GLOBAL REPORT—Hostel companies throughout Europe are adding standalone guestrooms to the mix to appeal to more guests and investors alike, according to sources.
Companies such as Germany’s A&O Hostels, the United Kingdom’s Generator Hostels and Italy’s Plus Hostels are getting in on the action, converting old factories and schools into properties that feature individual rooms as well as the dorm-style, shared spaces that long defined the hostel sector.
Others, such as Meininger Hotel Group, mixes dorm and regular rooms mostly in new builds.
Phillip Winter, A&O’s head of marketing, said that the company, which has 21 German properties as well as three in Austria and one in the Czech Republic, started offering private rooms because it felt some markets already had too many dorm beds, notably Berlin, which has approximately 3,500 beds. Overall, A&O has 5,250 rooms and more than 17,100 beds.
Harry Douglass, senior associate in business consultancy HVS’ London office and author of 2013 report “The sharing market: Commercial hostels in Europe,” said the sector took off in Germany when Meininger and A&O began hosting domestic school group trips, which the German government subsidizes.
According to the report, in 2013 there were approximately 34,700 beds in European hostel-hotels, although there was no indication of the number of rooms.
The report also states that in the U.K., hostels are now competing head on with limited-service lifestyle brands such as Motel One, Tune and CitizenM.
Douglass said hybrid brands are of increasing interest to traditional chains, which he believes might enter the space with fat wallets. Some are countering threats via development of tech-heavy, small-space product such as Marriott International’s Moxy.
“Traditional hotel companies want to increase direct booking and minimize impact from online travel agencies, so these hostel-hotel groups are especially important. They capture travelers from Day One and can keep them for their lifetime,” Douglass said.
Dynamic guests
As shower blocks are replaced by stylish design and social spaces, hostel-hotels are picking up new legions of fans seeking a relaxed atmosphere and lower price point.
“Classic backpackers are more likely found in Bolivia or Vietnam, while Europe is increasingly seeing a more affluent youth traveler, traveling with a wheelie-bag rather than a rucksack,” said Carl Michel, executive chairman of Generator Hostels, which has eight properties throughout Europe.
Michel said the age range of guests at his properties has broadened, although generally guest profiles skew relatively young. Additionally, the properties have seen many business travelers, he said.
According to Winter, 10% of A&O’s guest mix is corporate travelers.
With classic loyalty schemes appealing less to millennials and hostel-hotels successfully building advocacy and trust via social media, sources said generational disconnect is growing.
“Our different target groups are to our advantage. The school group guest returns during holidays with friends; later on with a (significant other) in a twin room; even later with kids and (spouse) in a family room,” Winter said, adding that this is not wishful thinking but what executives at the chain have seen.
A new kind of metric
With a burgeoning niche sector comes a growing performance metric: revenue per available bed, or RevPAB, which makes more sense for the sector than reporting skewed revenue-per-available-room information.
“We do gross it up to average room rate when talking to investors. Hostel economics drive extensively off the point that we are space efficient. The profit per square meter is greater,” Michel said.
A&O also uses RevPAB but switches to RevPAR and occupancy when comparing performance with budget hotels not offering dorms.
Calculating total RevPAR, or in this case total RevPAB, is useful. Food-and-beverage operations—with all those hungry dorm-room guests to feed—are an important element.
“Ancillary income is increasingly important. Our food-and-beverage offer has been substantially improved across our estate, approaching 25% of room revenue. (This) looks set to grow more strongly,” Michel said.
Niche expansion
After launching in Europe’s hipper cities such as Berlin and Barcelona, the niche is expanding into trendy secondary locations such as Belgrade, Serbia, and Tel Aviv, Israel.
Suitable location drivers are the presence of new, low-cost, intra-European airline routes and growing art, music and fashion events.
Michel said Generator is considering rolling its brand into resorts and North America.
“The goal is 18 to 20 properties within three years, around 12,500 beds. In parallel, we’ll develop a range of premium rooms,” he said.
Winter said A&O looks to open annually a minimum of two properties.
“The German market is occupied well. That means A&O will become more and more international, and franchising could be an interesting option for future development,” Winter added.
Douglass agreed secondary cities in Europe will be the model’s next expansion area.
“It’s a real-estate play. If RevPAR is high enough and real estate remains good, then this model can be recession-proof. Guests will always consider trading down,” he said.
“The biggest challenge with moving into franchises will be maintaining consistency of product and service,” Douglass added.