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Supported by an rapidly-growing domestic and international tourism market, Brazil’s hotel industry is showing ever increasing investment attractiveness.  Please see an interview with three of the industry’s leaders: Paul J. Sistare (CEO and President, Atlantica Hotels International), Ricardo Manarini (Brazil Region Head Developer, InterContinental Hotels Group) and Ricardo Vicalvi (Business Development Manager for Latin America, Accor Group) – we look into a range of issues including the history and growth potential of the business / marketplace; its relative challenges; the effects of the global downturn; currency risks; the organisations individual expansion plans in the country and several other topics…

1) Can you explain to our readers about your history and experience in Brazil?

Atlantica Hotels: Prior to founding Atlantica Hotels International (our original name was Barrington Hotels and Resorts International) in 1996, I had been the President and CEO of the Hong Kong based Richfield Hospitality International, recognized during my tenure as the largest independent hotel company in the world.   During my years as President and CEO, I presided over a growth that took us into basically all the continents of the world including a push in to South America.  It was early in 1994 when I began visiting Brazil to determine the viability for an aggressive expansion of our hotel management enterprise and discovered that Brazil was a market that almost every international company had overlooked.  I came to the conclusion that the basic strategy of international hotel companies was to look east and west and never look south. Secondly, I was impressed that there was a distinct lack of organization and focus in the Brazilian hospitality market.  Hotels were either categorized as “5 Stars” or no stars.  The industry was mostly (and still is) independently controlled by family operations and lacked a level of international sophistication in product quality, services and accounting standards.  International brands at that time was restricted to less than 5% of the total inventory.  Thirdly, there was an enormous gap in the consumer market being served.  The focus was mostly family operated resorts and upscale business traveller hotels with inconsistent product and standards.   There was virtually no focus on quality mid market hotels targeted to the exploding market of business travellers.   Brazil was moving from an emerging economy to a developing economy and no one had taken notice of the tremendous growth in inter country (Mercosul) and intra country (Brazil) business travel.  At that time, the existing hotel operators were focused on the international traveller which today makes up less than 10% of the total market occupancy of Brazil.  And that is up from the mid 90’s.  Lastly, I was overwhelmed with the lack of product of any kind in cities outside of São Paulo and Rio.  My initial surveys showed well over 50 cities with populations of 500,000 or more that had either minimal or no product whatsoever.  The trend at the time was to drive or fly from São Paulo or some of the major cities, conduct the business during the day and return.  Few mid market business travellers would take the chance to stay in the local accommodations unless there was some flight delays or highway traffic.  I discovered a typical business traveller would drive the early hours of the morning and then return very late that night enduring round trips of at least 6 to 8 hours.

In 1996, I resigned my position as CEO of Richfield and decided that; as the opportunity was so great in Brazil; I would form my own enterprise and focus on the domestic mid market business traveller needs with a product that embraced international standards and a consistency so that no matter what city you travelled, the individual or groups would experience the best in Brazilian hospitality with an international flair.  Our focus was to first build a team of experts with a similar mind set to be the best in the market and then develop internationally branded products with a specific and narrow focus on the Brazilian culture and traveller’s needs at a price point that was delivering high value for money spent.   During that time, Barrington Hotels and Resorts International became Choice Hotels do Brazil and later (2001) Atlantica Hotels international with a vision to be a leader in the Brazilian hospitality market by providing the best work environment for our team members, the best product for our consumers and the best returns for our investors: a very simple vision that was easily understood and embraced by all of Atlantica.

Many competitors have tried to enter the market however, none have recognized that building a strong infrastructure and investing in people is the fundamental key to a service industry.  In addition, no competitor has entered with the business focus of being completely independent.  Atlantica’s business model is to focus on the best returns for ownership by using the highly recognized international brands of Choice Hotels International (6,000 hotels throughout the world under the Sleep, Comfort, Quality and Clarion Brands) and Carlson International (1,000 hotels under the Radisson recognized as the best luxury brand in Europe and Park brands).   In short, Atlantica works for ownership and not the brands.  Moreover, Atlantica’s focus is on the mid market domestic business traveller product and we rarely stray outside of this area of expertise.

This business strategy in less than 12 years has now placed Atlantica as the 47th largest hotel company in the world (Lodging Magazine May 2010) and Atlantica Hotels International is now the largest privately held hotel company in Latin America.  In 2009, which is considered the worst year in the industry’s history, STR Global recognized Atlantica Hotels as the only hotel company in the world to have a system wide same store RevPar growth of 2.7% and Gallup International recognized Atlantica Hotels as the only Brazilian company and the only International company with the “Best Place to Work” award for the second year in a row formerly held by the Ritz Carlton Hotel group.   Only 25 companies in the world were recognized with this prestigious award.

InterContinental Hotels: Created by William Bass, InterContinental Hotels Group (IHG) PLC’s history began via a small hotel chain that, over the years, began receiving a series of investments that would lead to the formation of the global brand that exists today.  As the world’s largest hotel group IHG owns, manages, leases or franchises, through various subsidiaries, over 4,400 hotels and 650,000 rooms in nearly 100 countries and territories around the world. The Group owns a well recognized and respected portfolio of hotel brands, including InterContinental ® Hotels & Resorts, Crowne Plaza ® Hotels & Resorts, Holiday Inn ® Hotels and Resorts, Holiday Inn Express ®, Staybridge Suites ®, Candlewood Suites ® and Hotel Indigo ®. The network also manages the largest hotel loyalty program in the world: the Priority Club ® (with over 44 million members). IHG has more than 1,600 hotels under development, which will create 140,000 jobs worldwide over the coming years. We first entered the Brazilian market in the 1950s with the opening of the InterContinental Hotel in Belém and, today, we are present in the main Brazilian capitals with strong growth plans intended.

Accor Hotels: we operate in over 100 countries; have over 150,000 employees; own the largest group of hotels in Europe and are leaders in services to corporate clients and public institutions.  The most popular hotels that fall under our umbrella are the Sofitel, the Pullman, the MGallery, the Novotel, the Mercure, the Suite Hotel, the Ibis, the All Seasons, the Etap, the Formule 1 and the Motel 6 (globally amounting to over 500,000 rooms).  We have been present in Latin America since 1977, within which we operate the following of our networks: the Sofitel, the Novotel, the Mercure, the Ibis and the Formule 1.  Together, the hotels managed by Accor Hospitality in Latin America total 161 units with 26,000 rooms, 143 of which are in Brazil and 17 in other Latin countries. Our hotels are responsible for generating approximately 10,000 direct jobs in the region and also offer complete structure for a wide range of events.  We see Brazil is a very strategic opportunity for the future growth of Accor Hospitality: it is the fourth largest market for the company in the world, behind France, Germany and the United States.

2) What areas of Brazil are your hotels located and why were these areas initially chosen?

Atlantica Hotels: While most international companies have been widely focused in their knowledge of the market and geography of Brazil, they have focused their growth initiatives into either São Paulo or Rio.  A few have ventured out to cities such as Belo Horizonte and Salvador but the concentration has been São Paulo and Rio.   In contrast, Atlantica began an aggressive growth in our top 50 cities located throughout the key markets of Brazil where a quality product was virtually nonexistent.  Most real estate developers call these cities “secondary and tertiary” however for Atlantica, we consider these primary cities.  Today, Atlantica is in 41 cities throughout Brazil and in most cases our product in those cities are considered the best hotel in the city regardless of the brand.  Our development department is exploring additional cities throughout Brazil that most international companies and even Brazilians have difficulty locating on a map.  Atlantica was the first hotel company to penetrate the interior of the state of São Paulo with key locations in cities such as Campinas, Baru, Riberão Preto, São Jose dos Campos and later into the interior of the state of Minas Gerias, Pernambuco and others.  In the city of Manaus, Atlantica now controls 35% of the total hotel inventory crossing all market brands from budget to upscale.  These cities initially chosen were important since Atlantica (which is based in São Paulo) recognized that the domestic Brazilian business traveller was present due to the fact that major regional companies and manufacturers had located their plants in outlying areas.  In addition, the growth of the agri-business has become a key to the continued growth of Brazil’s impressive GDP expansion and export business.

InterContinental: we have the following hotels in our Brazilian network: São Paulo (InterContinental, Holiday Inn, Holiday Inn Express and Staybridge Suites), Rio de Janeiro (InterContinental), Curitiba (Crowne Plaza), Belém (Crowne Plaza), Salvador (Holiday Inn), Fortaleza (Holiday Inn ), Christmas (Holiday Inn Express), Porto Alegre (Holiday Inn), Recife (Holiday Inn) St. Louis (Holiday Inn) and Manaus (Holiday Inn). The development department of the network regularly performs detailed growth strategy research that assists us to identify priority cities for openings and expansion plans.

Accor Hotels: we operate in 60 Brazilian cities, all of which are major economic centres of the country.  Our hotels in the country are mostly geared to the ever rising number of business guests which we view as an excellent source of growth in the long term.

3) Why is Brazil so attractive for hotel development?

Atlantica Hotels: having worked in basically every continent in the world, I have yet to see a country with such potential as Brazil.  Brazil has emerged as the economic powerhouse of South America and today is recognized as the world’s largest exporter of raw iron ore, oranges, beef, sugar, leather and the list goes on.  Brazil has a tremendous trade surplus unlike any other country in the world other than China and is almost completely self reliant.  A recent IMF study has predicted that, by 2015, Brazil will be ranked as the 5th largest economy in the world up from the current 8th position.   These factors along with the consistent positive growth in GDP, availability of raw labour and relatively inexpensive construction products are natural resources for a currently fragmented and underdeveloped hospitality industry.

InterContinental Hotels: Brazil is the region of Latin America that now offers more possibilities for development, particularly after a long period of economic and political instability.  Furthermore, the IHG group’s market research and feasibility analyses are showing strong development potential in several largely untapped areas which we are very excited about

Accor Hotels: we believe that Brazil’s economy will broadly follow a similar suit to that of the USA in the past and, whilst there are several cultural and commercially idiosyncratic differences that we are taking account of, we feel confident to state that expansion of the country will happen in much the same manner.

4) Are there any areas of Brazil that look promising for future development?

Atlantica Hotels: we believe that the agri-business states will continue to grow and attract population movements from the major cities that were formerly favoured such as São Paulo, Rio and Belo Horizonte.  In addition, we see strong growth in the petro-chemical states of the interior of the state of Rio, Espírito Santos and Salvador.  However, many secondary cities where Atlantica already has hotels are seeing a movement of domestic and international regional headquarters where more supply is needed to accommodate the market.   Lastly, São Paulo continues to grow as the economic centre of Latin America and Atlantica is looking to double its current presence in this key city.

InterContinental Hotels: we are currently observing strong growth with very large demand in the North, Northeast and Midwest regions of Brazil.  Holiday Inn Express hotels are to be built in the following cities: Maceio, Bélem, Porto Velho, Manaus and Cuiaba.

Accor Hotels: our medium term expansion plans are focused on the interior regions of Brazil which are clearly demonstrating economic attractiveness – these areas will receive hotels ranging from the more economical Formula 1 to our luxury networks such as Sofitel and Novotel.

5) In your opinion, what are the challenges that the hotel industry in Brazil faces?

Atlantica Hotels: the first major challenge that a hotel developer and operator will face is the lack of reasonable financing.  This is the greatest barrier to entry in my opinion and has prevented most major hotel operators from building new products.  Currently, to acquire financing, a developer must first collateralize 50% of the value to construct the property and the balance will be financed at a floating rate of somewhere around 1.2% per month with a 5 to 7 year amortization period.  While monetary sources exist elsewhere such as the BNDES and the much touted Pension Funds that are very restrictive; in general, the process is long and complicated.  At the end, most companies simply lose patience.   Bringing in financing from outside of Brazil has been explored by some companies –however, many boards remain sceptical of the general economic indicators in South America and for some reason would rather invest in less ‘stable’ economies such as India and Russia or simply stay secure with European and American investments.  Secondly, the labour pool in Brazil for the hotel industry is basically unskilled.  While in the US and Europe and most of Asia, a hotel operator can expect to minimize training expensive for all hotel positions, in South America and Brazil specifically; the labour market, whilst quite large, requires intensive training.  Bilingual staff for front of the house operations is difficult to find and securing qualified management staff is even more of a challenge.  Atlantica has answered this by developing promising young individuals through University of Atlantica training programs with more than 75 courses offered to mid and senior level management in all areas of expertise.  The HR department follows key individuals through a career planning program initiated by Atlantica and, as hotels are opened by Atlantica, managers enter with not only the knowledge base of effective and efficient international class management but also with the culture of Atlantica with a vision to be the best.  Lastly, the hotel business in Brazil is extremely fragmented.  While the tourism industry represents one of the largest employers and largest tax base for Brazil, there is no single voice in governmental affairs.  The Brazilian government continues to focus on attracting industrial companies and enacts laws that are unfavourable to the hospitality industry mostly because the governmental officials simply do not recognize the financial value and contribution of the industry.  As such, more and more taxes are levied on the industry pressuring the bottom lines of hotels and making the investment less attractive to potential financiers.  If this trend continues, investors will look elsewhere and the Brazilian consumer will suffer a lack of quality product in specific markets.

InterContinental Hotels: a major challenge in the hotel industry in Brazil is creating a product that appeals to the Brazilian taste – there is no ‘one size fits all’ formula due to the fact that our current and potential clients are used to being able to choose from a variety of options (this was reflected in some data released by Jones Lang LaSalle Hotels where it was stated that just under 85% are independent).  Finance and credit are also other fundamental issues; although the BNDES has recently launched a line of credit with attractive rates and terms focusing on the 2014 World Cup and the Olympics in 2016, we feel a lot more needs to be done to encourage the development Brazilian hotel industry.

Accor Hotels: the current delays that are happening with the country’s expansion plans are a major concern, something of which Brazil is notoriously recognised for.  Another challenge is that of security and safety: whilst crime is decreasing statistically – there remain some dangerous parts of the country (particularly in many of our cities).  This is an issue that needs serious attention, particularly when the World Cup and Olympics come to the country and the whole world will be watching.

6) A major concern of many foreign investors and visitors in Brazil is the strength of the Brazilian currency – particularly in relation to the Euro and the US dollar.  What has been the hotel industry’s response to mitigate these issues?

Atlantica Hotels: the first thing Atlantica learned in Brazil is to operate completely in local currency.  Rates are quoted in this manner and, given the strength of industry in Brazil, all products are purchased locally.  Clearly making an investment in Brazil whose currency is valued according to world market conditions is a risk however; since the currency was unlinked from the US dollar in 1999 and dramatically plummeted, the Real has maintained a steady value for the past several years indicating the strength of the Brazilian trade surplus, the treasury reserves and economic growth.  The active management of the Brazilian government benefits both the hotel investor from the standpoint of a relatively stable currency but also the growth of industry which can sell their respective products on the world economic stage.  The latter creates more jobs which creates more travel and fills hotels.

InterContinental Hotels: this is a problem but we feel that, as Brazil becomes increasingly investment attractive, a strong inflow of foreign capital in the Brazilian market will outweigh such risks.  The fact that Brazil recovered from the effects of the world economic crisis much faster than countries like United States and Europe (who are still feeling the repercussions) puts the country in a very strong position investment wise.  Moreover, besides all this, investors would know that any hotel project requires a medium to long term strategy and, therefore as other currencies become stronger; the weight of these exchange factors will decrease.  One thing is for sure, the evidence of the performance of our hotels in Brazil is very positive – in many locations, for example, we have a demand far greater than supply.

Accor Hotels: the recent events in Europe have highlighted the difficulty if this issue for investors from these parts of the world looking into countries like Brazil that have recovered very quickly from the global recession.  However, most European economies have good fundamentals and are strong enough to bounce back eventually which will put their currency positions in better form than where they are presently.  There are also many ways currency exchange rates can be fixed thereby mitigating the effects of fluctuations – a strategy that many institutional investors in Brazil are adopting at present.

7) What are your thoughts on the future of the hotel industry in Brazil, particularly after the World Cup 2014 and the Olympics 2016?

Atlantica Hotels: There is indeed a major international focus on Brazil given the coming of the World Cup in 2014 and the Olympics in 2016.  However, Brazilians have carefully studied the effects of these events in other countries and have determined that life goes on after each event.  The World Cup will have an effect of approximately 60 days during the traditional shoulder in 10 cities while the Olympics will have an economic impact solely on the city of Rio de Janeiro although the international publicity generated by these events will raise the image of Brazil worldwide.   That being said, the government is carefully controlling financing being made available to improve infrastructure (airports, roads, highways) and making some money available to hotel operators to bring their products up to international standards.  The local hotel associations have been vocal about developing new product since Brazilian operators are quite aware of the vacant rooms in other countries that have hosted such events and the subsequent impact on rates and occupancies obviously impacting unit profitability.  Moreover, Brazilian memory is quite fresh from the sudden explosion of new supply that occurred in 2001 – 2003.  Over 15,000 rooms were added in the city of São Paulo alone and to this date, rates and occupancy have not recovered to the levels prior to the arrival of the new supply.

The international recognition that Brazil will receive will only enhance Brazil’s continued march into the economic powerhouses of the world.  While these events have a momentary effect in the overall history of the industry, Brazil’s continued and constant growth in GDP and attracting new industry is more important to the future growth of the hotel industry.  Given the current culture of intelligent building in Brazil and the current lack of financial resources, I cannot see a sudden growth in supply in the key cities as a result of the coming international events.  As such, this will allow the Brazilian hotel operators to maintain occupancy and rate growths and investors will see a solid continue growth in their returns.

InterContinental Hotels: the World Cup and Olympics are two events that have deepened the already heated international interest in the country.  As mentioned above, InterContinental Hotels own projects in the various cities where the games will be held and are well aware the potential that events of this size can bring to the tourism segment. Nevertheless, our long term focus is to invest in cities that will ensure a sustainable performance during and after these events have happened.

Accor Hotels: experienced hoteliers will know that, whilst international sporting events will undoubtedly help the country, they only last a very short period.  Whilst we have a strong presence in Rio de Janeiro and all of the cities within which World Cup games will be played, we are very vigilant of supply and demand factors and the risks of over-expansion.

8)What are your expansion plans in Brazil?

Atlantica Hotels: Since 1996, Atlantica has never had nor considered a target for number of hotels or rooms in Brazil.  Our focus has been consistent with our vision in 1996 which simply states that we will be the best place to work, the best place to stay and deliver the best market returns.  This vision has been the driving force of Atlantica’s hotel development as the returns of our products and our image in the market place has attracted more clients and investors.  Today, Atlantica has 27 hotels under construction and scheduled to open over the next 24 months.  These products are concentrated in secondary and tertiary cities throughout Brazil with no particular concentration in any area or state in the country but the products are concentrated in our mid market brands for the business traveller.  In addition, Atlantica has another 32 hotels under development and awaiting final confirmation including financing.  Historically, Atlantica has closed 60% of these types of projects and replaces those not closed by signing a new project approximately every 45 days.  In addition, Atlantica was the first company to offer the ability to convert regional brands of existing hotels to international brands.  Nearly 40% of our inventory represents converted hotels from regional brands as the investors seek products that are positioned for international recognition and consistency in brand standards.

In summary, Atlantica remains focused on our core vision and pioneering philosophy of exploring under supplied markets in the country of Brazil.  Many outsiders have asked if Atlantica has any plans for countries outside of Brazil and Atlantica has remained firm on continuing to grow innovative mid scale hospitality products designed for the business traveller in Brazil.  While other countries have a certain level of attraction, Brazil is what we know and we do well.  Our business model has served us well since 1996 and while we are always innovating and changing, our core focus remains the strength of our group.

InterContinental Hotels: the group is seeking $US 1.2 billion of investment funds of which $ 750 million will go to Brazil.  In addition, we will be growing our franchising business model, whereby an hotelier can manage an operation with the support of our globally leading brand – using this strategy,  by 2020, we will have an additional 37 hotels in the country.

Accor Hotels: Our expansion plan is focused on having 300 hotels in full operation by 2015 throughout Latin America with particular focus on our Ibis and Formula 1 brands.