If you are at a conference with 50 Scandinavians, it is likely that one or two of them may be staying at a fancy hotel, but will be too embarrassed to say so. The majority will probably have chosen something in the mid-range. Simply put, ostentatious wealth is generally sneered at by those in the Nordic region.
It’s a rather sweeping appraisal of Scandinavians, but Peter Tengström of Midstar insists the scenario is accurate. “It is not within us to show off money and fancy cars,” says the CEO. His imagined scenario offers insight as to why the mid-market hotel segment is so pervasive in the region. “There is a mentality here that luxury is the choice to put your money where you want.”
Tengström’s company invests in hotel real estate, and has 14 hotels of 100 rooms or more in its portfolio in Sweden and Norway. He says that hotel guests in the region favour trendy offerings or interesting products over extravagance. This also means operators can charge a high premium without delivering luxury service, but they have to be sure to offer quality.
The proliferation of mid-market hotels also has to do with tight margins. “We are an expensive part of the world,” says Christian Kielgast, co-owner of Nordic Hotels Consulting, which buys, sells and finances hotels across the region.
“The average rate of hotels has dropped compared with other key European markets, and the net price that hotels have generated is not super high.”
He says that to deal with the market constraints, local operators have learnt to run efficient hotels “without going completely crazy on the price”.
Low profit margins and high operational costs are two premises of the same argument that international brands have often debated. Rather persuasively, it has made foreign chains sparse in the region.
Tengström refers to a period between the late 1980s and early 1990s when Sheraton entered the market in Copenhagen, Malmö, Gothenburg, Stockholm and Helsinki, opting for signed management contracts.
Outdated, these contracts had managers running on top-line fees without a more modern and motivating incentive scheme. “Quite a lot of these prestigious hotels suffered with profitability due to badly written management contracts,” Tengström says.
With only one Sheraton left in Stockholm, Tengström’s appraisal seems accurate. “There are a few operators offering lease agreements, but if they consider taking on that liability, they want a higher profit margin than Nordic operators are used to.
“I think there are quite a lot of people, us included, who would love to have international operators in our part of the world. But you will have to be bold to jump in.”
Intercontinental partnerships
A seemingly obvious solution for international brands would be to tap into the regional market with the help of local expertise. Choice franchise’s Nordic Choice is a good example, having grown to about 200 hotels in the region. “They’ve done a tremendous job promoting the brand,” Tengström says, “but if you ask the average Scandinavian, they’d think it is a Scandinavian chain, not a global one.”
Besides Choice, the Red Star Group and Accor, international operators are reluctant to enter the Nordics. “It’s a big geographical region, but only has about 20 million people,” Tengström says. “There is not much emphasis on cracking the market. They might have a hotel or two in Stockholm, Copenhagen and Oslo, but that’s about it. They are not usually interested in going to the regional cities.”
Intra-Scandinavian travellers are the dominant demographic in regional destinations, which is another reason why international brands are not highly valued. Despite the scarcity of global names, the regional operators are growing consistently, although some areas are more popular than others.
“We see quite a significant difference between the capitals and the rest of the countries,” Kielgast says. Defining the Nordic region as Norway, Denmark, Sweden and Finland, he says Copenhagen and Stockholm have stuck out a bit as big achievers. Kielgast cites the Danish capital as “taking the lead” in leisure and international growth. Other areas of the countries see mainly domestic and regional visitors.
Leisure travel has been outpacing growth in corporate demand, according to Kielgast, but there has still been impressive performance for individual units, such as conferences and group markets.
Tengström splits business and leisure figures down the middle in Copenhagen, with corporate travel dominating Stockholm and Oslo’s markets by about two thirds. The CEO says it is important to view the region’s growth pragmatically: “It is coming from an extremely low level, so growth rates are obviously fantastic.
“When I started working in the hotel business in the early 1990s, we barely had any tourism coming to Stockholm at all. We had occupancy in the week of 60–80%, but in the weekend it dropped to 30%.”
Growth continues and the region should not be underestimated. “We never win on climate,” Kielgast says, “but with a lot of security issues in Paris, London and Brussels – people look at that as well. Until something happens here, the Nordic region is considered a safe destination.”
The absence or low chance of terror attacks is a major draw card for the region, but fluctuations in exchange rates also play a big part in its attractiveness. “Sweden and Norway’s currencies are not pegged to the euro,” Kielgast says, “so in the last couple of years, its decline has made it relatively cheaper for a broader European market and those from the US.”
Tengström reiterates Kielgast’s sentiments regarding safety and cost, adding that the price has gone down by as much as 5–10% in the past few years. Growth must also be attributed to the business savvy of regional operators offering creative products with technological additions and maximised space. “I think they have changed the ethos a bit in mid-range, three and four-star hotels,” Tengström says, “making it more casual and geared towards millennials.
“There are some things happening but the jury is still out [as to] whether these are good or bad. Making hotels more approachable for local guests has been the general theme. Operators are saying, ‘You know, let’s not just have hotel guests in our hotels. Let’s invite the local people to the bars and restaurants.”
New demands
The surge in leisure and international demand has made operators think about creating a conceptual element to their offering and how this can attract different segments. “The Nordic region used to be fairly static,” Kielgast says.
“It was predominantly mid-market hotels with a few Nordic players that controlled the majority with a fairly homogeneous product. They didn’t go too far from the pre-defined menu of what hotels should look like.”
Consumer demand is indeed changing and operators are tapping into this shift by taking an active approach to fresh concepts and how they can add value to a building. Kielgast says this has made hotels increasingly attractive to investors, not just existing hotels, but conversions and new hotels, too.
Tengström notes the consumer shift with positive growth in lifestyle, boutique and limited-service hotels, particularly in Stockholm and Copenhagen, but cites an important change for hotel guests from merely booking a room at a nice hotel to thinking seriously about where and why they are staying somewhere. “This goes hand in hand with companies having greater corporate social responsibility,” he says. Operators need to reflect the changing moods of travellers.
Never far from talk of social responsibility is the topic of sustainability, which Kielgast regards as one of the region’s attractive selling point. “Something as basic as clean air – I mean, if you look at Beijing, clean air and unspoilt nature are increasingly rare.”
With strict building codes in the region, much of the natural splendour is protected and celebrated. Kielgast refers to sustainability as a “self-fulfilling prophecy”. Hotel operators and tourism boards actively market the region’s green credentials, which shapes the general global perception, which, in turn, refocuses demand for sustainability.
The region, particularly the major cities, has been marketed well by the respective tourism boards. What started as an intra-regional competition, such as Denmark versus Finland or Sweden versus Norway, was quickly abandoned.
“People realised you need to market a destination rather than a country,” Tengström says, “like how Spain succeeded with Barcelona or Majorca.”
Tourism boards in Stockholm and Copenhagen have impressively marketed their cities, and even Oslo is performing better, with Norway opening up to tourism as the national economy struggles with a floundering oil industry and weakened currency.
“I think the cities have been getting a lot of positive press,” Kielgast says. “Take Copenhagen as an example, we had a gastronomic revolution, which put the city on the map with coverage in lifestyle magazines such as Monocle or in big publications like the New York Times.”
Good press and effective marketing has given the major cities in the Nordic region “second-tier” appeal, according to Kielgast. Big global destinations such as Paris, London and Rome remain the first choice for most tourists, but once they have been visited, the Nordics become fascinating alternatives.
Investment in infrastructure, such as bigger airports and more low-cost airlines offering more routes, has also added to growth, particularly in the leisure market. Perhaps, rather dichotomously, the growing cruise industry has also helped develop the market in some areas.
Copenhagen and Stockholm are part of the Baltic cruise network that often includes Helsinki and even St Petersburg. Copenhagen specifically has benefitted from this, as it is often the starting point or final destination of the cruise. This has provided much growth in the leisure and international markets; however, hotel operators in towns and cities along the cruise route receiving only day visitors are less enthusiastic. Having what is essentially a big floating hotel passing by is not what land-based operators want to see.
Despite the cruise industry’s threat to some hotel operators and the general reticence of global brands to get stuck into the market, the Nordics are growing in popularity. As many cities become more polluted and the fear of terror attacks worsens, clean air and safe travel offer major advantages for the region. Just remember, though, when stuck in a room with 50 Scandinavians, to keep quiet about your hotel’s address.
