Flowering hybrids

Backpackers in this part of the world will be familiar with the range and variety of hostels in the region. Usually they are independently owned and of varying levels of quality, from very basic accommodation to something more approaching a budget hotel. But the few chains that exist tend to have hostels that could be counted on one hand. It might seem, therefore, that the hostel segment of the hospitality market does not have much potential in terms of investment by the large hotel chains. But that’s where you would be wrong – according to a recent report by hotel consultancy HVS Global Hospitality Services. One event mentioned in the report in particular seems to be pointing the way towards a change in the shape of the hospitality market and the growth of the hostel segment. This was the takeover by UK travel agent Cox & Kings of the second largest hostel operator in Europe, German company Meininger, with the aim of building an international hotel and hostel group. And the factor that seems to be driving the investor interest in this sector is the apparent growing demand for a new product: the hotel/hostel hybrid, or ‘ho[s]tel’ – a hostel with many of the facilities of a hotel, such as en-suite bathrooms, flat screen TVs, kitchens, and food and beverage services. The commercialisation of hostels began around 15 years ago, but it is in the last ten years that this newer kind of product has taken off, when such operators as A&O and Generator entered the scene. The current economic downturn has helped to accelerate the growth of this segment as people tighten their belts, while school travel abroad has also become more popular due to the fall in the price of airline tickets. What still differentiates these hostels from a budget hotel is that the majority of rooms are multi-bed or dormitories rather than twins or singles, as well as the fact that the revenue is not calculated per available room (RevPAR) but per available bed (RevPAB).

Great expectations
According to the author of the report, Harry Douglass, a senior associate with HVS’s London office, it is greater expectations over the quality of hostel accommodation that is the main driver of the demand: “There are a few reasons for the demand for this new product. Generally people’s expectations are higher and they want to ensure that the rooms they stay in have higher standards. The demand is coming from very well-established student groups who are finding that hotels and traditional hostels are less able to accommodate large groups. These are prevalent in Central and wider Europe. Another factor is the increased number of low-cost airlines, putting international school trips within the reach of more people.” But the relative cheapness of travel compared to a few years ago doesn’t mean that the guests will have the same amount of disposal cash as other groups, so they will still be looking for good value in an informal environment away from home. “Such facilities need to concentrate very much on the basics and creating a safe and welcoming reception for guests,” adds Harry Douglass. “What we will see is that it is very important for operators to create a comfortable and convenient environment. Traditional hostels don’t have the same food and beverage offer as hotels, but the new concept will feature improved service in this regard,” he says.

Polish market still young
In Poland the hostel market is very much in its infancy. “There are no big players in this industry. Hostels are usually run by individuals with little capital to invest,” explains Krzysztof Godek, the owner of the Three Kafka chain, which has three hostels in Kraków with a total of nearly 200 beds. Along with Dizzy Daisy (five hostels), Twój Hostel (three), Moon Hostel (three) and Nathan’s Villa (three, including one which opens only seasonally), it is one of the largest hostel networks across the country. “The Polish market needs a few more years to mature. It is still relatively young,” explains Janusz Mitulski, a partner of Horwath HTL and the head of the hotel advisory department, as well as the vice-president of the Chamber of Commerce of the Polish hotel industry. For several years after the communist era the budget accommodation market was still dominated by the state sector and mostly made up of large and generally rundown youth hostels. International tourists only started to come to Poland in large numbers around 2004, with the entry of low cost airlines to the country. And it is foreign backpackers who are the main customers for this kind of accommodation. To supply their needs, small private hostels started to appear a few years ago in Poland’s city centres, designed to appeal to such tourists due to their ideal location, welcoming atmosphere, English speaking staff and relatively low prices. Importantly, the threshold for entry into this business for entrepreneurs has always been very low, usually a small bank loan for renting and renovating the premises and buying the basic furniture. “In this business you do not need to have a special purpose-built place. A 100–150 sqm apartment in an old but centrally located building will do just fine. There are plenty of places like this available on the market. Therefore literally anyone can open a hostel,” explains Krzysztof Godek.
The competition in the Polish hostel market, however, is rather intense. In Kraków there are more than a hundred hostels. In Warsaw and Wrocław many new ones appeared before the Euro 2012 football championships, but some of these are now experiencing problems. “At this point in Wrocław, the worst hostels that cannot improve their condition or advertising may actually cease to exist,” points out Edyta Cieślińska, the manager of the Moon hostel in Wroclaw, which is a part of a small network with two other hostels in Kraków and Warsaw. In recent years the chain closed two lower standard hostels in Kraków and in their place has opened one in which all the rooms have private bathrooms. According to her, this was a “significant investment” but one that apparently avoided getting embroiled in the stiff competition by being positioned in a higher segment of the market. “We have noticed that many potential guest turn down accommodation once they hear that the bathrooms and showers are shared. It seems to me that it is good for hostels to have private bathrooms,” observes Edyta Cieślińska.It would seem therefore that it is low prices and good locations rather than recognised brands that are currently the main factors in Poland. Harry Douglass agrees that location is important, but in a different sense from standard hotels: “The key difference to a full service or other hotel is that hostels need only to provide accessibility and convenience within the wider city. This tends to be more important than the neighbourhood within the micro-location that would typically attract hotel guests – as there is greater acceptance of these types of locations by groups, who already form a kind of community or neighbourhood in themselves,” he explains.

Hybrids have potential
Harry Douglass believes that ho[s]tels a niche that has yet to be fully exploited. But the existence of such a possible gap in the upper end of the hostel sector in markets such as Poland seems to be confirmed by what has been happening on better developed markets. “In Western Europe, the category of budget and ultra budget hotels is expanding, which in some areas crosses over with hostels. In Poland, such facilities should also appear in the near future,” predicts Janusz Mitulski. Certainly this upgrade could be speeded up by the appearance of large international operators. A similar phenomenon has already been observed in the hotel market. “Networks are in fact introducing higher standards. This is often how they differ from non-network hotels,” claims Janusz Mitulski. A slightly higher quality, while still using the word ‘hostel’ and maintaining relatively low prices, could also appeal to hotel customers who during the economic downturn are tempted to look for savings. “Customers are looking for cheaper offers and this should help hostels. I can see, for example, that trend growing among companies who are now choosing hostels to put up their employees. Previously they would only choose hotels,” says Krzysztof Godek.
So is Poland fertile ground for branded hostels? “In the key cities of Poland, such as Warsaw and Kraków, recognised brands will emerge, and will do so wherever there is demand from groups supplemented by individuals,” says Harry Douglass of HVS Global Hospitality Services. “As for whether the large operators will buy existing facilities and chains, this very much depends on whether the facilities have the right floor area and whether it is economically worthwhile converting them. The advantages of doing so may be greater or less than going for new-builds.” He insists, however, that the big players will be entering the hostel scene in our part of the world with hybrid hostel/hotels sometime in the near future. “At the end of the day you can’t ignore the economies of scale – the bigger you are, the lower the operating costs and the higher the profitability – so strategic expansion of the concept makes sense. Greater brand
acceptance in the sector also leads to an increase in bookings from people who would otherwise choose to stay in a conventional hotel or elsewhere,” concludes Mr Douglass.