The market closes in on room for expansion
Back in the mid-1990s you needed to book ahead to secure of a hotel room. It was next to impossible to decide a few days in advance and guarantee a good hotel in Warsaw or Wrocław. These were wonderful years for the few hotels that mattered. But the glitz has vanished.
With the opening of the Hyatt Regency Warsaw and Radisson SAS Centrum Hotel this year, Warsaw's market grew by 560 rooms in the four- and five-star categories. The total number of rooms in the first category reached 2,860. Wrocław saw the opening of a Radisson SAS, which topped the prime category accommodation up 1,160 rooms.
But this is just the beginning of the wave of new hotels. There are three more top quality hotels already under construction in Warsaw: the Westin, an InterContinental and the Port Hotel, offering between them 920 rooms. In addition, construction of a 360-room Hilton will commence in 2003. In Kraków, expected openings under the Radisson SAS and Sheraton brands will provide 438 additional rooms.
All this is happening against a recession in bookings. The annual occupancy rate in all hotel categories fell by 7% in 2001, compared to 2000, according to a Knight Frank report. In 2001, four- and five-star hotels still enjoyed the highest occupancy rates: 56.5% in Warsaw and 52.9% in Kraków. The year 2002 is said to be worse, and the projection is that the occupancy rate in Warsaw dropped by 10%, while Kraków lost about 25% of all its revenues from tourism.
Lidia Wiszniewska, the Radisson's regional director of sales and marketing, is relatively pleased with the company's new hotel in Warsaw.
"We had guests already on the first day, and the initial occupancy rate was 30%, but we will reach 40%," she said.
"It is normal that a new hotel takes away a group of customers from the existing ones," said Krzysztof Łopociński, director of the Institute of Tourism. "And there is always a group of people who stay only at the best hotel in town."
Demand has dropped in 2001 and is still going down. In the first eight months of the year, 22.8% fewer visitors arrived in Poland compared with the same period in 2001. And that was on top of a 27.3% drop in 2001. However, according to Łopociński, the number of foreigners staying here, mainly in premier accommodations, is not falling, but stable.
According to the Institute of Tourism, the number of German tourists, who used to be the largest group of visitors, more than halved in 2001 and will stay at this lower level for the next three years. No revival likely before 2006 is the pessimistic forecast. The major factors are the global recession, which Poland caught up with this year, and the virtual halt of privatisation by Treasury Minister Wiesław Kaczmarek, which prompted a fall in foreign direct investment of about 12%. Business travel expenses are those which are easiest to cut, so out they went. And the September 11 dampener on tourism continues as well.
The prognosis is gloomy, whichever way you look at the forecasts. In the years 2003-2007, the number of tourists will oscillate between 13.4 million - 15.8 million a year, according to the Institute of Tourism. The country's EU accession will decrease the number of visitors from the "further east" since Poland's eastern border will be sealed with new controls as a frontier of the EU. The slow growth in western European travellers to Poland will not compensate for the fall in Russian, Ukrainian and Belarussian visitors.
So why does the hotel construction boom continue apace, in spite of these depressing predictions?
One factor is the lengthy building time for large new hotels, from the original planning process to completion. And the preliminary phase, before the construction starts, is the longest. Since it involves authorities and bureaucracy, it is protracted far longer than necessary by excessive officialdom. Then there are inbuilt faults in analytical data. Securing investors is the key to success, and business plans for the hotels coming to market up to 2004 were based on the market research from the boom years. Research failed to spot the take up of new four- and five-star projects on the scale which has now occurred and was also predicated on the years of high FDI levels continuing uninterrupted.
"In 1994-1997, no-one expected that in 2002 we would see a recession and increasing unemployment," Wiszniewska said.
Pablo E. Graf, the Hyatt's general manager, added: "The opening of any hotel from planning to completion is a four- to five-year process. One would rather open to a buoyant market, of course, but we understand our business goes through cycles and you have to take the good times and rough times."
Others echoed their sentiments.
"After September 11, one of the American chains, which was about to finalise a deal in October, delayed the decision," said Dorota Latkowska of Knight Frank Nieruchomoci. "Only now, after a year, the project is going ahead again. There are other examples of investors trying to cut the losses on existing hotels rather than constructing new ones. Crown Plaza is an example of a project which requires restructuring because the operator is secured, but the investor is not. In some cases, it is the other way around - investors are seeking an operator."
To position their products on the market, hotels are entering the period of price wars, according to Latkowska. Even looking at the prices for individual guests, which are always higher than for corporate clients, the tendency is noticeable. A few years ago one had to pay €220-€240 for a room in the Marriott and Sheraton. Currently, Hyatt offers a room for €145 during the week and €95 on weekends. The Marriott is fighting back by charging only €89 Friday to Sunday but maintaining higher price of €175 on weekdays. The Sheraton's prices are still the highest of the three. The hotel has introduced a system of flexible pricing during the week, depending on occupancy. Last Thursday, for example, it was €200. The Sheraton's weekend rate is fixed at €110.
Gerd Bauer, Sheraton's area manager for Poland and Croatia said: "I am aware that some hotels have started to reduce their pricing structure significantly. Those hotels which undercut their regular price structure will not be able to deliver quality for money any longer. Quality in hospitality costs money, and quality is what our international clientele expects from us. The hotels under my management will continue to offer quality, and we will ask for the relevant prices accordingly."
The other option is to lower standards.
"Accor decided that some of its hotels must change their category to compete on the market," Łopociński said. "That is why Forum is now a three-star hotel and Sofitel Victoria has started to cut some of its costs, like the swimming pool."
Magdalena Turalska, the marketing director of the Sofitel Victoria Warsaw, which switched its strategic partner from InterContinental to Accor in April 2001, would not confirm that the hotel would downgrade from five stars to four. Nor did she confirm aggressive pricing policies.
"We rather try to interest the guests with our offers," she said. "Definitely, we do not attempt to steal corporate customers from other hotels."
The Hyatt is fighting for corporate customers by undercutting the prices of the Sheraton and Marriott, and rumours abound that it has managed to take away some corporate clients from the Marriott. Graf responded diplomatically: "The local and international economies did not contribute to making the pie in Warsaw any bigger than before we came into the market; on the contrary. New properties will always create a shift in customers within the same category hotels." The Marriott offered no response.
This year, Warsaw's hotels already reduced their prices by 10-20% on average, compared to 2001, according to the Knight Frank report. Internet reservations are increasing. Collecting points for frequent stays and co-operating with airlines and car rental networks are popular marketing tools that the hotels employ to maintain their customers' loyalty.
What is the effect of all this on hotel finances? Wiszniewska of the Radisson SAS said: "Our first year was relatively good, and we did not have losses like some other hotels. But 2003 will be a decisive year for all of us in the hotel business. We all fight for a piece of the same cake."
She sees the opening of Westin immediately opposite the Radisson as a critical point. "Despite being in a different category, we will share a certain pool of guests with the Westin, which I am sure will be a very good hotel," she said. The Marriott, Sheraton and Hyatt hotels declined to provide detailed comments about their current and future prospects.
"The tendency is that with each year our financial results are worsening," said Marcin Siwonia, the Marriott's head of public relations. "This is all I am prepared to say."
Graf added: "We feel our product is excellent and right for the type of business hotel we are. Success for large investments like hotels is not measured in one year, let alone a small fraction of it. I share our investor's optimistic mid- to long-term outlook for Warsaw and Poland. Despite all the talk about the market being oversupplied, which is correct for the next couple of years, an investor's horizon as well as the one of supporting financial institutions show a much more optimistic outlook."
The market is full of advice that chains which are present already should benefit from their knowledge of the local market when making decisions about the development of additional four- and five-star hotels.
"When one relies on market research a few years old, it is different than having a footing in the country," Wiszniewska said. However, when asked whether Radisson's decision to enter Poland en masse, with three existing hotels (in Szczecin, Wrocław and Warsaw), one in Kraków almost completed and four more in the planning, was a mistake, she did not provide a direct answer. "We have an opportunity to become the preferred chain of hotels in Poland and benefit from a good co-operation within the group," she said.
What would help all the hotels and everybody who benefits from tourism, is promotion. The country is underpromoted. If France, the most popular tourist destination in Europe, invests money in advertising, why not Poland, which is still relatively unknown? Egypt, Cyprus and Turkey are well known, and still they advertise.
"Why don't we take an example from those who do it better?" Wiszniewska said. "Learn from those who are better then us?"
"Businessmen notice Poland as a relatively attractive market," Turalska said. "Tourists are not aware of any of Poland's attractions, and Warsaw is not promoted either."
Many said that the local authorities are either disinterested in promoting Warsaw or not able to do it properly.
"To promote itself, Warsaw needs to organise something to attract tourists," Łopociński said. "It is not the case yet."
An additional problem is the lack of long-term planning. Selling the hotels to tour operators requires knowledge of events at the opera house, museums and other venues, up to as two years in advance.
"This information is not available because they do not plan that far ahead," Wiszniewska said. "One positive exception is the Wrocław opera, which has a good programme for 2003 and which sold the Radisson very well, especially to German visitors."
With a lost chance to organise the World Expo in 2010, Wrocław authorities will have to rethink their strategy for the city. Kraków is in a better position because like Prague and Budapest it is included in the tours of eastern Europe. The Radisson hotels in Wrocław and Szczecin attract visitors through a joint-programme called "Along the Odra River," although this was the hotels' own initiative.
"2003 will be the last year to enter the market," Wiszniewska said. "Those coming later than us will be in a very difficult market, with many good established brands."
According to Latkowska, the message for investors is clear: no more luxury hotels for the time being. The future lies with three-star hotels.
"With EU enlargement, we expect more visitors, but their spending power will be between €80 and €100 per night," Wiszniewska said. "If I had a three-star hotel in Warsaw, I would be very glad."
Łopociński disagrees: "There is no demand for three-star hotels. For conference organisers, it is better to rent a four-star hotel with all the facilities and negotiate the prices down, so they are comparable to a three-star hotel. For an individual traveller or an ordinary employee, two-star hotels are required, providing basic, cheap and comfortable accommodation."
There are 1,900 rooms in 10 hotels in the three-star category with almost 1,200 further under construction in Warsaw. All projects will be managed by foreign and Polish chains. Kraków offers 2,077 rooms in the three-star category and Wrocław 1,660 with 35 under construction.
With the opening of the Hyatt Regency Warsaw and Radisson SAS Centrum Hotel this year, Warsaw's market grew by 560 rooms in the four- and five-star categories. The total number of rooms in the first category reached 2,860. Wrocław saw the opening of a Radisson SAS, which topped the prime category accommodation up 1,160 rooms.
But this is just the beginning of the wave of new hotels. There are three more top quality hotels already under construction in Warsaw: the Westin, an InterContinental and the Port Hotel, offering between them 920 rooms. In addition, construction of a 360-room Hilton will commence in 2003. In Kraków, expected openings under the Radisson SAS and Sheraton brands will provide 438 additional rooms.
All this is happening against a recession in bookings. The annual occupancy rate in all hotel categories fell by 7% in 2001, compared to 2000, according to a Knight Frank report. In 2001, four- and five-star hotels still enjoyed the highest occupancy rates: 56.5% in Warsaw and 52.9% in Kraków. The year 2002 is said to be worse, and the projection is that the occupancy rate in Warsaw dropped by 10%, while Kraków lost about 25% of all its revenues from tourism.
Lidia Wiszniewska, the Radisson's regional director of sales and marketing, is relatively pleased with the company's new hotel in Warsaw.
"We had guests already on the first day, and the initial occupancy rate was 30%, but we will reach 40%," she said.
"It is normal that a new hotel takes away a group of customers from the existing ones," said Krzysztof Łopociński, director of the Institute of Tourism. "And there is always a group of people who stay only at the best hotel in town."
Demand has dropped in 2001 and is still going down. In the first eight months of the year, 22.8% fewer visitors arrived in Poland compared with the same period in 2001. And that was on top of a 27.3% drop in 2001. However, according to Łopociński, the number of foreigners staying here, mainly in premier accommodations, is not falling, but stable.
According to the Institute of Tourism, the number of German tourists, who used to be the largest group of visitors, more than halved in 2001 and will stay at this lower level for the next three years. No revival likely before 2006 is the pessimistic forecast. The major factors are the global recession, which Poland caught up with this year, and the virtual halt of privatisation by Treasury Minister Wiesław Kaczmarek, which prompted a fall in foreign direct investment of about 12%. Business travel expenses are those which are easiest to cut, so out they went. And the September 11 dampener on tourism continues as well.
The prognosis is gloomy, whichever way you look at the forecasts. In the years 2003-2007, the number of tourists will oscillate between 13.4 million - 15.8 million a year, according to the Institute of Tourism. The country's EU accession will decrease the number of visitors from the "further east" since Poland's eastern border will be sealed with new controls as a frontier of the EU. The slow growth in western European travellers to Poland will not compensate for the fall in Russian, Ukrainian and Belarussian visitors.
So why does the hotel construction boom continue apace, in spite of these depressing predictions?
One factor is the lengthy building time for large new hotels, from the original planning process to completion. And the preliminary phase, before the construction starts, is the longest. Since it involves authorities and bureaucracy, it is protracted far longer than necessary by excessive officialdom. Then there are inbuilt faults in analytical data. Securing investors is the key to success, and business plans for the hotels coming to market up to 2004 were based on the market research from the boom years. Research failed to spot the take up of new four- and five-star projects on the scale which has now occurred and was also predicated on the years of high FDI levels continuing uninterrupted.
"In 1994-1997, no-one expected that in 2002 we would see a recession and increasing unemployment," Wiszniewska said.
Pablo E. Graf, the Hyatt's general manager, added: "The opening of any hotel from planning to completion is a four- to five-year process. One would rather open to a buoyant market, of course, but we understand our business goes through cycles and you have to take the good times and rough times."
Others echoed their sentiments.
"After September 11, one of the American chains, which was about to finalise a deal in October, delayed the decision," said Dorota Latkowska of Knight Frank Nieruchomoci. "Only now, after a year, the project is going ahead again. There are other examples of investors trying to cut the losses on existing hotels rather than constructing new ones. Crown Plaza is an example of a project which requires restructuring because the operator is secured, but the investor is not. In some cases, it is the other way around - investors are seeking an operator."
To position their products on the market, hotels are entering the period of price wars, according to Latkowska. Even looking at the prices for individual guests, which are always higher than for corporate clients, the tendency is noticeable. A few years ago one had to pay €220-€240 for a room in the Marriott and Sheraton. Currently, Hyatt offers a room for €145 during the week and €95 on weekends. The Marriott is fighting back by charging only €89 Friday to Sunday but maintaining higher price of €175 on weekdays. The Sheraton's prices are still the highest of the three. The hotel has introduced a system of flexible pricing during the week, depending on occupancy. Last Thursday, for example, it was €200. The Sheraton's weekend rate is fixed at €110.
Gerd Bauer, Sheraton's area manager for Poland and Croatia said: "I am aware that some hotels have started to reduce their pricing structure significantly. Those hotels which undercut their regular price structure will not be able to deliver quality for money any longer. Quality in hospitality costs money, and quality is what our international clientele expects from us. The hotels under my management will continue to offer quality, and we will ask for the relevant prices accordingly."
The other option is to lower standards.
"Accor decided that some of its hotels must change their category to compete on the market," Łopociński said. "That is why Forum is now a three-star hotel and Sofitel Victoria has started to cut some of its costs, like the swimming pool."
Magdalena Turalska, the marketing director of the Sofitel Victoria Warsaw, which switched its strategic partner from InterContinental to Accor in April 2001, would not confirm that the hotel would downgrade from five stars to four. Nor did she confirm aggressive pricing policies.
"We rather try to interest the guests with our offers," she said. "Definitely, we do not attempt to steal corporate customers from other hotels."
The Hyatt is fighting for corporate customers by undercutting the prices of the Sheraton and Marriott, and rumours abound that it has managed to take away some corporate clients from the Marriott. Graf responded diplomatically: "The local and international economies did not contribute to making the pie in Warsaw any bigger than before we came into the market; on the contrary. New properties will always create a shift in customers within the same category hotels." The Marriott offered no response.
This year, Warsaw's hotels already reduced their prices by 10-20% on average, compared to 2001, according to the Knight Frank report. Internet reservations are increasing. Collecting points for frequent stays and co-operating with airlines and car rental networks are popular marketing tools that the hotels employ to maintain their customers' loyalty.
What is the effect of all this on hotel finances? Wiszniewska of the Radisson SAS said: "Our first year was relatively good, and we did not have losses like some other hotels. But 2003 will be a decisive year for all of us in the hotel business. We all fight for a piece of the same cake."
She sees the opening of Westin immediately opposite the Radisson as a critical point. "Despite being in a different category, we will share a certain pool of guests with the Westin, which I am sure will be a very good hotel," she said. The Marriott, Sheraton and Hyatt hotels declined to provide detailed comments about their current and future prospects.
"The tendency is that with each year our financial results are worsening," said Marcin Siwonia, the Marriott's head of public relations. "This is all I am prepared to say."
Graf added: "We feel our product is excellent and right for the type of business hotel we are. Success for large investments like hotels is not measured in one year, let alone a small fraction of it. I share our investor's optimistic mid- to long-term outlook for Warsaw and Poland. Despite all the talk about the market being oversupplied, which is correct for the next couple of years, an investor's horizon as well as the one of supporting financial institutions show a much more optimistic outlook."
The market is full of advice that chains which are present already should benefit from their knowledge of the local market when making decisions about the development of additional four- and five-star hotels.
"When one relies on market research a few years old, it is different than having a footing in the country," Wiszniewska said. However, when asked whether Radisson's decision to enter Poland en masse, with three existing hotels (in Szczecin, Wrocław and Warsaw), one in Kraków almost completed and four more in the planning, was a mistake, she did not provide a direct answer. "We have an opportunity to become the preferred chain of hotels in Poland and benefit from a good co-operation within the group," she said.
What would help all the hotels and everybody who benefits from tourism, is promotion. The country is underpromoted. If France, the most popular tourist destination in Europe, invests money in advertising, why not Poland, which is still relatively unknown? Egypt, Cyprus and Turkey are well known, and still they advertise.
"Why don't we take an example from those who do it better?" Wiszniewska said. "Learn from those who are better then us?"
"Businessmen notice Poland as a relatively attractive market," Turalska said. "Tourists are not aware of any of Poland's attractions, and Warsaw is not promoted either."
Many said that the local authorities are either disinterested in promoting Warsaw or not able to do it properly.
"To promote itself, Warsaw needs to organise something to attract tourists," Łopociński said. "It is not the case yet."
An additional problem is the lack of long-term planning. Selling the hotels to tour operators requires knowledge of events at the opera house, museums and other venues, up to as two years in advance.
"This information is not available because they do not plan that far ahead," Wiszniewska said. "One positive exception is the Wrocław opera, which has a good programme for 2003 and which sold the Radisson very well, especially to German visitors."
With a lost chance to organise the World Expo in 2010, Wrocław authorities will have to rethink their strategy for the city. Kraków is in a better position because like Prague and Budapest it is included in the tours of eastern Europe. The Radisson hotels in Wrocław and Szczecin attract visitors through a joint-programme called "Along the Odra River," although this was the hotels' own initiative.
"2003 will be the last year to enter the market," Wiszniewska said. "Those coming later than us will be in a very difficult market, with many good established brands."
According to Latkowska, the message for investors is clear: no more luxury hotels for the time being. The future lies with three-star hotels.
"With EU enlargement, we expect more visitors, but their spending power will be between €80 and €100 per night," Wiszniewska said. "If I had a three-star hotel in Warsaw, I would be very glad."
Łopociński disagrees: "There is no demand for three-star hotels. For conference organisers, it is better to rent a four-star hotel with all the facilities and negotiate the prices down, so they are comparable to a three-star hotel. For an individual traveller or an ordinary employee, two-star hotels are required, providing basic, cheap and comfortable accommodation."
There are 1,900 rooms in 10 hotels in the three-star category with almost 1,200 further under construction in Warsaw. All projects will be managed by foreign and Polish chains. Kraków offers 2,077 rooms in the three-star category and Wrocław 1,660 with 35 under construction.
