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The future seems brighter

By Inese Timuka . 14.05.2010

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The hotel market in Latvia has been growing steadily, in terms of both demand and supply, since the country entered the European Union in 2004.

The exception was from the end of 2008 to the end of 2009, when demand fell along with the global economic downturn. Yet the increasing supply of hotel rooms hasn’t stopped – a trend that is continuing in 2010.

The crisis of the last two years negatively affected absolutely all sectors of the Latvian economy, from medicine to financial services to manufacturing to tourism. Hotels have suffered more than most.
Latvia's accession to the EU undoubtedly stimulated the tourism industry. The number of tourists visiting Latvia rose dramatically from 2004 to 2005 by 24 percent. In 2006, a boost of 32 percent year-on-year revealed what seemed to be strong sustainable interest in the country, with the historic towns of Riga, Sigulda, Ventspils and Cesis serving as attractions and the resort of Jurmala traditionally drawing large summertime crowds from east as well as west.
At the beginning of 2007, it seemed that hoteliers were poised for yet another successful year, when the fast-changing economic reality dampened the spirits of Latvian businessmen.
Now, polls show that Europeans are starting to travel again, but their trips are typically are less expensive, shorter or limited to their home countries.
Another hit to the hotel industry came suddenly, when VAT for hotel services was increased from 5 to 21 percent in 2009 and Latvia had the second-highest VAT rate for the hotel sector in Europe, behind Denmark, giving a big shock to hoteliers.
However, more than a year has passed and lawmakers in recession-afflicted Latvia have now halved value-added tax for hotels in a move the government has said will boost tourism and jobs.
The hospitality industry in Europe, and particularly in Latvia, has been significantly impacted by the global economic crisis and lack of capital.
"Presently, the hotel market in Riga is not in good shape at all. I consider Riga still to be a soft market, as it used to be six or seven years ago," opined Bernard Loew, general manager of one of the best-known properties in Riga, the Grand Palace Hotel.
Loew is looking at the new season with partite feelings: “This year will not be better than the last in terms of occupancy, average room rates, etc. It will take time to reach the levels we had two or three years ago and some more time to surpass these levels.”

Is price the key? 

While the big hotel chains are benefiting from brand recognition, which brings in the customers, especially business travelers, regardless of the economic situation, the lesser known brands are forced to be creative and innovate in order to survive.
The owners of the smaller businesses are faced with a tough choice: creative ideas require extensive investments, but spending money in these uncertain times seems very risky for enterprises.
So creativity in Riga more often than not comes to a simple solution – to simply offer a lower room rate, perhaps even lower than the actual cost. But not every hotel is participating in this price race.
"We have created our own unique offers, with our hotel interior, setting and the level of service,” Iveta Sprudza, general manager of the upmarket Hotel Bergs, said. “I think we have created our own special image in this seven-year period.”
She agrees that price is an important factor, but appropriate service and good products have their own price.
“If we cross the border and lower the price we risk losing the quality and service levels.”
We were told that the Hotel Bergs is comparing its price not to local competitors but to hotels of the same quality and level all around the world.
However, we were interested in what their response was to the radically increased VAT rate in 2009.
“We separated stays in the hotel from breakfast, so now breakfast is not included in the room rate. At the beginning some of our loyal customers and others couldn't understand why we did it, but looking back we can see the decision was right,” Sprudza said.
One of the longstanding favorite hotels in the coastal resort of Jurmala, the Baltic Beach Hotel & SPA, took a similar position. Director Stella Idelsone denied that she thought it necessary to reduce prices.
“I believe it is wrong to participate in a race to lower the price of the room. Each service has its own price level, so we should stick to it. If we reduce prices too much, we won't be able to increase them after the economy is back on track.”
She said that last winter they tried to lower the price out of curiosity, as an experiment, but it didn’t prove useful.
“We saw that it was possible to sell a room for 65 euros and it was also possible to sell it for 85 euros. For the guests, a low price is not that important. More important is what they will get for this value of money,” she said.
“When VAT was enlarged the tourist flows didn't fall, because all bookings and agreements with travel companies were done prior to that, so all the losses we covered from our side. None of our service rates went up.”
Both Bergs and the Baltic Beach Hotel commented that in their business the short Latvian season does not playing much of a role. Those who are willing to have spa holidays are not unduly concerned whether it is summer or autumn outside.
“For our product, we haven't had serious seasonality problems,” Sprudza explained. “Yes it is true that in the summer period we have more solo travelers, but the numbers of our target audience – business travelers – are more-or-less the same all year around.”
Asked about her thoughts for the new season, she said: “It’s hard to predict right now, but we have made several changes in our work. For instance, we have become more loyal to our customers. And we have revised our pricing policy, for example we changed it to a daily rate system where prices change according to the dates, occupancy and events in the city. Bergs has also implemented package offers, so our customers pay a bit higher price but in return they get a good set of services.”

Good tax news

Thankfully, VAT on hotel services are now back down to 10 percent, a government decision effective from May 1.
“The reduced VAT gives an opportunity for development,” Idelsone said. “It allows us to improve the quality of the service and implement new services in our offers for clients, and that will attract more clients to Latvia and to Jurmala.”
She believes that attracting tourists to Jurmala is the most pressing problem. As soon as the tourists are there they can be pampered from A to Z.
“We know how to treat them at the highest level. We have all the resources necessary to serve them at the highest level. Due to the economic conditions and VAT changes we couldn't invest money into development. For two years we have had a project to build a new luxury wing with apartments and a hundred more rooms plus new conference facilities, but we were forced to put these plans on stand-by.” She now believes that the project will start soon.
The general manager of the Grand Palace Hotel said that it was necessary to look on the recent change together with other indicators. “The VAT reduction will help some companies reduce their losses. Some companies might reach break-even point at best, and it will help local employment again. But it will take much more to be competitive in the international market. How easy it is to reach the destination, how stable and safe the market is, which service levels can one expect – these are the questions a traveler usually has and I believe there is still a lot of work to be done.”

An Estonian player

Even though the economy is still sluggish and the tourist flows have stagnated, at least for now, newcomers are still arriving in the Latvian hotel market. But all of the experts we spoke to said that they have positive feelings towards new competitors.
“I hope the changes we are seeing in the market are leading to good results,” Idelsone said. “Right now strong players are entering the Riga hotel scene, for example the Tallink Riga Hotel. I think this is the most serious opening in Riga in 2010.”
In the middle of April, shortly before its grand opening, we visited the Tallink Riga Hotel to interview Hannes Tall, its general manager. He has been working for Tallink, an Estonian shipping giant, for 12 years and entered the hotel segment from Day 1 when Tallink unveiled its first hotel in Tallinn in 2004.
“Tallink itself operates four hotels in Tallinn. The fifth will be the one in Riga, which will be the first outside Estonia,” he said, adding that this hotel differs from the others as it is the newest built property.
Asked who the main target audience is for the new hotel, he replied – the passengers of Tallink’s ships sailing across the Baltic Sea. “We will not specialize, however. We are ready to take people from everywhere. Families, business travelers and tourists. As you can see, it is a very beautiful hotel.”
Tall was positive that this is a good time to open a new hotel in Riga.
“At the beginning, we met a lot of skepticism – why open a hotel at such a difficult time? But now we see good things happen – the VAT level has been lowered, plus we are opening on time.”
Asked how he feels about the stiff competition in Riga and who the main competitors are, Tall said that it was difficult to name just a few.
“Mainly we are competing with everyone. The Tallink hotel offers a complex – we are competing with rooms, with restaurants, with our conference facilities. I can’t give you the names because it is with everyone. We are new in this market and I think everyone feels that we are competitors to them.”

Epilogue 

So it seems that the most difficult period is already behind us and the future is brighter, as the streets of Riga are filling up with people talking foreign languages more and more with every day. The difficult economic environment has forced hotel managers to adapt a proactive, hands-on approach to finances, and nowadays the age-old adage that a penny saved is a penny earned rings especially true, and maybe the lesson in survival they learned this winter will bring new results in the future.




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