Money is flowing into the hostels market and established hotel companies want a piece. Will this new corporatization cost hostels the soul of their original mission?
It took AccorHotels only 18 months to bring its hostel-like concept Jo&Joe to life.
The hospitality giant had been watching the sector, studying where it might be able to make its mark before it hit on, what it thought, was the right approach.
“The market has changed and for us it was a time just to see that this kind of market is going more and more professional with bigger brands, with real concepts and we decided to get into it,” François Leclerc, vice president of brand and operations at Jo&Joe, told Skift.
The likes of Accor and now Hilton, think the hostel market is ripe for disruption. These are not scrappy upstarts but rather the established hotel companies looking to use their scale to pick up a different type of consumer.
Hostels certainly aren’t a new invention; they have been around for more than a century but up until fairly recently they weren’t part of the wider hospitality conversation. Sure, as a business model in hospitality they’ve been evolving in their own way.
Way back when, It was those people passionate about traveling who decided to lease their own building, sort out a supply of bunks, and throw open their doors. It wasn’t necessarily about making a truck load of cash, but more about bringing people together.
Big hoteliers and investors hadn’t taken much notice, favoring other areas such as vacation rentals.
All that has started to change. Private equity has gotten interested and established hotel companies are now adding hostels or hostel-like offerings to their portfolios. But will this corporatization alienate the regular hostel customer base? And if it does, how hard of a sell will it be to convince hotel customers to try out a hostel?
Zooming out and looking at the hostel market as a whole, it’s easy to see why the money is starting to flow in. Most properties are unbranded and the small chains that have popped up in Europe, Asia, and North America are still small scale. Then there’s the hostel model itself with its multi-bed dorms and flexible layouts, making it extremely cost effective. And finally, the people using hostels, the under 35s are spending more money doing things, including traveling.
Package all these factors together and it’s easy to see why hostels are changing. Private rooms are much more common than they once were and some of the properties are starting to mirror the design-led approach of boutique hotels. Some are spending more money on sophisticated food and beverage options, while others have retained the communal kitchen areas that historically have been such a feature of hostels.
This tension between old and new is at the heart of the new hostel experience. Is a sector that was built on charitable goodwill in danger of losing its soul? And what will happen when the likes of Accor and Hilton get their feet under the table?
There’s even a debate about using the word hostel itself with many of those making the most noise preferring to use terms such as “hybrid,” “open house” or poshtel instead.
“I can understand why it was used to maybe to get your customers to understand that hostels had improved, but I always believed that the word hostel itself should be improved because hostels are great places,” said Anne Dolan, co-founder of Clink Hostels, which has three properties in London and Amsterdam.
Skift has spoken to people from across the hostel space, some who are new to it, others who had been involved for a long time to assess the new landscape and to find out where the industry goes from here.
Hostels or youth hostels aren’t a new phenomenon. The movement goes back to Richard Schirrmann, a German teacher who founded the first one in 1912.
“From a humble background, he developed an idea which spread around the world and which has blossomed into many different guises. But he took very little financial reward from his invention. He never copyrighted the idea, never built a brand or sold it to anyone,” said author Duncan M Simpson in his biography of Schirrmann.
Schirrmann’s concept of providing inexpensive accommodation for young people quickly spread across Europe through the 1920s and 30s.
“It was driven by the idea of giving young people opportunities to travel, get out in the countryside, meet other people from different parts of the country, different parts of the world,” Simpson told Skift.
As the 20th century wore on and people in Europe, North America and Asia grew richer and they wanted to use their increased leisure time to travel. Hostel numbers continued to grow, expanding into new locations to give young people further opportunities to travel.
National youth hostel associations controlled much of the stock, and most of these organizations were part of the Hostelling International.
Eventually a growing independent hostels movement emerged, which took issue with traditional hostel rules.
“If you look at the period in the late 70s, early 80s, particularly in Australia, in New Zealand, there were an awful lot of young people traveling to Australia and New Zealand,” Simpson said.
“I think the idea of independent hostels really took off there at that period of time. I think partly because the demand exceeded what the official associations could actually provide at the time in Australia and New Zealand. And I think also because a lot of young people were pretty fed up with the idea of curfews. They had to be in by a certain time.”
Domestic youth hostel charities still play a vital role in the ecosystem, providing budget accommodation to those of limited means but independent hostels, which provide a different type of travel experience, have flourished.
A number of things had to change for hostels to explode in the way they have done. The first was they had to make the booking process easier, the second—and this is perhaps more controversial—was they had to look better.
Joining the Dots
For most of their existence hostels across the word operated their booking systems in the same way: pen and paper or latterly a computer spreadsheet.
Because they weren’t part of large chains, computer reservation systems weren’t viable. People booked in person, over the phone or via email. It wasn’t an efficient system. If you wanted to stay in a certain city you might ring around a number of hostels or fire off multiple emails and the first person to reply would get your business.
All this changed in 1999 when Irish software developer Ray Nolan developed a property management program and, crucially, decided to give it away free to hostels. The business model was to take a 10 percent deposit and get the guests to pay the rest when they checked in.
“Hostels—instead of being asked for 10 grand or five grand or whatever it was to install our software—were simply getting it for nothing. And that’s pretty compelling because [of] the efficiencies,” Nolan told Skift.
“Most of them were running literally a paper diary of their bookings before Hostelworld started giving away its software.”
Unsurprisingly, usage spread quickly. “So, we were in the U.S. and Israel by the end of ’99 so we had four countries then. Very quickly in 2000 we were in France, Holland, Switzerland, Italy, we were starting to take over. So by the end of 2000 I would say we were in 14 or 15 countries,” Nolan said.
“Our strategy was find the big guys in the cities, the guys who maybe made the most noise, and maybe the more visionary ones, the ones that maybe had websites.”
Where Nolan and Hostelworld blazed a trail others followed.
“Every year, some new hostel something would arrive and they would do everything from completely download our content and pictures and rip the complete website and relaunch it, and the problem was, those guys didn’t usually succeed because they didn’t have the contacts with the hostels,” Nolan said.
In 2013, Hostelworld bought rival Hostelbookers. The move took out one of its chief competitors but because of the rampant growth of its more generalist online travel agent rivals the overall market is much, much bigger.
Both Booking.com and Expedia offer budget accommodation, including hostels and organizing travel accommodation is much less of a siloed process than it was previously. Consumers want to see it all. Hotels compete against hostels, which compete against apartments. Each borrowing ideas from the other.
Maybe 10 years ago, hostels had the youth and budget market sewn up. Backpackers followed a well-trodden path from hostel to hostel to hostel. Hotels were boring and too expensive and Airbnb barely existed.
Today the market is totally different. All forms of accommodation co-exist thanks in part to the big online aggregators. For those with a bit more money to spend, design-led boutique hotels with big social areas are a serious threat to hostels as is the booming alternative accommodation market.
To stand out, hostels have had to adapt.
A Design Revolution
Generator Hostels maybe wasn’t the first design-led hostel brand but it has done the most to change the way hostels think. It has also done wonders for the way consumer media portrays hostels.
Partly this is down to scale. In an industry with few chains, Generator’s 14 properties, spread across Europe and now Miami, help it stand out.
Brother and sister team Louise and Kingsley Duffy started the company with just two properties, Berlin and London (the pair also launched booking site Hostelbookers.)
Patron Capital bought the company in August 2007, in one of the sector’s first private equity deals. The portfolio grew from two to 11 before the company was flipped to another private equity firm, Queensgate Investments, for $480 million (€450 million).
Queensgate is making a big bet on the sector and said at the time it wanted to invest a further $320 million (€300 million) in expanding the portfolio particularly in the United States.
“Queensgate, our investors behind us, have a huge fund. We have, at the moment, €300 million. Potentially quite a bit more. There’s a lot of interest to put more money into this, because I think this segment that we operate in, in the right market, has to be the most profitable way of running a piece of real estate, because, simply by adding more beds to a room, you’re making a lot more money,” Generator CEO Alastair Thomann told Skift.
While scale is clearly desirable it doesn’t mean a budget brand, as anyone who has visited a Generator hostel will attest. And what’s more Thomann thinks this is the direction of travel for the hostels market.
“We’re definitely a luxury version of hostels,” he said.
“I think those you’re gonna see move more and more towards boutique. If I see the hostels that are opening up in our markets that we’re operating in. They’re amazing. They’re all going for design. They’re very luxurious. They’re all almost boutique hotels.
“It’s a brilliant concept, hostels. You’re charging 4-star rates and you’re offering a 2-star service, which is what makes it so profitable. This is what it’s all about. The more you’re perceived and you’re offering these amazing public spaces, and destination bars, and destination restaurant has huge halo effect on your bed rates, and your room rates, and it gets even better.”
Generator claims to be profitable (“Our profits have gone from €20 million [$23.1 million] to €26 million [$30 million] to now €33 million [$38.1 million] in the space of 24 months,” Thomann said) but it is difficult to reconcile these figures with publicly available accounts in the UK.
Whatever the reality, spending so much money on property, design, food and brand is going to add up. And although Generator and others in the sector might think luxury is the only game in town, there are others pursuing a more modest strategy.
Meininger is unofficially the world’s second largest hostel chain behind fellow Berlin-headquartered company A&O Hotels and Hostels.
It’s an unofficial title because the company doesn’t technically brand itself as a hostel operator – something that is becoming a bit of a trend in the sector. Rather, it styles itself as a hybrid. It has features people would associate with hostels such as shared accommodation and guest kitchens, while at the same time offering “clear hotel quality” according to CEO Hannes Spanring.
“You know, a hostel for some people, still has some negative connections, actually,” Spanring told Skift.
Major Hostel Players
|Company||Locations||Number of Properties||Number of Beds|
|Generator||Europe and United States||14||8,120|
|St Christopher’s Inns||Europe||16||3,704|
|Mad Monkey Hostel Group||Asia and Australia||12||1,500|
Source: Colliers International, hostel websites
There’s the idea that you have to share your own bathroom or perhaps that it is not safe or clean. That’s how some people think of hostels. Maybe this doesn’t matter much if you’re just looking to get backpackers through the door but if you want other groups it can be a problem. (Interviewees told Skift that the U.S. market had a particular aversion to the word hostel.)
The individual traveller is one of four segments the company targets. The others are groups, families and low-budget business travelers.
“So, what we are doing, [is] we’re offering from single, double beds, up to some dormitories and it’s nice,” Spanring said.
“One week we had a school group traveling on a school trip. They had a four-bed room. It’s all combined with the school people. The next night, we had parents there with two kids, all combined in one room, otherwise they have to maybe book two rooms in a normal, traditional hotel.”
Market-leader A&O is pursuing a similar strategy, which last year prompted a rebrand.
“The demand for the hostel product continues to change: in the early years, classic backpackers filled most of our establishments meanwhile today, A&O welcomes a lot of families, couples and more and more business guests stay with us,” A&O’s chief marketing officer Phillip Winter told Skift.
A&O and Meininger aren’t going after exactly the same market as Instagram-friendly Generator. Their properties are modern but not at the luxury end of the spectrum. A&O’s tagline is “everyone can travel” and, according to Spanring, Meininger is firmly fixated with “the budget sector”.
The concept on budget travel, means a substantial food and beverage offering isn’t a big part of Meininger’s offering. For one thing the construction costs are a lot higher and crucially for Spanring, profit margins are pretty lousy.
In the space of five years Meininger has added more than 3,500 beds to its overall network and increased gross revenues 58 percent to $104 million (€90 million) in its 2018 financial year. In 2017 A&O recorded revenue of $134 million (€117 million) with 4.1 million overnight stays. The chain is growing at 15 percent a year.
And while there may be stylistic differences with Generator there are geographical similarities.
Meininger too is looking at the United States for future growth.
“We see a massive demand in America and there is no supply, actually… and this is why we also, absolutely, think it’s the right time to step into the U.S. market,” Spanring said.
Safestay is another brand that has been growing pretty fast in recent years. After opening its first hostel in 2012, it now has 13, spread across Europe. It targets smaller properties of around 250 beds (a lot less than say a Generator) and has a mix of private rooms and dorms.
“By the end of 2019, we should be at 20 [hostels] and then in the subsequent years, get to 40,” Nuno Sacramento, chief operating officer of Safestay, told Skift.
Safestay too doesn’t see a point to having a sophisticated food and beverage offering, preferring to keep it simple.
“We charge for breakfast in all of our locations. The majority of the time we’re just trying to cover the cost. We don’t see it as a highly profitable revenue stream. Particularly in Europe where [there’s] a coffee shop experience – you can have a coffee and a cake for €3,” Sacramento said.
What’s interesting about A&O, Meininger and especially Safestay is that none of these companies are that old, Meininger launched in 1999, A&O started a year later and Safestay has been around for less than a decade.
In that time, none of the big hotel chains have wanted a piece of the action. Sacramento, who previously worked for UK-based Premier Inn, said there was a general lack of understanding within the hotel sector about hostels.
“Typically, you can put the hostel in the less effective real estate space because of the way you play with ceilings you go…vertical rather than going horizontal,” he said.
“The other interesting thing about hostels is that, they’re a lot more financially viable and I didn’t understand this when I was in hotels of course.”
That’s because hotel rooms need to have a certain square footage and that has to include a bathroom, there are certain expectations. Hostels have a lot more flexibility on the number of beds and whether you include a bathroom or not.
“They don’t understand the model, as I didn’t. I joined the business [Safestay] in February in 2017 and you just can’t see how the variables would work.”
What seemed craziest to Sacramento is that while hotel chains have been busy slicing and dicing various segments to make sure they had various markets covered, they didn’t even look at hostels, which left the door open for people like Safestay.
“The hotel market ended up defining itself and for us, what became interesting is that, once the budget market starts thinking about how it subdivides: you know, is there a premium budget market? Is there a low-end market?
“At that point, it kind of indicates that something else has to come along. For us, that something else that was there already, which was hostels.”
Eventually hotels did catch on. They started to understand the importance of the large social area and in some cases started to develop hostel offerings of their own.
The Best of All Worlds
When you look at the big five hotel companies—Marriott, Hilton, InterContinental, Wyndham, Choice and Accor—it’s easy to pick out the one that might be the biggest risk taker.
Under loquacious CEO Sébastien Bazin, Accor has bought or invested in a host of different companies over the past couple of years, some in the hospitality sector, others outside it. The idea being to create a company with more consumer touch points over and above simply hotels.
In September 2016, Accor announced Jo&Joe, a new brand, which “blends the best of private-rental, hostel and hotel formats.” (Another example of a company wanting to operate hostels, without calling them hostels.)
“The market is changing. People want more freedom, they want more autonomy, they are looking for design. You know that. They went to share experience with guests. We decided to get in that, because the guests from today will be maybe the relevant customer for tomorrow,” Accor’s Leclerc said.
So, if you stay in a Jo&Joe property when you are in your twenties, you might move up to a Mercure or Novotel and then on to a more upmarket Fairmont as you get older and—hopefully for Accor—wealthier.
Leclerc believes Jo&Joe can successfully combine three different hospitality areas: hotels, hostels and private rentals, taking the best features of each.
The fist Jo&Joe property opened in renovated hotel in Hossegor in the south of France and a new build in Paris will follow. Other locations to follow include: Rome, Budapest, London and Rio de Janerio.
“I don’t want to give figures, because where we want to be is a real company with a lot of ambition, but we don’t want to put some figures on the table. But…it’s key for Accor. We have the total support of Sébastien Bazin on that, so maybe it will take time, but we’ll take time to have the most relevant location in every single city. So, three in Paris, two in London, in Roma, in South America,” Leclerc said.
While Leclerc and the rest of the Accor team are ambitious, he acknowledged the difference in operating hostels, which require a different IT system, a different type of building and more social spaces.
“The hostel business is completely different then the regular business for us, we sell rooms for €50. With Jo&Joe and with the hostel business we sell beds. So, it’s completely different,” Leclerc said.
Accor isn’t the only hotel company determined to try and do something different. Marriott’s Moxy brand, launched in 2015, has certain hostel-like elements and just last week Hilton finally fleshed out its plans for what CEO Christopher Nassetta initially dubbed a “hostel on steroids.”
Motto was inspired by “the rise of boutique lifestyle hostels” and will include dorm rooms and sizeable social areas, both hallmarks of a hostel. But, again, like many other companies, Hilton isn’t calling Motto a hostel brand. “With what hostels stand for, we just didn’t feel comfortable about planting our flag in there,” Tripp McLaughlin, global head of Motto by Hilton, said.
Given that the big five are looking at gaps in their portfolio it’s possible that one of the sizeable chains might sell up — or two or more might merge.
Generator’s Thomann certainly thinks so. “I think that’s one of the reasons why Queensgate would have bought-in, to sell it again. Consolidation will happen by then. Let’s face it.”
What’s perhaps surprising is that it hasn’t already happened. There have been a few small deals, such as Safestay’s acquisition of three of Equity Point’s portfolio of seven hostels but no sizeable consolidation.
“The hostel industry is still exceptionally fragmented, from an overall standpoint, in particularly when we compare it to the hotel industry,” Patrick Mayock, senior director, research and development at research company STR, told Skift.
“It’s interesting to note that the hostel landscape, from an owner/operator branded perspective, is still very, very fragmented. If and where there is really any consolidation on the hostel, it happens to be more around associations. Hosteling International, for instance, a lot of hostels fall under that umbrella.”
Booking platform Hostelworld claims to have 16,000 hostels on its books but according to a 2017 estimate from real estate company Colliers International, the top 10 global chains only had 118 properties between themselves. That’s less than 1 percent of Hostelworld’s supply.
The hostel segment is a relatively new area for STR. It only started measuring the market in May this year and at the moment only covers London and Amsterdam.
The reason for STR’s coverage? Hostel owners obviously wanted to see how they were doing against their competitors, but hotel companies were also keen to know more.
“First and foremost, we have some interest in a hostel space from our core hotel clients. So, for the past few years, we’ve noticed an interest in some traditional hotel entities taking a key interest, or in some cases an investment stake, in the hostel model,” Mayock said.
“Accor is a great example. They’ve launched their Jo&Joe Hostel brand. Hilton has made it known that they are working on a hostel concept [now launched as Motto.] So those are just two examples. And noticing that, and wanting to serve our core hotel clients, we realize that now the time would probably be good for us to start looking at hostels, as well.”
Accor and Hilton might not be the only big hotel companies looking at the hostel market and for a couple of good reasons.
The first is financial. The hotel market is highly cyclical and since 2009 has been on a pretty steady upward path. History teaches us that the good times don’t continue forever so its sensible to assume that a downturn is on the cards sometime in the next couple of years.
And when times get tough, the flexibility of hostels and their lower price point gives them an advantage over hotels.
“If you look at the financial crisis 2008, 2009, the first companies which were hit hardest were the five and four-star hotels because travel is put on hold. Business travel is then put on hold. Suddenly you’re really running a five-star hotel with all the offerings…with rates that are in the three-star hotel range. It’s not profitable,” said Meininger’s Spanring.
But even if we avert a crisis for a couple of years, there’s another reason hotel companies and private investors might want to take a closer look at hostels.
The youth travel market is worth $280 billion and accounted for 23 percent of all international arrivals in 2017, according to the World Youth, Student and Educational (WYSE) Travel Confederation and the World Tourism Organization (UNWTO).
Now the, definition of “youth travel” is a pretty broad one, covering people aged 15 to 29 but it is still a huge market and one that is growing.
When factoring in exchange rate fluctuations average trip expenditure has increased 18 percent since 2012 and totaled $3,293 (€2,867) in 2017.
Now there’re myriad reasons why young people might be spending more on travel. The world is getting richer (while still managing to be horrendously unequal.) At the same time in Europe and North America, the traditional purchases most people saved for—a house, a car—are out of reach for many or just un-necessary. So, what do they spend their money on instead?
The rise of Uber, Netflix and Spotify means that this generation of young people isn’t as hung up on purchasing things as maybe previous ones were. All of which makes youth travel a particularly interesting sector.
“It is a significant growth market for hospitality offer because if you look at how that segment of the population—particularly more so in Europe and North America—they’re spending a lot more money doing things, and part of that is traveling,” Marie Hickey, director of commercial research at real estate company Savills told Skift.
“And that’s been aided by obviously the growth in sort of budget airline travel. So, they’re spending more money experience doing stuff traveling and less on actually buying stuff.”
Of course, young people have always traveled and they still do buy stuff, it’s just that experiences matter, especially as pretty much everybody knows what everybody else is doing these day.
“People are now realizing that the demographic of young people is such that…they have a much higher drive to experience new things, and because in a lot of countries housing is getting more and more expensive, they’re putting their money into experiential travel, and they are recognizing it,” David Chapman, director general of the WYSE Travel Confederation told Skift.
“Again, we’ve seen this change within the last 10 years of our research, that more and more young people are accepting that they’re not going to go into a job for life. They’re probably going to have a job which is going to be interspersed with periods of travel and family life and those sort of things, and I think the market are now starting to realize that there is this…young person marketplace that they need to be reaching out and grabbing.”
As anyone who has stayed at a hostel will know, they are great bases to experience a destination, partly because other people are around you who want to do the same. It’s the thing that unites the Generator’s of this world with a flea pit on the Khao San Road. Hostels score very favorably among young people when asked about the ability to “live like a local” in a particular type of accommodation, either beating or giving Airbnb a run for its money across different age ranges.
Hostels also excel on the social side, a must for any young traveler.
“We always say that the “S” in hostel stands for social and that’s the difference between a hotel and a hostel,” Chapman said.
“I left school and went into a hotel management training program and was a hotel general manager myself until my late 30s, early 40s, and when I look back at what we did in hotels, we gave people a very up market product, but we encapsulated everybody in their own space.
“You arrived and you were put into your bedroom, and then you came down and you were put on your table for two, and then you had your breakfast the following morning, and then you left, so the experience of the hotel was very much the nice curtains, big bath, towels you don’t get at home, and then air conditioning, those sort of things, but your interaction in terms of what you gained from the locality and what you learnt about the area that you stayed in was next to nothing.”
Hostels are the opposite. If you’re staying in a dorm you have no choice but to mingle. Even if you’re in private rooms the spaces are setup in a way that pushes everyone together.
Katie Dawes aka the Hostel Girl has been writing about and reviewing hostels since 2014. In that time, she estimates that she has stayed in more than 60.
“A few times I’d go to hostels with friends, but you end up in a hostel alone basically because none of your friends back home either want to go to that destination or they don’t want do to the activities that you’ve gone there to do,” Dawes told Skift.
“Or they just don’t want to travel in general, which is what I’ve found. And so then you find yourself walking into a place full of other people who found exactly the same thing.”
Plenty of other people share her passion. Dolan, co-founded Clink Hostels after coming back from a backpacking trip. She’s watched the industry change dramatically over the last few years as it welcomed more outside investment.
“Usually when I sat down beside people, [and] they asked me what did I do and I said I ran a hostel, some people would go, ‘Oh you’re very charitable,’ or other people would sort of walk away quietly,” she said.
“Whereas for the first time ever, about eighteen months ago I sat down on the plane, I was talking to the guy beside me, he said ‘oh what do you do,’ I said ‘oh I run a youth hostel, a backpackers hostel.’ And he said, ‘oh…we looked at putting a bid in for Generator.’
“I thought ‘oh wow,’ for once someone isn’t afraid to talk to me, particular a suit isn’t afraid to talk to me about hostels.”
For better or worse this is the world hostels now operate in. Standards have improved across the board, it’s easy to book via an online travel agent or direct. Young people want to travel and experience as much as possible, maybe more so than previous generations. Investors and hotel companies are piling into a market that is still highly fragmented with only a few strong brands.
The irony is that for everything hostels have given the wider travel and hospitality industry none of these new entrants want to be known as a hostel.
CORRECTION: An earlier version of this story included the wrong number of beds for Generator after the company’s PR representatives gave Skift the incorrect total figure. We have now amended this.
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Photo credit: Jo and Joe Hossegor. AccorHotels came up with the concept inhouse. AccorHotels