Like many successful companies, Hostelworld resolves to win by maintaining its focus on what it does best: Selling hostels. Its big challenge is to generate more awareness about the modern and socially oriented hostel while larger players like Airbnb and Booking.com suck the air out of Google.
After executing an initial public offering and listing on the London and Dublin stock exchanges in November, Hostelworld, which previously had been majority-owned by a private equity firm, gained some autonomy and can now move a lot faster in a market that requires such flexibility.
That’s the view of CEO Feargal Mooney, who joined the Hostelworld Group in 2002 as COO and CFO.
In recent years, Hostelworld, which also operates Hostels.com and HostelBookers.com, has eliminated consumer booking fees, raised based commissions to 12 percent, and embarked on campaigns to change often-ill-conceived notions about the value proposition of today’s hostels for solo or duo-traveling guests.
Skift discussed Hostelworld’s future plans with Mooney, who touched on the varied dynamics of competing against Airbnb and Booking.com, newly focused marketing campaigns and expansion in Asia.
An edited version of the interview follows:
Skift: You have mentioned that your management team gets a little bit more autonomy after the IPO. So what is your thinking about the way forward, and what does that concretely mean? Is there spending you can do in opening up in new markets that perhaps you couldn’t do before?
Mooney: I think if you think about some of the changes that you might make in your business strategy as the business developer. Even look back over the course of what had happened in our business, and what we had done over the course of the last three or four years, we’ve made some very significant changes, and with the support of a private equity shareholders, around changing our pricing models.
We used to charge a customer booking fee, which was a very significant piece of our revenue. We dropped that in 2013 and we, over the course of last year, made some changes to our marketing strategy, and invested fairly heavily in the re-branding of the Hostelworld site and invested in a lot of brand advertising over the course of last year, as well as investing into developing our mobile offering.
All of those things were things that we did anyway because they’re the right things to do, and as the management team, we’re setting our clear strategy. But when you’ve got a private equity shareholder and you’re saying, “We want to drop booking fees but we want to invest more in brand marketing,” they’re clearly thinking well, “Will we get a return on this within the lifetime of our investment?” While it’s the right thing to do for the medium and longer term sometimes it takes a little bit more persuasion, it takes a little bit longer to get there.
Skift: You mentioned the booking fee, and I guess one of your differentiators to accommodations owners is that distribution charges through you are lower than they are through the major online travel agencies. How did dropping the booking fee for consumers play into that? Did you have to raise the commissions, or how did that work?
Mooney: We did. For a long time we had a 10 percent commission to the property owners. We now have a base rate of 12 percent so it’s a little bit higher but still, as you point out, significantly lower than pretty much any other generalist OTAs that are out there.
One of the other things that we did is we developed some other tools that hostel operators can use, and can opt into to or not, for their own business. One of those is a featured listing product for hostels. They can buy a separate advertising slot at the top of the destination page, and the other one is an elevate product, which allows hostels to bid a higher percentage for better placement on the page.
What that does, I think, is again it puts a little bit more power into the hostel’s hands because historically if you’re running a hostel and you were seeing low occupancy, the only real tool you had was to lower your price. Then the guy down the street lowers his price as well, and nobody does any better for it. Whereas now they can give themselves a little bit of a boost either through a featured listing, or through elevating.
Skift: So what are your biggest challenges going forward? Are you trying to be known as more of a budget accommodations site and more than just for hostels? Or is it to get more inventory?
Mooney: No, I think it’s actually quite the reverse. We are very, very focused on hostels. That’s what we do, that’s what we focus on, that’s what we do best. We do it better than anybody else, and that is one of the unique characteristics of our business. Now, we do have other budget accommodation types on our platform. We have some budget type B&Bs. We have them, but they’re really just as a background product where a destination doesn’t have hostels, or doesn’t have a lot of choice of hostels or on busy nights where levels are high, [they are there] just to be able to book something in the budget range.
Where we have hostels, then that’s what we flog and that’s what we book. Over 90 percent of our reservations go into hostels, and that’s significantly increased over the last few years. I think the way we feel about it is that while we could look and say, let’s try and sell some intimate budget hotel, it might be a higher price point, we might make an extra little commission, but that really isn’t what we’re about. And I think what we’re about is being something different, being something unique, and everything about our brand positioning is focused on the hostel experience.
The hostel experience is not just about a cheap place to stay. It’s very much about the social aspects of the hostel stay. People, when they’re staying in hostels, they go there specifically to interact with other international travellers, and our customer base, over half of our customers, are traveling solo. What that means is they really want that social engagement you only find in a hostel, and by being focused on that, I think that’s what makes us unique.
If you look at our core millennial kind of customer audience, we’re very much aware that even when they’re booking travel, hostels aren’t always top of mind for them. That’s something that we’re setting out to try and change and raise the awareness. Some of that has driven our change in our marketing strategy over the last year, but historically our marketing investment is almost exclusively into paid search, and what that meant was that people have to be booked, aware of, and actively searching for hostels in order for us to engage.
We just weren’t engaging with the right audience, and through our brand advertising now and whether that’s advertising we did last year with TV and cinema and so on, or whether it’s on some of the other digital channels, Facebook, YouTube, display advertising. We’re reaching out to a wider audience, highlighting the quality of hostel product today, but also how the hostel experience is different to any other accommodation types.
Raising awareness is a big piece and then also changing perceptions because quite often when you mention hostels in some parts of the world, people have a negative perception of hostels. People think that the hostels that might have been in place 30, 40 years ago, they tend to be cheap but that was about all and not necessarily a high-quality product. I think not everybody realizes the evolution of the hostel product over the last number of years. A significant amount of investment that’s gone in to the hostel product, and most of the hostels are high-quality product with all of the facilities and amenities that you might find in other travel accommodation types. Whether that’s a cafe, restaurants, bars, nightclubs, some of them have swimming pools, and people aren’t necessarily aware of that.
Skift: As your advertising shows, you also want people to know that if they stay in the hostel, they can go skinny dipping, right?
Mooney: Not necessarily. I think clearly we have one of our ads which features a group of hostelers, backpackers, customers, who are in Mexico and go skinny dipping, but I think the key message there is not really skinny dipping. It is about that social nature of the hostel experience.
You got a bunch of kids walking into the hostel and the fact that they are so comfortable with each other, they’re interacting with each other, that they are prepared to go skinny dipping before they even know each other’s names.
I think that is an example of what marks out the hostel experience from, let’s say, a hotel. You walk into a hotel lobby, there’ll be people in the lobby at coffee tables or whatever, but if you sit down beside them and start engaging them, they’ll look at you a bit funny, and say well, “What does he want?” Whereas in hostels, people expect that you’ll want to engage with them. People expect you want to be comfortable with them, and that’s part of the experience so it doesn’t necessarily have to be skinny dipping. It may be skinny dipping, but it’s really just highlighting the social nature of hostel experience.
Skift: Is there enough upside for you as a company just to increase awareness about hostels? Or does the hostel ecosystem have to grow as well?
Mooney: The hostel ecosystem is growing as well. There’s significant investment going into the supply side of hostels, and if you look at the hostel supply and see the investments that have been made in the last years. This is different than what was indicated 10 years ago, where hostels tended to be a kind of single operator lifestyle business. You now have serious investment in hostel properties. You’ve got private equity investment into hostels, you actually have a publicly listed hostel operator company on the London Exchange.
You’ve got chains of hostels beginning to develop, and they’re opening and investing in purpose-built, from the ground up, quality product, and quite often it is an 800- or 1,000-bed facility with all of the amenities, as I just described. And they are better than any of the hotels that are up there, and they also have the social experience. So the supply is coming and you look at destinations like Paris, Barcelona, Amsterdam, and so on, and see the hostels that have opened there … Generator, St Christopher’s, Meininger, all those chains which have invested in opening. And the same thing is happening down in Australia with Nomads and Base.
The U.S. is significantly underrepresented in terms of hostel product, of course. That is because there isn’t a clear separation of licenses in some parts of the U.S. but nevertheless, there’s investment going on there as well. For example, Freehand Hostel in Chicago and Miami. We’ve seen over the course of the last three or four years that investment is there, supply is there. There are large hostels in key destinations that are building that supply and our job is to build the demand that meets that.
Skift: How do you deal with the challenge of Airbnb and Booking.com? A lot of young people think of Airbnb as the place to go for budget accommodations, and on the other hand Booking.com has their 905,000 properties so if you want to see what’s available in the entire market, that’s the place to go.
Mooney: We think about both of those quite differently. What I will start with is saying that, of course, everybody in the online accommodation market that competes at this level is trying to get customers in the door to our properties. So there’s always an element of competition there. Having said that, there are some that we compete with more directly than others.
In relation to Airbnb, that is something that we would see as being quite a different product, at a very different price point. If you think about even what Airbnb might have started as, compared to what it is now, Airbnb was essentially vacation rentals right? It is HomeAway or Flipkey with a brand that’s likely to appeal more to a younger audience. And in terms of it being a lower price point and cost effective, if you are traveling with a group of six or seven mates, then possibly renting an Airbnb house or apartment might be cost- effective.
That’s not who our customer is. Over 50 percent of our customers are traveling solo, another 35 percent of them are traveling in pairs. So if you’re one or two people the cost of renting an apartment or a house on Airbnb just isn’t cost-effective. It isn’t good value proposition. If you’re traveling solo, you probably want to meet other people, have that social interactive experience that you’re not going to find with Airbnb. From that perspective, there is less of an impact from Airbnb.
Clearly, Airbnb does have an impact more on the other vacation rental providers, it does have an impact on hotels, and there may be some knockoff impact from that in terms of hotels under pressure from Airbnb impacting their price point. And the price point of hotel rooms coming down. Coes that mean that there’s an adverse pressure on the hostel price point? We wouldn’t necessarily look at them as a direct competitor. That’s not to say that our customers aren’t going to use Airbnb for certain types of trips, but not the types of trips that they’re booking with us.
Booking.com we think about it a bit differently. They are more of a direct competitor in the sense that they are, if you look at who is delivering bookings into hostels worldwide, we are the largest distribution channel, the largest OTA for hostels worldwide, and Booking.com is the second largest. We have significantly more market share than they do in the hostel space, and that’s because we’re focused on hostels, and that’s what we do well.
As far as Booking.com, there’s 905,000 properties they’ve got. Very deep pockets, and they’re driving huge volumes of traffic through the site, and having hostels included in that 905,000. Clearly some of those hostels get bookings. It seems to be delivering quite a different customer into the hostel compared to ours, and you know quite often it’s a customer that may have been looking for a little low-price hotel, sees a hostel and may not necessarily understand the difference between a hotel and a hostel. And quite often they are not necessarily happy when they get to the hostel and find a very different experience. Clearly, Booking.com is in that space in a generalist sort of way.
Skift: What’s the way forward as far as growth and awareness, and new markets? What’s in the planning?
Mooney: A few things. In think that on the marketing and the awareness side, we made some significant changes over the course of last summer by going beyond page search into brand advertising for the first time. And we have continued that and we are just at this stage beginning to kick off our 2016 campaign. That has kicked off and over the next few weeks it will begin wrapping up fairly significantly. It is again primarily on digital channels because that’s where our customers are.
That doesn’t mean Google Search necessarily but it could be YouTube, Facebook, Instagram, and other social channels like that. And we thought given the good impact from that last year, doing more of that again, and some really exciting stuff. And some really engaging stuff, backed up by some smart and clever public relations campaigns as well. We had Chris Eubank, who is a British boxer, in a hostel which again was probably more focused on the UK market. We’ll follow that up with some similar type thing, more of an international flavor. We had Skypediving in Australia with the guy Skyping his parents while jumping off of a plane with a group of other hostel guests.
About 15 percent of our business is in Asia already but is our fastest-growing destination region, and you know that’s the result of some investments we made a couple years ago by opening an office in Shanghai and sourcing products in the Asian region. We’re now beginning to look more at some of the Asian countries as a source market. South Korea in particular.
South Korea is already our seventh highest customer nationality, and that’s without us really having done any kind of specifically focused marketing campaigns in the Korean markets. We have just opened an office in South Korea. It’s a one-person country market manager that we recruited from eBay who is on the ground in Seoul, helping us to understand the market opportunity there, and how we might leverage it a bit more.
Then I think in terms of our mobile offering, we’re very focused on that as well. We’ve done a really great mobile app experience out there now across both iOS and Android. We announced in our earnings release that over 40 percent of our bookings actually are coming through mobile, and that’s continued to go up by a strong rate. We expect this year to have over half of our bookings on mobile, and half of those are through our mobile app, which is where we want them to be.
We have a really great mobile app for the booking experience. We’re moving now into offering customers a little bit more through our app, and giving them more of a reason to download and engage with our app throughout their travel experience. If you look at our customers, they tend to be traveling over quite a long, extended time so quite often they’re traveling for several weeks, booking hostels as they’re traveling. And therefore getting them to download our app and engage with it while they’re going is important to us.
Some of the things we’re doing around that is delivering more content. We’ve just done a partnership with Gogobot that provides content about the weather in the destination they’re traveling to for the date that they will be there. It’ll have content around sites and activities in that destination, restaurants in that destination, and again this isn’t just general content for them. It is very much tailored to backpackers and budget travelers so we’re going to continue to build on that, and also begin to get a lot more engaging, a lot more personalized and contextualized.
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Photo credit: Hostelworld CEO Feargal Mooney believes the company's future revolves around maintaining its focus on hostels and not branching out into being a budget accommodations provider in a big way. David Parry