The intricacies of Hyatt’s plan to scale ryokans in Japan

Underwriting a ryokan investment, especially located in the regional areas of Japan, is more intricate than the rituals of staying in one. But Kiraku, Hyatt Hotel Corp.’s equal joint venture partner in developing a new ryokan brand, Atona, expects an ROI within two to three years upon opening the first property.

Atona will be a hybrid between a ryokan and an international hotel experience. But Hyatt is not the first to be reinventing ryokans. It is, nevertheless, the first large global hotel group to envision a branded ryokan chain of real scale.

Jim Chu, Hyatt’s Chicago-based executive vice president and chief growth officer, has in mind “at least 50 ryokans” in Japan, when asked about the number in an interview at HICAP 2022 last October.

We have a track record and a good relationship [with lenders] from our previous projects. Plus, a name such as Hyatt and [its distribution of] 30 million guest profiles, add to the sense of security for investors and lenders.

Kou Sundberg

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Hoshino Resorts, the acknowledged pioneer of luxury ryokans in Japan, has only 22 ryokans under its Kai brand after several years.

The challenges of a bigger scale are manifold. An obvious one is staying authentic, avoiding commoditizing or standardizing a product whose charm lies in great part to its individuality.

Underwriting is a lot of guesswork. “There are too many variances,” said Kou Sundberg, president and CEO of Kiraku, when asked how he’s underwriting the first Atona ryokan which is targeted to open in 2025. “You might be averaging 80% to 85% occupancy in say, Kyoto, but 60% to 70% occupancy in the regional areas. Seasonality is huge. The business model is different from [normal] hotels. And traditional ryokans have near zero or zero revenue management.”

Atona, announced in September 2022, is still in design phase. This early, however, it has hit a construction roadblock in the shape of supply issues and rising costs.

“We’re seeing costs rising by about 30% to 40%, in part due to weakness of the yen. The lack of supply is shocking,” Sundberg said. “For example, we got steel for the other projects within four months of ordering. Now it takes about 12 months. We know that a lot of paused 5-star projects in regional areas that are waiting to restart after COVID have not done so.”

“We will have to adjust our plans and study the construction market and costs of materials in order to make the right decisions,” he said.

But Sundberg is still hopeful about an initial rollout of 10 Atona ryokans, the first in 2025. Land costs in regional areas have been decreasing for the past 24 years, he said. There is also keen interest from financial institutions and “sustainability-focused” family offices for Atona.

“We have a track record and a good relationship [with lenders] from our previous projects,” Sundberg added. “Plus, a name such as Hyatt and [its distribution of] 30 million guest profiles, add to the sense of security for investors and lenders.”

Before founding Kiraku, Sundberg was investment analyst at Fortress Investment Group, overseeing acquisition, asset management and operation of the U.S. firm’s domestic hotel portfolio in Japan.

“With Atona, it is kind of scaling what we have been doing, even though the concept is a bit different from what we have done,” Sundberg said. “Nazuna and Kiraku properties are focused on the renovation of cultural assets and ryokans, whereas Atona is more hotspring-oriented in locations within national parks and hotspring towns.” said Sundberg.

Good relationship with municipalities is also advantage in identifying locations for Atona.

“We’re looking at a few places. My vision is for Atona to be in unique hidden destinations, initially within two hours by car or train from Tokyo, Osaka or Kyoto, then further, say six hours. So, if you stay a few nights in say, Tokyo, you could start stepping into regional places and experience a ryokan stay with Atona,” he added.

But he's also aware of increased competition in the space, saying a lot of global private equity funds are also looking to renovate or convert ryokans into luxury accommodations, seeing the high rates they can fetch.

“Everyone is asking me, what are you trying to build, what’s the cost, what’s your FFP budget? It’s a secret sauce that I don’t really want to share,” Sundberg said with a laugh.

Experience brings differentiation

Sundberg is counting on his experience in running ryokans in the past five years for some indicators. Kiraku operates four ryokans under the Nazuna brand, and 10 eponymous Kiraku private villas.

Nazuna Kyoto Nijo-jo

Sundberg expects Atona to fetch a rate of $600-$800 per night, per room. That’s higher than the Nazuna ryokans, which fetcha $500-$600.

The two are different models, however. Nazuna ryokans are small. Nazuna Kyoto Tsubaki Street, for example, is a conversion of an alleyway of michiyas (traditional wooden townhouses) into a 23-room ryokan. Nazuna Obi Onsen Resort is a renovation of a large samurai mansion. It has just five rooms.

Atona ryokans, on the other hand, are largely new-builds and have a bigger room count.

“A lot of luxury ryokans have just below 20 rooms, while luxury hotels such as Park Hyatt Kyoto have around 70 rooms. We're aiming for that middle point, 30 to 50 rooms, which allows us to operate the F&B as a restaurant,” Sundberg said.

F&B is a big reinvention area for Atona because traditional ryokan inclusions such as multi-course Japanese breakfast and dinner served in-room at specific times daily may not sit well with modern global travelers.

“Whenever I go to a ryokan, I'd wake up in my tatami room at 7 a.m. and as soon as I’ve eaten in the room, the futons are taken away and I can’t have my second sleep,” Sundberg said. “Or, you might have been out during the day and eaten a great lunch and all you want is a light meal for dinner, not a full course.”

Plans are to offer a la carte in a restaurant. Guests can choose to have a ryokan kaiseki multi-course dinner if they so wish. We’re thinking a lot about F&B these days. We want to give guests the flexibility and choice of cuisines,” Sundberg added.

Atona’s room size will also be bigger, around 50-60 sqm. As the brand centers around hot springs and nature, Sundberg aims to offer a semi-outdoor or outdoor onsen bath for each room.

He believes the wellness component and a different F&B concept are two value-adds that will enable Atona to fetch a higher RevPAR in the market. Atona should also perform better than competitors by running a more efficient ryokan operation, Sundberg said.

“What we’ve been doing at Nazuna is to keep a high GOP margin by optimizing the operations,” he said.

All Nazuna and Kiraku properties have implemented Hamlet, a property management system developed by Kiraku, to manage day-to-day operations, collect KPI data and improve overall operational efficiency.

While increased construction costs are a bane, current upswing in business fans Sundberg’s positive outlook for Atona.

Since Japan fully opened borders in October 2022, business is booming. “Our occupancy in November for Nazuna properties was 91% to 97%. December ended strongly as well, 75% to 85%,” he said.

“I’m telling the revenue management team to increase rates,” Sundberg said.