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Hostels deliver good travelling vibes

11 December 2015
11 Dec 2015 -

Four men and women wearing rucksacks walking on pavement, side viewAn increasingly mobile youthful population and a strong mobile strategy is making HostelWorld a prime investment target.

Banish the thought of hostels as down-and-out barracks for students and impoverished writers. So out of date! Retune to 2015!

Here the travelling young are a lucrative USD 230 billion global market, hostels come as boutique hotels and their OTAs can star on stock exchanges in London and Dublin with a GBP 200m ticket.

Hostelworld, the hostel OTA, has just made a great stock market début priced at 185p a share. The price has since powered on, having no trouble reaching 230p (though it has met some profit-taking). This Dublin-based business synthesises the often overlooked budget youth travel sector, the launch documents revealing a big money scene. Growth in it is rapid, and that USD 230 billion is forecast by STAY WYSE, the youth travel industry association, to reach USD 336 billion in the next five years.

Another relevant number, one researched by University World News, put the number of internationally mobile students last year at around 5 million. It notes that while Asian student mobility is still the greatest driver for growth, European student mobility is also rising rapidly.

Backed by these kinds of numbers the IPO went down a treat with the funds. Takers included top fund manager Neil Woodford, who picked up 13.5 million shares (14% of the company).

Increasing investment is changing this market. Given the facilities on offer, it is no wonder that the term ‘poshtels’ has been coined. Hostels are making a bid for the cost-conscious but style-seeking consumer, glamourising communal living, to compete with boutique hotels. Targets are the young, families, business and single travellers who go for the social aspect of staying at hostels and the low prices charged.

In the UK, Euromonitor reckons the hostels segment could notch up 3% annual growth to reach sales of GBP 216 million in 2018 from 653 hostels. Hostelworld’s business model keeps its price at around GBP 12.

The spending power of the millennials is attracting a wide range of investors to hostels’ top end

Hostelworld is part of a fast growing industry. In the US, Freeland debuted three years ago, becoming just one company expanding in the hostel market there. On the other side of the Atlantic, Generator Hostels and Beds & Bars’ St. Christopher’s Inns have both grown fast out of London bases. The spending power of the millenials is attracting a wide range of investors to hostels’ top end, including European property investment groups Fonciere des Regions and Patron Capital Partners and US investors Invesco.

Invesco has bought 23% of Generator, investing EUR 60 million. Fonciere des Regions has announced that it is to invest EUR 400 million in European hostels in the next three years. The attraction to the property groups in hostels is that the high room occupancy rates generate good profits.

Hostels are also ‘super-attractive’ to investors because the companies that operate the properties look after them, said Philippe Le Trung, head of corporate development at Fonciere des Regions in an interview with Bloomberg. “They need partners to develop new things.”

Hostels are “catering more for what millenials want, like and need in terms of accommodation versus traditional baby boomers,” says another Bloomberg interviewee, Howard Roth, head of global real estate at auditing firm EY. Among investors, “there’s the mindset and the appetite for anything that can create a yield.”

So Hostelworld got this market right. Irish founder, internet entrepreneur Ray Nolan sold the business to private equity group Hellman & Friedman in 2009 for a reported EUR 202.5 million, and they’ve developed it. There is a global hostel database with over 12,600 hostels and approximately 21,000 other forms of budget accommodation available in more than 170 countries.The customer-generated review database has about 8 million post-stay customer reviews (accumulated since 2005) adding at the rate of 400,000 in H1 2015.

Hostelworld owns and operates multiple customer websites and apps through Hostelworld, its flagship and leading brand, along with supporting brands Hostelbookers (acquired in 2013) and Hostels.com (acquired in 2003). But Hostelworld is the primary source of traffic.

On top of technology

The company, which describes itself as the leading global hostel OTA, has “a lower cost distribution channel than most other major OTAs, starting at a base commission rate of 12%.” Its commission range is generally 12-20%.

Revenue has grown from EUR 52 million in 2012 to €79 million last year and in the first half of 2015 reached EUR 44 million. While Hostelworld made EUR 9 million at operating level in 2012, the budget has been investment-heavy since and for several years it reported operating losses. However, in H1 this and last year it delivered EUR 3.7 million and EUR 6.5 million profits respectively.

38% of Hostelworld’s total bookings originated from mobile devices(including tablets) in the first half of 2015 compared to just 12% in 2012

A fair amount of money has gone into Hostelworld’s in-house platform, iOS, Android smartphone and tablet apps technology and to supporting its ‘’mobile first’’ strategy. It estimates that more than 38% of Hostelworld’s total bookings originated from mobile devices(including tablets) in the first half of 2015 compared to just 12% in 2012. Money from the IPO will be spent on further technology development.

Hostelworld’s IPO raised GBP 125.4 million. The company said it would use the money to “further raise our already strong brand awareness in our growing and worldwide marketplace”. It is very aware that, while a top specialist, it does not have this market to itself. Closest competitors are Hostelling International, a not-for-profit organisation, and its website hihostels.com, hostelsclub.com and gomio.com. The major competitors listed in its launch documents include all the usual names from Booking.com to Airbnb, Google, TripAdvisor, etc.

So, it is working with hostel and other accommodation groups to provide a flexible pricing model with opportunities to increase yields and will continue to do so. “As a result, the Group expects to realise potential new revenue optimisation from enhanced B2B products and additional services provided to accommodation providers,“ it says.

Last year’s numbers seemed to show that Hostelworld has been doing the right things, with 7.1 million bookings made and approximately 155 million visits to its websites and apps. Its appeal seems to be hitting the right buttons, with 90% of its customers being 35 years or under and 77% under the age of 30. Customer satisfaction numbers look good, too, with a growing repeat rate – trending from 57% in 2012 to 59% last year.

There seems to be plenty of scope for expansion. According to a Research Now Survey of 18 to 34 year olds in seven key markets, only 17% of respondents stated they have stayed in a hostel while 71% said they would “consider doing so.” So, as investment takes hostels’ image up-market, Hostelworld hopes, success will breed success and bring further growth.

Source: Eye for Travel