International hotel operators getting serious about Africa
The Rezidor Hotel Group, operator of brands such as Radisson Blu and Park Inn, has an aggressive African expansion strategy. How we made it in Africa talks to Andrew McLachlan, Rezidor’s vice president of business development for Africa and the Indian Ocean Islands.
How serious are international hotel brands about expanding their African footprint?
Emerging markets are the areas which are showing the most growth because of the economic slowdown in developed countries as a result of the global recession. So everybody is aware of the emerging markets, and the one emerging market which has huge potential is Africa.
We as Rezidor were late starters in the African market. We arrived in Africa in 2000 with our first hotel in Cape Town, and we didn’t really do too much until 2006 when we decided to open our dedicated Africa office. Some of our competitors such as Hilton, Sheraton and InterContinental have been in Africa for over 40 years. However, many of their hotels were built in the 1970s or 1980s and they haven’t had much growth after that. A lot of countries went into civil war but have since come out of it and are currently in their second or third terms of democratic governments. All the big brands are now focused on Africa. Initially they were trying to grow their African markets out of their home territories such as Dubai, London or Brussels. Most of them have, however, opened, or are about to open, African offices. Hyatt, Hilton and Starwood now have people based in Cape Town.
Would you say that Africa’s business environment is improving?
Absolutely. I have been travelling through the emerging markets of Africa since 2002. Over the last eight years I have seen massive improvements in the way I have been able to do business across Africa.
There are a number of things that have changed. The first one is the evolution of cellphone. In a lot of these countries the old traditional landline doesn’t really exist and people couldn’t communicate with one another. With cellphones communication is so much easier and faster. What is also happening is that these countries are plugging into the latest technology. I’ve been in Ivory Coast and Mali three months ago, and everybody has the latest Blackberry. I was in Dar es Salaam earlier this week and my email connection was faster than it is in South Africa.
Another development is the improvement in air travel. You can fly to any destination in Africa, be there for a day, and fly out a day later. A few years ago, if you went to certain countries there was one flight on a Monday and the next flight only a week later. Even if you had to be somewhere for only one day, you were stuck in there for seven days. The banking sector has also become better. I don’t travel with cash anymore. I used to travel with a lot of money on me but these days one can just use a credit or debit card. It has become much easier to do the basic things.
Hotel accommodation in places such as Lagos is still very expensive compared to other destinations; why is this?
It is expensive for two reasons. The first reason is that there is still a shortage of hotel rooms. If an operator is the only game in town, it can basically charge what it wants to charge.
The second reason is that the running costs in these environments are a lot more than they are in developed countries. You have to charge more because your overheads are more. For instance, in a place like Lagos you are running on diesel generators almost 90% of the day. Three or four generators, each burning US$16 to $17 an hour can get very expensive. Also, in many African countries you are almost building city hotels as if you are on an island. For example, you have to build your own water purification and sewerage plants. You have to be completely self-sufficient and with all that self-sufficiency the hotel costs and running costs are more.
Why is there still a shortage of four and five-star hotels in many African cities?
It is very difficult to build new hotels in Africa. If it was easy, everybody would be there. As hotel operators we don’t own the real estate and only manage the property on behalf of the owners. When you are going into places like Luanda or Lagos it is important to find the right local partner that you can do business with. Finding the right local partner is difficult. Assisting the owner in raising funding to actually build the hotel can also be demanding. Debt-to-equity ratios have always been tough in these markets. The promoter needs to be quite strong in his own right to have 50% of equity up front. Raising the debt can also take a long period of time. And then in a lot of these environments pretty much everything except the sand has to be imported, even the nails and screws. In South Africa or Europe it takes on average 18 months to build a 200 room hotel; in the rest of Africa it is normally 36 months.
Because of a shortage of debt funding, many owners have in the past built their hotels on a piecemeal basis. They would start building a hotel with cash and when the money runs out the project stops. Once they have accumulated some more money they would start building again. Many of the local banks only offer loans for a very short period, often a two or three-year term and at very high interest rates. If the project is going to take more than three years to build, it is not viable to take debt funding.