis actually provides them with an opportunity to establish a foothold here, as well as the time needed to build a hotel – by the time it is ready, the economy could already be on the rebound and recovering.

Marriott, Hyatt, Movenpick and Intercontinental are all interested in Bulgaria, with the latter already having signed a preliminary contract for a hotel. Whatever happens in the market from now on, the new players will certainly have an impact on it.

Who is coming?
The first news about a new arrival came from Intercontinental Hotels Group, which inked a preliminary agreement with local firm International Capital Group, owned by the Sigma Capital fund. Sigma Capital has ties to Georgi Velchev, brother of Bulgaria’s former finance minister Milen Velchev.

The hotel is to be built on Tsarigradsko Chaussee, on the location of the former Ropotamo restaurant, an iconic image of communist-era Sofia. The chain has a preliminary agreement with the investor, but a binding contract would be signed only after a construction permit is issued, which is expected to happen later this year, Sigma Capital manager Vesselin Danev said.

Marriott, meanwhile, has been testing the waters for several years. "We are definitely interested in the market here. We cannot disclose any names because of confidentiality issues," Marriott International vice-president for international hotel development, Carlton Ervin, said. The chain was likely to use one of three brands it owns – Marriott Hotels, Renaissance Hotels or Courtyard, Ervin said.

A deal could be signed by the end of this year as "the financial crisis will not deter investors who are planning for the long-term," he said. A possible target for Marriott is the future Millennium hotel, being built by construction firm Nikmi close to the National Palace of Culture (NDK).

"In a short-term or medium-term" is the way Hyatt envisions its entrance on the Bulgarian market. Oliver Berger, Hyatt International vice-president for acquisitions and development, said that the Bulgarian market had an interesting potential for development. The chain will enter only after it has identified a potential project on a key location in the centre of Sofia, sending a fact-finding team to Sofia at the end of 2008.

Switzerland’s Movenpick Hotels and Resorts is looking for opportunities to enter the market. The company is especially interested in central Sofia and areas near the airport, aiming for a hotel with a 200-room capacity with conference halls and restaurants, the chain’s senior vice-president for facility management and development, Philip Mertens, said.

Analysts are split on how to interpret the interest shown by major hotel brands. Some claim that now is the time for an investment because land and buildings can be purchased cheaply, whereas others believe that because of the economic crisis, financial resources are either not there, or the expense will push back and postpone the construction of such hotels by years. "Currently, any investor with cash can buy land cheaply," Hilton Sofia general manager Jacques Brune said.

This is a view shared by Danev: "When a particular project has the support of an international brand, there can also be solid financing behind it."
Holiday Inn’s general manager Ani Petrova is less optimistic. "If it weren’t for the crisis, the market would have been ready for the new hotels in 2010-2011. Now, their arrival will be delayed," she said.

Luxurious competition
Whenever the new chains enter the market, they will irreversibly alter the landscape of the five-star hotel business in the country. The new hotels will increase competition, which means that factors like quality of service, location and overall standards will become even more important than they are now. This without doubt will affect the business of the six five-star hotels in Sofia, of which only Grand Hotel Sofia is not a part of a foreign chain.

According to Bulgarian criteria, there are two more five-star hotels in Sofia – Anel and Arena di Serdika, but, price-wise, Anel is rather a four-star establishment, whereas Arena di Serdica’s marketing labels it a boutique hotel. With eight such luxury hotels, Sofia is lagging far behind Vienna and Prague, for instance, where more than 20 such hotels are competing for the market share.

Before the crisis, Sofia hotels could not complain of lack of business. Reserving a room for a Tuesday or a Wednesday was often impossible, these being the busiest days in the week. Mondays and Thursdays were relatively good for business, but demand would drop sharply on Fridays and weekends.

Sofia is still not a typical European destination for business travel. The prices here are lower than in other capitals, as there are still a lot of improvements to be made at all levels, including the quality of service. Some five-star brands are missing altogether because the market is so small.

As a consequence, prices lag behind other European capitals in all basic criteria, such as the average price for a night or the average revenue from available rooms. Until mid-2008, the average price in Sofia was 109 euro, whereas in Prague and Vienna the price was 160 euro (excluding breakfast and VAT). Even Bucharest is more expensive, with an average price of about 140 euro.

Being a small and underdeveloped market, until recently Sofia was growing constantly. Last year, however, the trend was reversed and a drop in business was registered almost every month, not unlike in the rest of Europe.

During weaker periods, hotels tend to step up their efforts to increase demand. Some reduce prices, others let in large tourist groups. Both measures have their inherent risks: cutting prices is easy, it is raising them that is often rather difficult, while allowing groups of tourists in casual dress can have a negative effect on the image of the hotel.

"World chain hotels have assured business of up to 20 to 30 per cent from centralised reservation systems," according to Zhoulieta Serafimova, deputy chief executive of Grand Hotel Sofia. "Stand-alone hotels have to make up that percentage on their own. We are strong on the local market, working actively with direct contractors and tour operators. Independent hotels tend to optimise their websites to boast their on-line bookings."

Behind the facade
The amount of business that luxury hotels have in Sofia can be measured along several lines. The first and obvious one is the beds rented last year – assuming all 1250 beds in five-star hotels were available year-round and with an average occupancy rate of 57 per cent (according to data from the hotels themselves), this amounts to 260 000 overnight stays, or about 26 million euro.

This accounts for 50-65 per cent of the hotel’s total revenues, but hotels also gain revenue from conference activities and catering, explaining why the Sheraton invested in a new 700-seat conference hall to guarantee further revenue. More revenue comes in from renting out floor space to shops, as the Sheraton and Radisson SAS do.

The financial reports for 2008 will be ready in March, but even judging by the 2007 figures, it is apparent that profits in the sector are marginal or non-existent. Apart from expenses for their traditional activities, most of the five-star hotels (except Grand Hotel Sofia), have accumulated excessive outstanding debts. This explains why in 2008 the owners of both Kempinski and Radisson tried selling the hotels, but with the financial crisis gaining strength, the timing was wrong and no deals were signed.

There is little cause for optimism that 2009 will be any better: as companies cut costs, five-star accomodation is among the first to go. Business in Europe is expected to drop overall by 10 per cent, according to consulting firm Deloitte, which is likely to be mirrored in Bulgaria.

Kapital weekly, issue 03