Courtesy of Hyatt

Hyatt International's Gebhard Rainer, who oversees the hotel brand's development in Russia.

Multinational hotel chains are planting their brands throughout Russia, and Hyatt is no exception. Gebhard Rainer, managing director for Hyatt International, leads its operations in Europe, Africa and the Middle East. Part of that swath is Russia, which he knows well enough that he can discuss Moscow's Ring Roads and southern Russia's trade. REQ's Rachel Nielsen asked him what Hyatt is doing in Vladivostok, St. Petersburg, Moscow and other significant markets.

REQ spoke with you last December, in fact the same night that Russia was announced as the host of the 2018 World Cup. Has the awarding of the 2018 World Cup affected your approach or your thinking on developing the Hyatt brand in Russia?

Gebhard Rainer: From a strategic point of view, it has not affected us, because it's a one-off event. But it has changed the landscape in terms of the opportunities available, because it is a major event and a big event for Russia. Obviously, there is development activity, and more opportunities in the short-term are being offered now.

But for us, from a brand perspective and a strategy perspective, it has not changed our approach to Russia. We are still the same in terms of our commitment to develop in Russia. We really take a long-term view. We want to make sure we spread our brands, with the right mix and the right distribution over the years, in the right locations.

You said there will be some opportunities that come out of the World Cup. What will those be for Hyatt?

GR: The opportunities will be in the cities where the games — and the quarterfinals and semifinals — are going to be played, because those are the cities where additional accommodation is going to be needed. We're assessing those cities, and not just from this one-off event potential, because if you would judge a city by a major event such as the World Cup, you could always put one of your top brands there. For the period of the event, you would be guaranteed to be full [occupancy] and make enough money or have enough customers. But you have to have a longer view. We're assessing the cities by their capability to benefit from the event afterward, economically.

Let me ask you about the Sochi Olympic Games. I know you have a hotel that is in the works in Rostov-on-Don. Can you tell me about that project?

GR: This project actually is an interesting one. This is sort of an example of our long-term view on the potential opportunities in Russia. If you look at Rostov-on-Don at the moment from an economic perspective, it's not the most exciting area, but it is very exciting if you take a long-term view of the Rostov-on-Don region. It is a southern regional capital that has, from a trading perspective, a large importance. It will have growing importance in the south of Russia, from a trading perspective, and therefore economically it has long-term potential.

It's going to be a [Hyatt] Regency, a very efficient, five-star business hotel. It will have all of the appropriate facilities to cater to the local, regional and international business travelers, as well as the small component of leisure traveler that's going to happen.

What's the planned opening date at this time?

GR: The planned opening date at this point in time would be at the end of 2013, beginning of 2014. We're actually in the process of designing this [date].

That brings me to another area, ownership versus management versus franchising. With the Rostov hotel, you will be managing but not actually owning the property?

GR: That is correct. We are predominantly a management company, that's what our core business is. When you look at our portfolio outside of North America, the owned properties are very few. Out of the 500 to 600 outside of North America, we only own seven. The rest is all management, with the exception of a couple that are franchises.

Franchising is an interesting model, and for us, it's a model that has a lot of scope and opportunity, specifically now that we have the brands Hyatt Place and Hyatt House, which are select-service brands in the four-star market. Those brands lend themselves very well to franchising.

You have a hotel that will be part of the Dynamo stadium complex in northern Moscow.

GR: Well, it's still in negotiations. We have signed preliminary agreements but we haven't signed the final agreements for it yet. I can't really talk about it, it's not for public consumption.

I want to ask because, on June 23, there was an agreement that was signed between Dynamo ownership and VTB Bank. [It was reported by RBK in June.]

GR: That is correct, because the project is financed by VTB, and it's not just the hotel. It's actually a large development that includes rehabilitation and a complete rebuild of the stadium itself; it includes large apartment complexes and leisure complexes. So it's a very, very large project, out of which one component is the hotel, which will very likely be a Hyatt hotel. It will be a five-star hotel.

Also in Moscow, you have a second hotel in the Moskva-City development. I want to ask if there's any news or any developments on that.

GR: In the Federation Tower? That project is not moving forward at the moment. It was because of the difficulties the whole project is in, in terms of its financing, with [Russian developer] Mirax going through a lot of financial difficulties. We have actually terminated the agreements there. We have a first option, a first call on any hotel that might be developed in the towers, but for the time being, that's not the plan, there's not much happening there.

Because that project isn't going forward, are you looking at other sites in Moscow?

GR: Yes, we're looking at various sites in Moscow. Moscow is one of the largest metropolises in Europe and it's still growing very much, so there is a lot of potential. We're looking at various areas in Moscow and the surroundings of Moscow to deploy different brands.

Given the way the hotel market tends to develop, is it logical to see the development of the top tier of the market — five-star and four-star — at first and then the development of three-star hotels?

GR: The biggest opportunity — the biggest demand — going forward is going to be in the three- to four-star area, because that's the level of hotel that currently is lacking in its distribution. But when you look at the size of a city like Moscow, even in the five-star luxury segment, there are still opportunities there, because the city does not have enough hotels.

If you compare Moscow with cities such as New York or Los Angeles or Tokyo or Shanghai, then Moscow is very far away from saturation in the hotel market, even in the five-star category. Moscow, like many metropolises in the world, is developing toward having not just one city center, but multiple city centers.

Do you say that because of the announcement about the government offices moving outside the city center?

GR: That is just a confirmation of what we think is happening. The reasons for that [trend] are more along the lines of the logistical challenges of mega metropolises. When you have a city like Moscow, there is very little [that can be done] to ease traffic congestion into the city. These cities have old infrastructures, they have old core structures, and you cannot rebuild the city.

Therefore, the growth opportunities are outward, toward the suburbs. The government moving out just proves that theory. It makes absolute sense for the government to establish its own area that is more suitable and more efficient for them.

That automatically develops into another center because anybody who has anything to do with the government has to be close to the government to deal with them.

The government has set a timeline for that expansion — they think this process will happen over the next 15, 20 years. What's your timeline as a hotel developer?

GR: That's really for the government to answer. If they say 15, 20 years, that's what the timeframe is. For us as a hotel company, it's not just a focus on one decision of the government. For us, it's watching the city's expanse grow and watching the dynamics of the city and using opportunities that come along.

The gradation of different areas in this city is changing as well. If you look at some of the suburbs today, over the last five or 10 years, there is a fairly sizable and now very important local leisure market that has developed in the outskirts of Moscow.

Are you still expecting to open two new hotels in Vladivostok before the APEC summit?

GR: Yes, we're more or less on track to open them before the APEC conference next year in September.

Vladivostok is one of those examples where, from a long-term strategy, and you have to have a long-term view on Vladivostok.

We believe that Vladivostok is going to become a hugely important eastern port city for Russia. It's a major, major hub for getting resources out of Siberia and northern Siberia into a location from where you can actually transport raw materials, and it's a city that has huge potential for developing an eastern trading zone that competes and potentially has advantages over places such as South Korea, which has become a lot more expensive. It certainly competes and has a large part of the car manufacturing industry out of Korea and Japan, so it's a very interesting port city.

Once the APEC summit is over, how fast are you going to see other business travelers coming into the city and using your hotel?

GR: The government has the right approach and has some good plans for making sure the city has the impetus to develop after the APEC conference. It's not a short-term fix, but it's a medium-term to long-term [fix] that people have to take on Vladivostok, and that's the view we're taking as well. I'm not expecting Vladivostok to take off within six months after the APEC conference, and it's a gold-rush feel and everybody rushes into Vladivostok. It's going to be a controlled development.

Are there any special considerations that you have to make when you build a property, especially a five-star property, in a city that's still developing? In Vladivostok, you will have two five-star hotels. How do you manage the property in that interim period?

GR: It's a risk assessment, as well. It's not going to be a huge rush on Vladivostok after the conference, but the other side of the coin is the fact that there are [few] international hotels there.

For the time being, the market is going to be limited, the supply is also very limited. It's going to take a while before the other hotel companies are going to move in and develop hotels and have them ready for operation. It's a more or less simultaneous development that's hopefully going to happen — where the economy and business are going to develop and unfold, and with that, additional supply is going to develop and come in, and other companies will open hotels. It's a careful balance that's got to be monitored.

With these two hotels, we have to make sure that we get through that period of limited demand, from a business point of view, and keep on being successful.

Are there any developments in St. Petersburg in terms of scoping out locations or signing deals?

GR: We are seriously looking at St. Petersburg. We are in talks with somebody in St. Petersburg at the moment. We haven't signed any agreements, so I can't give you any specifics on this, but we will be in St. Petersburg within the next two to three years, which in the life of a hotel is very soon. It would be a five-star property, a full-service hotel.

Is there a lack of high-end properties in St. Petersburg? What can you say about the market there?

GR: There are a lot of plans for a lot of hotels. I don't think everything will materialize. When you look at it from an international standards perspective, there are not enough truly five-star hotels in St. Petersburg. There are very good hotels in St. Petersburg that would need additional investment to upgrade. There are now international brands going into the city, with the W that just opened, with the Four Seasons that will be opening, so it is slowly developing toward international standards. You have other hotels that are managed by international companies, but have retained their local names, such as the Astoria. Those are hotels that have a lot of history, old buildings, beautiful locations, but need money in order to upgrade.

We heard at the GRI hotel conference this fall that the mid-market hotel segment is the most promising in Russia. What do you think of that assessment?

GR: That's what everybody is now starting to focus on, because that's where the biggest amount is. When you think about mid-market segment, it's a logical conclusion, because the traveling middle-class, both from a business and a leisure point of view in Russia is developing and has developed over the years, and there is a demand there.