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Brand hotel aggressive expansion into Africa

Brand hotel aggressive expansion into Africa

Andrew McLachlan is Senior Vice President, Development, Sub-Saharan Africa, Radisson Hotel Group. Andrew is a 48-year-old South African national based in Cape Town with 28 years’ experience in the hotel industry. Andrew's career in the hotel industry started in 1990 before being formally enrolled in an in-house Hotel Management program with Protea Hotels. After working in various capacities in the hospitality business for years, Andrew set his foot into the hotel development world as Protea Hotels Special Projects Manager in 2002.In December 2006, Andrew joined Radisson Hotel Group as Director Business Development and was promoted to Senior Director and Vice President and thereafter Senior Vice President Development in May 2016. He established the group's presence in the region through a dedicated development office in Cape Town and is now spearheading Radisson Hotel Group’s growth strategies in this emerging market. Few weeks ago,Andrew was in Addis Ababa to take part in the 2019Africa Hotel Investment Forum and AsratSeyoum of The Reporter sat down with him at Sheraton Addis Hotel to discuss some of current issues with brand hotel development in the continent. Excerpts: 

The Reporter: After short intermission since the early expansion of brand hotels in Africa in 2010s, there appears to be a renewed push in expanding affordable global hotel brands into Africa, in recent years. Can you explain the major drivers of this dynamism?

Andrew McLachlan: From the Radisson Hotel Group point of view, we are actually a late starter in the African market, especially compared to our big competitors the Hilton, Accor and Marriot. They all have been in African for as long as 50 or 60 years. We have only come to Africa in the early 2000s, so I call us (Radisson) a young person with a lot of energy. By the time we come to Africa, there was a clear gap in African hotel market; there was not too many branded hotels focused in Africa and there was a huge under supply of branded hotels. So, in 2007, we establish a dedicated African office run by Africans; and we were the first branded hotel in Africa to have boots on the ground in the continent. This was the time when we saw our momentum of growth really peak up in Africa. It was in 2011 and 2012 that our competitors really recognized the growth that we were having in Africa and started to follow suit with physical presence in the continent. At end of the day, it comes down to the size of the market in Africa. It is a huge continent with 54 countries and over 60 cities having a population of over one million; so this offers a lot of opportunities from leisure to business to MICE. And it is fact that we still have a huge under supply of brand hotels in Africa. If you take all the hotels in Africa, I think not more than 25 percent are brand. So, there are a lot of opportunities to take over existing hotels and brand them, as well as build new ones. As population, economies and the middle class keep growing; and as more people starts to travel there will be more demand for brand hotels in Africa in Africa. Around 2009/10, telecommunications really moved in Africa; as you have more and more data and connectivity people are able to do business better. At the same time, as business starts to peak up more and more people have a need to travel and that is why we also saw rise in the airline business in Africa about the same time. You can see a lot of airlines in Africa growing in terms of their networks; if, for example, you see Ethiopian Airlines, its network growth over the past ten years has been significant. Kenyan Airlines as well have done the same; Rwandan Air is also growing. So, as business grows peoples’ need for travel will increase as well. And the two important things that business travelers ask for are a reliable airline to travel with and brand hotels in their destinations which they know and trust. A lot of African travelers whether business or otherwise have started to travel more and come to be familiar with brand hotels. This is how most of the brand hotels started to break into the African market.

With the rise of brand reliability, I think the old system of star- rating is also fading out across the hospitality industry, is that right?

The thing with start-rating is that there is no globally accepted standard for star-rating. This means that, for example, one country’s four start-rating for a hotel could be significantly different from the four star-rating of the another country;whereas in brand recognition, people actually know what to expect from a certain brand of hotel wherever it may be. As a result brand hotels have generally rendered the star-rating system useless. Indeed, you still have your municipal ratings but generally when people book hotels they now tend to look to the brand andrankings in Trip Advisor, informing them of where the facility is ranked in relative to other options within specific cities. This basically is more appealing to customers since it features the actual rating from the experience of other customers. So, generally, brands and online travel advisory and agency systems have emerged as more important tools vis-à-vis star-rating.

It might also be perplexing to observe that, although generally prices are lower in emerging markets than the advanced ones, hotel fares don’t seem to follow this rule. In fact, hotel rooms in emerging markets are very high; why do you think that is the case?

We can raise two things here. One is hotels do cost more to build in an emerging market than advanced markets; this means that to make a return on the investment, the hotel investor would be inclined to set hotel rates at highest possible levels to maximize revenue. In an emerging market, it generally takes longer to build hotels (24 months in advanced economies against 48 to 60 months in an emerging market). So, the cost of capital is high . Since it is an emerging market, one also have to import a lot of finishing materials to the country as it cannot be sourced easily in these economies. On the other hand, once opened, the operating cost of hotels in emerging markets can also be very high because of the higher price of electricity and imported materials to run the facility. However, as more brand hotels join the market, we see hotel room rates going down or stabilizing.  A good example is the Nigerian hotel industry where in Lagos as more and more hotels join the markets the prices have started to stabilize rather than increasing. It all comes down to economics and the rules of demand and supply for hotel.

But, with high room rates in emerging markets and a growing middle class and average income, is it not difficult for brand hotels to expand where buying capacity for services they provide is still growing?

If you take my company, for instance, we have only targeted 23 cities out of 60 African cities with population above one million. In doing so, we very carefully examine the economic fundamentals of the cities. We try to have demand break downs in the cities we are interested in and try to identify how much of the demand is generated by local customers and international ones. And, based on that, we make sure that we put the right brand into the right city. For instance, in certain markets some 60 percent of the demand generated could be from the international customers. In such markets, we consider that quality is most important factor and the ability to pay is there so we put most reliable brands in these cities. On the other hand, if we feel that the market we are going into is primarily reliant on local demand we try to match that market with more appropriate hotel brand. So, the rate we try to achieve, you might find, are quite diverse in diverse markets. If you look at South Africa, the rates at cities like Johannesburg or Durban is never the same with other small time markets. If you also take Ethiopia, we already have one hotel working in Addis, while the other is also under construction in the capital; another one in Bishoftu will start after a year. We also have ambitions to go to Bahir Dar; but we don’t expect the rates in Bishoftu and Bahir Dar to be the same as in Addis. At the same time, as these destinations evolve overtime, we also expect out pricing strategy to change with them.

With regard to Radisson, in recent times, you have concluded some 11 new hotel deals in Africa; can you tell me what is behind the latest aggressive moves you are taking?

In 2018, as a company, we said we need a new five-year plan and in that plan we wanted to grow in the number of hotels we own world-wide and also grow in profitability. So, we decided on 24 new initiatives that we want to launch as company. Oneof the objectives was to achieve a target of 130 hotels in Africa by 2020. We are now at the end of the second year of that five-year strategy and have achieved 100 hotels, so far. I am quite confident that we have enough demand to add another 30 hotels in the coming three years. Mind you, there is still a lot of gap in brand hotels supply in Africa. In fact, most of this expansion might not be in the form of building new hotels; rather we have significant level investment in taking over existing facilities and rebranding them. For instance, we have managed to take over three existing hotels from our competitors and rebrand them in Nigera. We are actually in talks with well-known local brand hotel in Addis Ababa; the investor who is running an independent brand right now feels that as more and more brand hotels comes into the market, he needs to be part of global brand market. So, there are still a lot of opportunities in Africa. When I first launch the office in Africa (2007), I said that I want to reach 50 hotel in Africa by 2015. There were a lot of reservation to my plan back then; but I believe that if we do a good job hotels would breed hotels in Africa. Definitely, the first 50 hotels were a lot harder to achieve than the next 50 hotels. There is still a lot of opportunities in Africa; in fact, with regard to brand hotels, Africa is still in its infancy. But, these economies need to have good leadership. In fact, Ethiopia has a strong airline industry and this is a definite plus to the country and the hospitality industry. Again Ethiopia has hope in terms of developing its tourist attractions. You have many historical attractions in Ethiopia, especially along the Norther Tourist Circuit. In the south, the country have similar environment to that of the Kenyan safari which is benefiting Ethiopia's neighbor to South immensely. Ethiopia also has its people to capitalize on; it is unique mostly. Nevertheless, at the moment, it is difficult to build hotels here due to shortage of foreign currency. You can’t source everything locally; there is a quite big import need to build hotels here. You might have seen in Addis a number of unfinished hotels, this is because of the foreign currency shortage. Especially, there is big foreign currency and import need in building finishing materials. I hope eventually Ethiopia will open up from a banking point of view and solve the currency problem.

So, is there a new deal for Ethiopia out of the 11 new deals you have just announced?

No. There isn’t any deal for Ethiopia from the 11 we just announced; but we expect to announce two more deals in Ethiopia by the end of the year. We are currently under negotiations. And we can’t reveal anything about the ongoing negotiations at this stage.

Let’s talk about Airbnbs. Currently, there is debate whether the Airbnb sub-industry is a substitute or complementary to the brand hotels across the middle income spectrum. What is your take with regard to this?

In general, Airbnbs can be considered a competition in most markets to the brand hotel industry. I think Airbnbs are really good in offering leisure products, offering affordable apartment accommodations in many cities. However, I don’t really see Airbnbs being a competitor to business hotels in general. Business travelers look for certain facilities when they choose their accommodation.They, for example, look for fast Wi-Fi connection and similar business facilities from the hotels they select to stay. Mostly, I think,they select brand hotels for the reliability of the services they are getting. And this is one of the challenges Airbnbs face: lack of reliability of the services. In some markets there is more push for regulation of Airbnbs, these days. Regulators are saying that, these days, if Airbnbs are to operate in the hospitality sector, they need to be governed by the rules and regulation of the sector. Hospitality industry players pay hospitality tax and Airbnb are not subject to such taxes at this time; and some professionals are saying it is only fair that Airbnbs are subject to the same rules and regulations. Also Airbnbs are facing challenges in terms of using apartment buildings for their businesses since residents are raising security concerns and breach of building codes. On the other hand, if you look at Airbnbs, they are basically some renovated forms of guesthouses, Bed and Breakfasts (bnbs) or rental apartment businesses. These facilities have been there for many years, side by side with the hoteling industry: then we can say that there is some complementarity between hoteling and Airbnb in this sense.

But, Africa is a virgin market; do you think the disruptive effect of Airbnbs will be greater in Africa?

No. I don’t really think so. I don’t see Airbnbs becoming a competing force in Africa.First of all, most of the travel in Africa are based on business, not leisure. This means that brand hotels have a unique advantage in Africa as compared to Europe where considerable level of the travel is for leisure.In the future, in Africa, I think the brand hotel and Airbnb services would grow to be more complementary.