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Trends

Baltic States, tourists are flocking

The Baltic States have been becoming more and more en vogue in recent years, with record growth in tourist arrivals over the past three years. With increasing direct flights and Culture Capital status, the region should sustain growth in tourist numbers in the coming years, thus bringing active hotel development.

Key facts

  • Population: 6.3 million (2013 census)
  • Surface area: more than 175,000 km2
  • Countries: Estonia, Latvia, Lithuania
  • Hotel supply: 230 (Estonia), 210 (Latvia), 260 (Lithuania)
  • Tourist arrivals: 1.87 million (Estonia), 1.37 million (Latvia), 1.5 million (Lithuania)


Despite a tumultuous history of a series of occupations under brutal regimes, the Baltic Countries have emerged with some of the strongest economies in Europe, emerging back from the financial crisis which growth rates among the fastest on the continent. All three members of the Baltics are liberal democracies with market economies, having come a long way from Soviet occupation over much of the 20th century. After restoring independence with the fall of the Soviet Union, the Baltics set up a system of active cooperation with each other, interfacing each of the countries’ presidents, parliamentary speakers, heads of government, and foreign ministers. They set up the Baltic Council in 1991 as the platform for parliamentary cooperation, and the Baltic Council of Ministers in 1994. In addition to further integration amongst themselves, the states pursued a foreign policy of Western European integration after their Soviet legacies. These states became the first former-Soviet states to join NATO and the EU, both achieved in 2004. Estonia and Latvia have joined the Eurozone as well, in 2011 and 2014 respectively.

The Baltic States flourished in this European positioning, undergoing rapid expansion to achieve the highest growth rates in Europe during the first half of the 2000s. In 2006 GDP in Estonia grew by 11.2%, while the Latvian economy grew by 11.9% and Lithuania by 7.5%. At the same time, all three countries saw their unemployment rates fall below the EU average. However, these countries were hard-hit by the financial crisis in 2007–2010. According to the International Monetary Fund (IMF), GDP in countries of the region (based on purchasing-power-parity) decreased by 13-17% from 2008 to 2009. Today, the Baltic States are yet all classified as "high income" economies by the World Bank, with GDP having risen to 92.5 billion dollars at a 5% growth rate in 2012. Latvia even suggests plans to pay off loans from the IMF and the European Commission by 2014, which had helped it get through the crisis only a few years earlier. The three states managed this miraculous recovery through decisive austerity, now praised by international institutions as a reform model for the rest of the continent and beyond. Now this haven for renewed economic growth in Europe is attracting growing tourism to the region.

Tourism's weight on the regional economy

In all three Baltic States, the service sector makes up the largest economic sector: In Lithuania, the service sector is nearing 50% of its GDP, more than half of GDP in Estonia, and around 70% in Latvia. The service sector is most often dominated by technology, but in Latvia, tourism is a defined key component. In 2011, foreign travelers crossed Latvia’s border 5.54 million times, spending a total of nearly 540 million euro in the country, approximately 4% of GDP. Although tourism is not yet defined as a key priority sector in Lithuania and Estonia, they are also seeing their tourist numbers rise. In 2012, 1.87 million foreign tourists stayed overnight in Estonia’s accommodations, a 3.6% increase over the 2011 figure. Last year, Lithuania reported a 13% rise in tourist numbers, record growth for the country and the world in arrival growth (behind Iceland). This brought Lithuania 1.3 billion euro in revenue. The most conservative estimates for 2013 arrivals put the total number of visitors to Lithuania at six percent above the 2012 figure. According to the World Travel & Tourism Council (WTTC), tourism in the Baltic countries should develop at an average annual increase of 3.3 percent in Estonia, 4.9 percent in Lithuania, and 6.0 percent in Latvia between 2013 and 2023.

This leap in tourist arrivals has been generated by several main factors: high price competitiveness toward visitors from traditional European source markets and high appeal, notably on quickly-rising tourist from markets such as Russian and central Europe. This has led to an increasing number of direct flights to the Baltic States and their selection as recent and soon-to-be culture capitals. Vilnius, Lithuania was the first Culture Capital of Europe in the Baltics, in 2009, followed by Tallinn, capital of Estonia, in 2011. This publicity helped boost tourism numbers to these states, with rising demand bringing more direct flights, especially from Russia. Now, Riga, Latvia is under the spolight with its title as Culture Capital of Europe in 2014.

Given high growth rates in tourist numbers and financial results in particular, the Baltic governments have been deregulating the industry to further encourage Foreign Direct Investment. In Latvia, with tourism as a defined priority, government is investing in marketing campaigns, and developing infrastructure projects, such as the International Airport of Riga. Additionally, companies in the tourism industry are subject to a -12% VAT rate reduction, as opposed to the standard rate of 22%. Policy efforts should support local governments to attract investment, and are a positive sign for the overall investment environment in Latvia.

Baltic development pipeline

With rising demand, hotel development in the region is being generated. The Baltics are expected to see at least 13 new hotels open in the near future. In 2012, eight Lithuanian hotels newly opened or were refurbished. Among the most prestigious is the Kempinski Hotel Cathedral Square for 96 guestrooms in Vilnius, opened in September 2012. Louvre Hotels reaffirmed the hospitality industry’s interest in the region with its September 2013 opening of the Campanile Vilnius Airport for 92 rooms. The group plans to open two further hotels in Vilnius, in addition to prospects in Kaunas and Klaipėida. Two Comfort Hotels also opened in Klapeida. Riga will also see two Première Classe hotels join its supply, for a total of 185 rooms. In addition, Kempinski is furthering its position in the Baltics with plans to refurbish the famous Hotel Riga into a luxury hotel for 232 rooms. Starwood Hotels group is preparing to open the Sheraton Riga Hotel for 312 rooms in April 2014. Two further large hotel projects are currently under development, one for 280 rooms in June 2014 and another for 200 rooms in 2015. Within the next seven years, numerous hotels are planned  in Estonia as well, although yet to be officially announced.

Hilton Worldwide has been recently drawn to the region, having announced its entrance on the Baltic market: the Hilton Tallinn is expected to open in Estonia’s capital in 2016, after having signed a management agreement with project owner Fortuna Travel OÜ. The hotel will feature 202 guestrooms and suites.

Although the region is certainly a growth area for many international groups, Rezidor has a lead in the Baltic States as the largest international operator in the market. The group consolidated this grip on the region in 2010 with the addition of 10 Reval Hotels in the Baltics and Russia to its portfolio, the largest chain in the region, owned by the Norwegian company Linstow. Rezidor now has 13 hotels in the region. Ronald Smithjes who is the District Director Radisson Blu Hotels, Baltics and General Manager of the Radisson Blu Hotel Latvija, confirmed Rezidor’s future aspirations for development in the region in an interview with Hospitality-ON: “We do not have specific growth targets for the Baltic states region, but we want to remain the Number One international hotel operator in this region, and are therefore constantly exploring new possibilities. The economies in the three Baltic States countries are in a positive growth trend, which makes it interesting for us to operate hotels in these countries. Furthermore, the location ensures us of large and powerful feeder markets such as Russia and Scandinavian countries. On top of this, we are at current the largest international hotel operator within the Baltics”.
Furthermore, growth potential in the region is in turn attracting a lot of interest from investors to partner with the group, turning potential to reality. “We are therefore constantly exploring new possibilities, but adding any additional hotels has to make sense for our investors as well as for Rezidor, and our clientele, in terms of positioning and possible Return on Investment”, explains Mr. Smithjes. He also notes growth potential for the midmarket Park Inn by Radisson brand, as the portfolio currently consists of 9 Radisson Blu establishments and only 4 Park Inn by Radisson establishments in the region. Although there is no preference for any particular country in the region, he highlights the capitals for future interest. Thus the midscale segment, both business and leisure, in the capitals remain on Rezidor’s radar.

Baltic hotel chains

Aside from international brands, the Baltic region also has an active market of native hotel groups, such as Meriton Hotels and Baltic Hotel Group, both based in Tallinn, Estonia. Both groups are small, with only a few establishments in either portfolio, needing some time to get off the ground as they were founded on the heels of the collapse of the Soviet Union. Meriton was founded in 1995 with the purchase of Hotel Tallinn. The renovated and expanded hotel opened its doors in 1999, managed by the French Accor group as the Grand Hotel Mercure Tallinn. In 2000 however, the operating contract was terminated and the hotel became the Grand Hotel Tallinn. The group further developed in 2001 with the Villa Mary, and then in 2004 with the Meriton Old Town Hotel Tallinn for 41 rooms.  The Meriton Conference & Spa Hotel and Old Town Garden Hotel opened in 2009. The Meriton Conference & Spa hotel and Meriton Grand Hotel Tallinn were united to create the Meriton Grand Conference & Spa hotel Tallinn, bringing the group’s portfolio to four today. The portfolio of Baltic Hotel Group includes Baltic Hotel Vana Wirlu (82 rooms), Baltic Hotel Promenaadi (13 rooms), and Baltic Hotel Imperial (35 rooms).

Challenges for tourism development

As is the challenge with any developing tourist market, the Baltic States are focused on a need for renewed tourism products in order to feed and grow current demand, all year round. In order to do so, governments are pushing the development of medical and health tourism, conference tourism, as well as culinary tourism, in addition to rural tourism which is currently in high demand in all Baltic States. In Latvia, the Economy Ministry, the ministry responsible for tourism, has set several specific economic goals for the tourism industry. By 2015, the ministry aims to increase the proportion of foreign tourists who stay three or more days, increase the export of tourism services by 5 to 10 percent per year, and increase the tourism industry’s share of GDP to the Eastern and Central European average of 5%.
Despite the high optimism for the sector, Mr. Smithjes warns that the Baltics have not fully healed from the recession which caused many denizens of these countries leave home to find work elsewhere. Therefore, in addition to updating product as in infrastructure, service must also be reinforced to bring back the workforce lost to the crisis of 2009. “The hotel industry is predominantly a peoples' business”, underlines Smithjes. “We need a lot of hands to cook, serve, host guests and clean rooms; this makes it difficult for us to find enough qualified and skilled workforce throughout the region”, he continues. This observation reinforces the notion that government programs to boost tourism in the Baltics would be wise to attract workforce as well as holidaymakers, making sure that demand can be supported by a competent supply.

If the countries of Southeast Asia are the Asian Tigers with their quickly developing economies, the Baltic States on a small scale can be regarded as Europe’s Tigers. Little more than a decade after independence from the Soviet Union, these three countries have developed functional democracies and market economies strong enough to lead the European Community in economic recovery, and are growing their tourism sectors at double-digit rates. Now it remains for the region to meet this influx of demand with a growing hotel supply through the growing interest from international groups and the tenacity of its own regional chains. The supply side of the equation must also grow, with updated product and a more numerous and competent workforce to meet demand.

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