To start off with, Richard showed us his brain-child – the hostel Napoleon.
“We opened in 2006,” he says. “My Russian friend and companion Mikhail NURIDZHANOV, who studied with me at the University of London in the mid-nineties, convinced me that this is an entirely realistic business in Moscow. After university, I worked at a financial company. And, one day, I threw a rucksack over my shoulders and went travelling for six months, visiting several countries and, of course, staying in hostels. Arriving in Moscow for the first time in 2000, I was amazed to find that there was not a single hostel here! Nor did I come across one in Siberia either. No doubt, it was then that the desire to try my hand at this business came about.
Why did Richard choose Moscow in particular?
“I found it interesting to work in a big city, and I have quite a few friends here,” he continues. “Of course, in those days there were some highly negative stereotypes of Russia, a few of my London acquaintances were sceptical about the idea, and my parents thought I was a completely “crazy dreamer”.
How did the Briton start his business in Moscow?
“By looking for premises,” replies Richard. “A hostel should be located in the city-centre, close to a metro station and, as the Russians say, “a few steps away” from the Russian capital's major landmarks. We looked at a lot of places over six months and, in the end, settled on a building in Maly Zlatoustinskiy Lane. It is on Maroseyka, one of the most ancient streets in the centre of Moscow, two-minutes' walk from Kitay-gorod metro. On the third floor of an old building there was a large communal flat which had previously housed eight families. Then, the flat was bought by a Russian businessman: he intended to let it as office space, and had even started renovating it. We rented the place, but as a hostel, not as an office. This is what a lot of entrepreneurs opening hostels in the centre of Moscow do: buying a large space in the centre is too expensive, prices are through the roof, more than a million dollars, and renting works out more profitable. The rent is huge, I won't say how much exactly, but we are talking about the market price for renting property in the middle of one the most expensive cities on earth. That's how we opened our Napoleon. We did the renovations in three months at a cost of 3 million rubles, or about $95,000. Overall investment came to 6 million rubles (around $190,000) which we recouped after two years. If we were to start such an undertaking now, the return period for investment would be longer, as the price per bunk has dropped. The hostel can now accommodate 48 people at once, in an overall area of 188 sq.m. Our average occupancy rate is 50%. Most guests come in summer: the hostel is a seasonal business.”
Oleg KHLEBNOV, Managing Partner of Inventica:
“At the time of the survey we conducted, 53 hostels with 2,300 beds were in business, making up 3% of the overall one-time capacity available at the capital's hotel-type establishments. The hostel sector has good prospects and is growing in Moscow. Such an evaluation is based on, firstly, international comparisons (for example, in Australia and New Zealand hostels form up to 15% of the hotel stock). And, secondly, this is supported by the overall deficit of hotel beds in Moscow.
The relative simplicity of entering the market offered by the low investment costs and lack of strict rules governing hostels, as well as the high, unmet demand, means young, ambitious entrepreneurs are able to join the market. The kind of businessmen who understand their target market are drawing up high-quality and relevant proposals.The need for developing Moscow's budget accommodation has been recognised also at government level. According to plans by the Moscow Tourism Committee, the number of hostels in the capital should, in the near future, be increased threefold, whereby the room stock of said establishments will reach approximately 1,260 units, with the one-time capacity offered by hostels growing to 6,900 beds. The Committee for Tourism is already in negotiations with regional authorities concerning making premises available for use as hostels.The most common way of starting a hostel is to use residential housing stock with the consequent obligatory transferral of it to non-residential stock. The investment budget for opening a hostel on rented premises of 180 sq.m. (36 beds) is around 5m rubles ($155,000), of which1.2m ($37,260) is working capital needed to cover the lack of cash flow in the first few months of operating until the establishment reaches its planned capacity. The length of time it takes to start a hostel – from company registration to opening for business – is approximately 5 months.The average utilised capacity of a hostel is 50-60%, however particularly successful enterprises are known to fill 80% of their room stock. Given the average bill – 870 rubles ($27) – and allowing for a pessimistic take-up rate (25% in the first year, 50% in the second, 65% in the third), the payback period is calculated at 3.2 years (discounted payback period of 4 years)”.
“Everything depends upon the staff,” reckons Richard LINES. “We have eight people working for us who are approachable, speak good English, and are willing to help the guests at any time. Finding such staff, and for an acceptable salary, was difficult. Recruiting the cleaners and couriers, of course, was easier, but our receptionist has to be able to speak fluent English, think on their feet, be reliable, communicative, patient and responsive. Finally, they need to know how to smile: something Russians rarely do. On average, twenty candidates are interviewed for each position before we find the right person. Training takes two weeks, during which people get to know our computer programmes and way of working. Grounds for dismissal can be theft or sloppy work, but we very rarely sack anyone: most of our employees have been working for us for over three years. Basic salary is 1,000 rubles or around $30 a day, plus bonuses, commission and other incentives. The main thing is that I believe in my staff 100%. They are consummate professionals. Incidentally, one of our former employees recently went off to work in a five-star hotel in Moscow.”
Within a few months, the Napoleon had become popular amongst young tourists coming to Moscow from Europe, America and Asia. In 2007, it was awarded the title “Best Hostel in Russia”.
The hostel staff have plenty of work to do.
“Everything here should be clean and comfortable at all times,” says Richard. “We provide our guests with information on the best places to go to in Moscow, we can book plane tickets, theatre tickets, order a taxi. There is air-conditioning in the rooms, you can watch TV in the living-room, relax in the mini-bar, cook your favourite dish in the kitchen, or do your washing in the mini-launderette. All this – and at a very reasonable price. A night's stay in the hostel costs all of 800 rubles, or less than $25. There is a discount system and free services: high-speed internet, computers with CD-RW and card-readers. Each guest receives a free map of Moscow, tea and coffee at any time. There is a safe and security lockers. We organise gatherings for the guests in bars and clubs in Moscow, as well as both a café and barbecue in the adjacent garden during the summer.”
Richard does not hide the fact that when he arrived in Russia he encountered more than a few difficulties.
“But I was prepared for it being a whole lot worse,” admits the Briton. “There is less bureaucracy in Moscow than in London. It is true that your bureaucrat in England is more regulated in his actions, whereas in Russia officials tend to “improvise”. For example, we had to pay quite a lot for a special Federal Migratory Service programme for the obligatory guest registration, but, now, we can register our customers quickly. There were issues at first with the inspectors: health, fire-safety, housing. But most of these problems stemmed more from my not knowing the state requirements here...which are a lot less rigorous than in England.
Georgy MOKHOV, Deputy Chairman of the Moscow Committee for Tourism and the Hotel Industry:
“Out of the 359 hotels with a stock of 42,300 rooms and 81,800 beds in Moscow, 173 hotels with 26,800 rooms and 51,600 beds are economy class. According to figures compiled by the Moscow Committee for Tourism and the Hotel Industry, of the overall number of hotels in the capital, only 19% of the room stock belongs to hotels with fewer than three stars, bed-and-breakfasts or hostels. In accordance with the tourism development programme in Moscow, active development in the hostel and bed-and-breakfast sector is forecast for the next few years. At the beginning of 2012, there were 64 hostels in business in the city with 303 rooms and 1,731 beds, as well as 88 bed-and-breakfasts with 1,900 rooms and 4,100 beds. Today, the number of hostels has risen to 75. According to various calculations, the shortfall of rooms in the sector of hotels with three stars or fewer is around 15,000 rooms. According to this research, conducted at the end of 2011, of the 41 hostels in actual business, 10 were opened between 2004 and 2009, 15 in 2010, and 16 in 2011. Statistics for hostels opening for business show that this sector is experiencing high demand which, in turn, has contributed to its trebling in size over the last two years.
Also, this sector of the hotel industry is not legally governed by special codes of practice: hostels are not covered by the state system for classifying hotels and other kinds of accommodation. Thus, this type of activity is not governed by any regulatory framework and is, unquestionably, in need of being legally regulated”.
“Although there weren't any particular problems, the fire-safety inspectors did, for example, insist that we acquired their equipment, which was a lot more expensive than other available brands. But you can't blame them for trying,” smiles Richard. “In the end, we bought a much cheaper version of the equipment. Overall, our experience of dealing with the inspectors is positive: sometimes they even give us good advice. It is more than possible to work in this country. When people ask me what attracted me to Russia, I reply that here there are a great many opportunities, and that is precisely because there isn't the stringent western regulation of everything and anything. If I was in this business in London, where there are hundreds of hostels, I'd have to cope with the fiercest competition. And to open a hostel in London you have to go through much trickier bureaucratic processes with much stricter requirements than in Moscow. Finally, the taxes are much higher in England – although in Russia the “attendant expenses” like registering guests or installing cash-tills cost more.”
“In London, for example, hostel premises have to have four fire-exits, but in Moscow, one will suffice.
Richard LINES is certain that for the foreign businessman to succeed in Russia they need to familiarise themselves with the particularities of the Russian market, which also goes for the hotel business.
“It is important to have a Russian companion who knows the ins-and-outs of doing business here,” says Richard. “There is a huge untapped market for one and two-star hotels in Russia. It is possible also to start a successful restaurant business – many foreigners have achieved great things here. When starting a business in Russia, you have to bear the local mentality in mind, even speak a bit of the language. What is more, it is important here to have good relations with officials and business partners, and sometimes even with your competitors.”
Is Richard LINES considering expanding his business in Russia?
“I'm not only considering it, but actually doing it,” he replies. “We are thinking about opening hostels in the Golden Ring tourist towns. In Kaluga we have a production line making and bottling “mixed” soft drinks, for example apple and mango, bilberry and orange, apple and blueberry. We have hired experienced local technicians who have quickly come up with recipes for several kinds of drinks. We have our own design for the labels and packaging. Now production is in “full flow”. I would advise any western businessman to have more faith in Russian experts: there are many professionals here of the very highest calibre.”
Richard has one more dream.
“I want to open a large hostel in Moscow,” admits the Briton. “Ideally, with rooms for 2-3 persons, but where the guests wouldn't have to pay any more than 2,000 rubles or $60.”