Tetrareal AD Chairman George Veltchev: Entry of Global Luxury Brands Is Stamp of Approval for Bulgarian Tourism
Interview of Novinite.com (Sofia News Agency) Dr. George Veltchev, Chairman of the Board of Tetrareal AD.
As Novinite.com (Sofia News Agency) has already reported, Tetrareal AD, a company dealing with tourist services, hotel management, and real estate, among others, recently announced that it had signed two franchise agreements with Hilton Worldwide for the opening of two Hilton-branded hotels in the Golden Sands resort – the Doubletree by Hilton Varna, which is in a pre-opening phase, and the Hilton Varna, which is to be opened in 2011.
The two new hotels are Hilton’s first properties in Bulgaria outside of the capital Sofia, and the first properties of a global luxury hotel brand of such scope to enter Bulgaria’s Black Sea coast, which is the country’s major tourism hub.
Why do you think there has been little or no penetration of global hotel brands, such as Hilton, on the Bulgarian Black Sea coast?
Most global hotel brands have been looking for opportunities to enter the Bulgarian Black Sea coast with their brands in one way or another. Of course, it is faster and easier for a hotel owner to bring them to a property under a management agreement; however, franchise opportunities have also been available.
The problem usually lies with the long and detailed research that the global brands have to conduct on the likelihood of achieving a certain average daily rate. The second problem is the seasonal character of the Bulgarian seaside hotels. For example, most top international chains such as Starwood, Hilton, or Marriott, would rarely agree to provide their brand to a seasonal hotel unless it is a world-class resort destination.
Our combination here with the Doubletree by Hilton Varna and the future Hilton Varna is more interesting to them because the new hotel, which will be carrying Hilton’s main brand, will be a year-round hotel, and that is why they probably decided that they can afford to sign up a second brand – Doubletree by Hilton – with another hotel which will not operate throughout the entire year.
The main factor that an international luxury hotel chain uses to decide whether to provide their brand has to do with how much profits they can generate, mostly on the basis of how much revenue per room a property can book.
Why did you choose Hilton as a brand for your hotels?
We have been talking to Hilton for almost 4 years. Why did we choose them? Well, we were in negotiations with both Hilton and Starwood. This might sound incredible – but, at the end of the day, it was the human factor which was decisive.
Starwood had expressed greater interest than Hilton in introducing two of their brands on the Bulgarian Black Sea coast but they constantly changed their respective managers in charge of expansion, so, naturally, much of the momentum of the negotiations was lost, whereas with Hilton, we had good communication at every level, including with the help of our general manager Claudio Sturm, who used to work for Hilton, and who has now managed for three years the group of hotels that we are now re-branding.
Helios Spa & Resort is a five-star hotel in its own right, and you still went for such a large-scale investment in order to re-brand it. What has led you to take this step?
The major factor for this decision was the large number of hotels in the Bulgarian Black Sea resorts, and the inability of a five-star hotel to stand out among others, particularly when it is located in a resort with 83 hotels.
Actually, the main thing preventing a five-star hotel that is not affiliated with a certain high-class international brand from becoming really successful is the fact that the requirements for a five-star hotel are not sufficient to make most tour operators, and even most travel agents believe that the quality is on the level that we all would like to see. So without world-class brands Bulgaria is doing away with the opportunity to attract wealthier tourists.
Building upon what you just mentioned – the Bulgarian tourist products have been viewed both positively and negatively. Is the arrival of the top international brands the major road to achieving a positive image and favorable branding for Bulgaria?
This is one of the ways, and maybe the major way to do that. This practically amounts to a stamp of approval for Bulgarian tourism. It is perceived as a significant problem when you have relatively large resorts with 80-150 hotels – as in the case of the large Bulgarian Black Sea resorts – and there are no well-known international brands.
I am not talking about tourist vacation brands such as Iberostar or RIU, which are completely unknown to the global hotel industry, I am talking about high-quality brands, and there aren’t many of those on the Bulgarian Black Sea coast. We have tried to introduce some of them, such as Kempinski. Practically, Sol Melia is currently the only global brand which is present here. It is clear that if large resorts do not feature any global brands, they will remain a marginal destination.
As soon as global brands, such as Kempinski, started entering the market, more international brands became interested in the Bulgarian Black Sea coast. When Kempinski entered Golden Sands, for better or worse, everybody started asking questions. Why did Kempinski enter the Golden Sands? Why did it get out subsequently? In order to restore the image and to be considered a world-class destination, we needed to have a brand such Hilton, Starwood, or Marriott, or, ideally, all of them.
How risky is the investment in the re-branding of your hotel complex? What do you expect will be the effect of having the Hilton brand?
Every investment is risky, this one no less than any other, but perhaps no more than any other either. Of course, I expect the new brand to have a substantial impact on the revenues, and, at some point on the profitability.
The entering of Hilton in Golden Sands should break the existing mould where tour operators dominate almost every tourist destination in Bulgaria. If we can reduce the hotels' reliance on tour operators for customers from the current 90% down to 25%-30%, the respective management or franchise agreement will always be worth going for.
What will be the specific features of the two Hilton-branded hotels?
Both hotels are going to apply for five-star category, and it is important to point out that the international chain has not expressed interest in the local categorization since both are world-famous brands (Hilton and Doubletree) and the customers' expectations for them are based on their name, and not on the decision of the local authorities in charge of the categorization of the tourist facilities in each country. Despite that, both hotels meet the highest requirements in Bulgaria, so our decision on the category has been based on the quality of the hotels.
When did you sign the franchise contracts, and when are the two hotels expected to open doors?
The contracts were signed in June 2010. Doubletree by Hilton Varna is in a pre-opening phase, which means that it is already welcoming guests but is still completing the training of the staff, and undergoing an inspection of the quality by Hilton, and the installation and synchronization of the management systems.
Hilton Varna is planned to be opened in June 2011, and the pre-opening phase there will be shorter since the training will be carried out with the help of Doubletree by Hilton Varna, and the systems will be put in place before the beginning of the pre-opening phase.
How many rooms do the hotels have, what sort of additional amenities do they include?
Doubletree by Hilton Varna has a total of 196 keys, including 17 suites and 28 junior suites, two restaurants, a bar and a night club, an indoor and outdoor pool. The rooms have been refurbished according to the most detailed standards, with 32-inch LCD HD TVs, the proprietary Doubletree mattresses, which are unique for Bulgaria in our property, Neutrogena Spa cosmetics, and many other specifics requirements for each room outlined as brand standards, such as the requirement for the equipment of the gym by Precor, among others.
Hilton Varna will have about 170 rooms, including one presidential suite with an area of 225 square meters, a terrace of 90 square meters with a frontal sea view; one VIP suite, and one maisonette suite. Not unlike all other Hilton hotels, the new facility will feature executive rooms, which, together with the suites, will be serviced by an executive lounge with a separate check-in and guest service.
The lobby of Hilton Varna will be 460 square meters in area and 10 meters in height. Its interior has been designed by Boutique Design, a London-based company whose professionals have produced the interior design of many of the hotels designed by WATG, the world’s most famous brand in hotel design. Hilton Varna will feature five restaurants, conference halls with a total of 700 seats, galleries with boutique stores, a spa center with a fitness center and a boutique pool, and a night club.
What is the amount of investment in each of these new hotels?
The total investment in meeting all of Hilton’s requirements is considerable since our goal has always been to create an unique product of world-class quality. These two hotels, together with the two most luxurious hotels owned by Sigma Capital, Melia Grand Hermitage and Sol Nessebar Palace, are among the few, if not the only ones on the Bulgarian Black Sea coast, which have met, without exception, all international safety and fire-safety regulations, including fire sprinkler systems, which are not required by Bulgarian law.
Are the buildings of the two hotels brand new?
Doubletree by Hilton Varna is a fully refurbished building which previously used to be the luxury part of the Helios Spa & Resort, a hotel complex with five-star category. Hilton Varna is a brand new hotel which is being constructed on the location of the former Veliko Tarnovo hotel, built in 1970, and fully renovated 10 years ago. Its outdated construction and design necessitated its demolition and the construction of a new modern building.
How long did you negotiate with Hilton Worldwide for before you signed the franchise agreements with them?
We first established contact with Hilton Worldwide on September 19, 2006, so it took about 4 years. We probably are, I dare say, the most experienced hotel owners in Bulgaria in dealing with international hotel chains, in terms of completing successfully negotiations with a number of brands.
Our experience shows that a management agreement could be made considerably faster because the hotel chain does not require that much experience on part of the owner; rather, it wants to have clearly defined conditions and relations, and as little interference as possible during the duration of the contract.
The franchise contracts are rarely made in Bulgaria except in those cases when the brand is not much of an asset to its owner (and I do not intend to offend any of those), or in such cases where, after working for a few years with a certain owner under a management agreement, this is transformed in a franchise one as a final attempt to keep the brand on the market before a final decision to terminate it.
I think the successful signing of a franchise agreement with a brand and a hotel chain such as Hilton, which is the undisputed Number 1 globally, was an big challenge for a new partner such as Tetrareal AD in terms of brand awareness and brand recognition. We view this achievement as recognition of our more than 10 years’ of experience in this sector in Bulgaria.
What exactly is the form of co-operation between the international chain and the investor under your franchise agreement, and what are the rights and responsibilities of the two parties?
If I have to summarize in a nutshell a contract of more than 60 pages of rights and responsibilities without violating its confidentiality, I will point out that the investor is required to maintain the brand standards, which are outlined in detail on about 240 pages. In exchange for that and for the payment of the stipulated license fees and the use of the management systems, the investor has the right to use the brand.
The brand approves the top management appointed to run the hotel under their brand, and carries out the training, monitoring, and regular inspections of the standards, and makes recommendations about observing them. Hilton has the right to withdraw its brand at any point if its standards are not upheld.
Why did Hilton decide to enter the Bulgarian Black Sea coast, and with two hotels, not just with one?
Hilton is the most popular and most widely recognized brand in the hotel business. It is not strange but rather natural that it will come to the top luxury Bulgarian resort now that it already has solid positions in Sofia, and is increasing its presence there. Of course, as in every other business, in order to achieve an agreement, you need at least two sides. We have experience, both in the tourism industry and in the fair and mutually beneficial cooperation with other, even though less known, brands and hotel chains.
In the case of Hilton, we had high ambitions to convince them that they should give the Bulgarian Black Sea coast a vote of confidence despite the fact that other luxury brands, such as Kempinski, discovered that mass tourism is different from the hotel business in the luxury palaces of Middle Eastern and Asian billionaires.
The power of the Hilton brands in the world of tourist hotel sales exceeds many times the power of almost all their competitors, with only Starwood, Marriott, and Hyatt being remotely close to them in terms of marketing power. Luxury and mass tourism are not mutually exclusive for Hilton the way they are for most other hotel chains.
What are the requirements that a seaside resort hotel has to meet in order to become a part of the Hilton Chain?
The requirements that a resort or urban hotel has to meet in order to deserve a top brand are outlined in detail on 300 pages. It is essential to point out that that it is a requirement to meet the standards, not just to cover some or most of them.
Hilton’s requirements are the result of many years of optimization, research, and development of a first-class hotel product, which is why, even though the existing hotels with the Hilton brand are given an opportunity to introduce each new standard in the most economically sound way, each new hotel has to meet the latest requirements.
Thus, it is impossible for a new Hilton hotel not to provide its rooms with 32’’ LCD HD TV sets even though many of the Hilton hotels are yet to be introducing those over the next few years. The same goes for the many other standards outlined in these 300 pages. Then, there come the additional requirements for the service, where the interpretation is reduced to a minimum, as each individual step of the hotel service is described in detail.
What share of the guests of the hotels is expected to be booked through Hilton’s reservation system, compared to other channels?
All reservations will be made directly on Hilton’s reservations system. It is no secret that the seaside resort tourism business in Bulgaria relies primarily on tour operators, probably for as much as 90% of the total business. Honestly, I can’t think of a tour operator who would not want to have the Hilton brand as part of their portfolio on the Bulgarian Black Sea coast. But there is also another set of statistical data.
After we put into operation the Kempinski Grand Hotel Hermitage in Golden Sands, already during the first full year of operations, 55% of the sales came from individual business, regardless of the fact that less than 10% of them were generated through the central marketing office of Kempinski.
With Hilton, we have different expectations in the very least because of their superior marketing power – over 30% of the guests are members of the Hilton HHonors program, i.e. guests who would always prefer to stay in a Hilton branded hotel, whenever such is available in a town or resort.
Over 1/3 of all bookings are made by global distribution systems, i.e. each online reservation will first offer a hotel with the Hilton, Starwood, Marriott or Hyatt brands if they are available. And over 10% of all reservations (this percentage is even higher for the resort hotels), come from using points from Hilton HHonors.
So, realistically speaking, under 50% of the entire business of a Hilton-branded hotel will rely on the channels that are traditional for the Bulgarian seaside resort tourism; if we take into account the statistics from running the Kempinski hotel in the Golden Sands, this is probably twice overstated.
How long do you expect it will take to return your investment?
This really depends on too many factors. If you had asked this question in 2006, I would probably have given a rather different answer. Currently, if we take the weighted average cost of capital of about 10%, with a loan-to-value ratio of 2/3, with cost of debt at 6%-7%, and the rest being invested as equity, such an investment is expected to exceed the weighted average cost of capital by no more than 5%, i.e. it will take a period of 7-10 years. If the demand goes back to the 2007 levels, this will change to 5-7 years.
Which are the main tourist markets from which the two new hotels will be drawing tourists?
These will be the traditional markets for Bulgaria – Germany and Benelux, the Scandinavian countries, Russia, Romania, and Bulgaria, as well as some Middle Eastern markets. It is no secret in the hotel business here that the most demanding and generous tourists in Bulgaria, if their requirements are met, are the Russians, Romanians, and Bulgarians, so it is only natural that we will invest additional efforts into attracting them to the best product on the Bulgarian Black Sea coast.
How much higher can be the average room package price demanded by a hotel from an international luxury chain compared to a similar product which is not branded?
The “asking price” is a theoretical notion – the price depends on the elasticity of demand in every quality segment. Anyone can “ask” but the price is determined by what the customers are ready to pay for what is offered. The Bulgarian tourist product is too diverse and varied in order to have any reliable statistical data about the elasticity in any segment.
The estimate of global brands such as Marriott and Starwood are that the minimum increase of the price of their product compared with the non-branded products, if the price-quality ratio is kept constant, is 25%. But this is not a rule to which we intend to adhere. Our pricing policies are determined exclusively by the demand curve, and we will be simply be offering the best prices for the best product.
How does the operation of the high-class seaside resort hotel reconcile with Bulgaria’s image as a mass tourism destination which is mostly attractive with its low prices?
The luxury segment on the Bulgarian Black Sea coast, when offered without a global brand, cannot give the investor the financial results that can be generated by a mediocre four-star mass tourism hotel because of the former's inability to “shake off” the image and competition of the surrounding market.
It is very similar with vacation properties – the most luxury property on a golf course which is really worth a price of EUR 3000-5000 per square meter cannot be sold at this price at the moment because investors say that if you paid more than EUR 300 per square meter in Bulgaria, you have made the worst deal of your life.
This is not true, quite to the contrary – you probably made a mistake if you paid EUR 300 per square meter but the so called “herd instinct” is stronger than the economic logic. That is why we need one-time “game-changing events” such as the introduction of the Kempninski Grand Hotel Hermitage, or the Thracian Cliffs Golf & Spa Resort, and the introduction of the Hilton in Golden Sands, in order to create a new image, from which everybody will benefit in the future. But as I said earlier, especially for Hilton, the luxury and mass tourism are not mutually exclusive.
What makes Bulgaria’s Northern Black Sea coast more attractive for a luxury brand in comparison with the Southern Black Sea coast?
It is more attractive at the very least because it has not been turned into a ghetto. Golden Sands has always been, and will remain the top luxury resort in Bulgaria, and on the Black Sea coast. Key factors are its proximity to Varna, which is a tourist phenomenon in itself (compare it with Burgas), as well as the successful preventing of the destruction of the Golden Sands National Park.
In addition, the competition among the hotels in the resort has led to the full renovation of most hotels, without the emergence of scary blocks of flats as it happened elsewhere where the appetite of the investors and municipal councils was the main driving force for resort development.
The summer of 2006 was the only time in the past 10 years when the price levels of the luxury hotels in Sunny Beach, for example, came close to those in Golden Sands. The reason for that is that in 2005-2006 a number of delayed construction permits in Golden Sands were granted, and the supply instantly surpassed the demand.
Two things have happened since then, which have established the Southern Black Sea coast as a “tour operator destination”, and the Northern coast as the “more expensive” or “luxury” destination – call it as you wish.
First, a number of airlines started regular flights to Varna forcing out most of the opportunistic tour operators by making their charter business unprofitable, and, second, the over-development of the Southern Black Sea coast caused a price war among the hotels located beyond the beach-front line in Sunny Beach, which is the pole-bearer of the southern resorts. That is why Hilton, Sheraton or Hyatt first have to be convinced that they can achieve a sufficient ADR (average daily rate) before they can ever offer their brand there.
How did the economic crisis affect the Bulgarian tourism industry in the past two years, and what are your expectations about this and next year?
In Bulgaria, not unlike in Greece, the tourism sector suffered considerably more from the general economic situation than most other sectors. Unlike in Greece, Croatia, or Turkey, however, in Bulgaria there was no one to make a simple calculation on an A4 sheet of paper about which sector of the economy is the most flexible, and most capable of preventing the growth of unemployment, and of improving the balance of payments in the shortest period of time.
Every single euro that we invested this year in advertising has generated about 20 euro in revenue, of which 2 euro went to the treasury as VAT, 8 euro went to salaries and taxes, and 5 euro went to reinvestment, with a total of 15 out of every 20 euro coming from abroad.
If somebody in the Bulgarian Council of Ministers can explain everyone else there how the economic multiplier works, perhaps they will also manage to explain to them why in every corner of Europe there are billboards of Turkey the size of the Bulgarian Parliament building, and why they are not paid for by the Turkish hotel owners but by the taxpayers who are the greatest beneficiaries from the results of such advertising campaigns.
There are two main trends this year. First, the German tourists are coming back to Bulgaria, which is good news because Germany is one of the few places where the Bulgarian seaside tourism is successful without much advertising.
Second, the Bulgarians, being affected by the economic crisis, have rediscovered the simple truth that it is better to buy the same product in Bulgaria for 500 euro than to buy it in Turkey for 1,000 euro, or in Greece for 1,500 euro. Of course, I am not talking about services you can buy in Greece for 10,000 euro or in the Maldives for 15,000 euro, which are still impossible to buy in Bulgaria.
That is why, thanks to these two trends and to Bulgaria’s growing popularity in Russia and Romania, the current expectations are that, in 2010, Bulgarian tourism will bounce back to the 2008 levels, which, on one hand, is not that great of an achievement, but on the other, it is good news for hotel owners, banks, the Minister of Finance, and the people who make a living in this sector.
What do you think is the current profile of the Bulgarian seaside resort tourism product, and what is its potential for development? Do you agree with the criticism of the so called mass tourism?
Its profile and trend is “All Inclusive”, and its potential is “mass tourism”. In the last 10 years it has become very trendy to talk about high value added tourist products such as hunting, golf, ski, rural, and cultural tourism. All this is very interesting, commendable, and important for the country's image.
However, alternative tourism faces severe limitations. First of all, the criticism of mass tourism is a neat way to put the blame for something that the state failed to do on somebody else. Mass tourism is not a problem, but quite to the contrary. Take Spain as an example where a lot of people – not just hotel owners but everybody involved in the tourism business, from the bell boy to the manager – made a fortune from mass tourism.
Everybody in Bulgaria loves to talk about the various kinds of alternative tourism but the truth is that there are fewer than 500 people who practice golf tourism; and fewer than 1,000 people practicing hunting tourism.
In order to develop its rural tourism, Bulgaria needs proper structures for the utilization of EU funds, such as Italy, for example. Because at present, a consultant for an EU-funded rural tourism project would take almost 50% of the money, and the so-called “investor” would look for ways to appropriate some of the rest, and to invest only whatever is left. Cultural tourism can be developed only if there are large numbers of tourists who come here with another purpose.
The winter tourism in Bulgaria is growing but the season there is very short, the prices are depressed, and, realistically speaking, today, as was the case 10 and 20 years ago, Bulgaria's summer tourism generates over 90% of the industry’s revenue. So in order to develop any single one of the other types of tourism, we have to develop further the mass tourism.
I think that the seaside resort tourism in Bulgaria is going to continue to be structurally dominated by the mass segment, with the All Inclusive offering, unfortunately, continuing to increase its market share. The only thing we can hope for are some new game-changing events, such as the ones I described earlier, including the introduction of further luxury brands, which should increase the size of the infamous “pizza” of the Minister of Finance, or, as they choose to call it in the West, of the “economic pie”.
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