Having travelled to almost 60 countries, and stayed at multiple hostels along the journey, the budget hostels sector is one I am very familiar with, from quaint retreat style wellness hostels in Ecuador to large, party-type hostels in Europe, I’ve seen them all. One group that piqued my interest recently is Generator brand of hostels, a PE backed company which owns and operates hostel properties across Europe and the US.
A brief history of Generator
Originally founded by siblings Louise and Kingsley Duffy in 1995, the Generator brand of hostels has grown from the original Bloomsbury location in London, to 21 hostels today, and counting.
In August 2007, 12 years after being founded, the company was acquired by a PE fund, Patron Capital, who injected capital and expanded the hostel count from two to twelve. 10 years later, Patron sold the group to current owners, Queensgate Investments, a British PE firm with £3bn of AUM. Queensgate acquired the company for €450m, and committed to invest €300m into expanding the business.
In 2019, Queensgate acquired the “Freehand” brand of higher-end hostels from Sydell Group and Yucaipa Cos for $400m, thus adding four new US hostels into the group, and integrated them onto the Generator platform.
Most of the above transactions were presumably funded with leverage, leading to a heavily geared balance sheet when Covid-19 happened. In 2021, as covid eased, the company successfully restructured its business, by refinancing €500m of its debt from lenders HSBC, Societe General and Aareal Bank, and adding €100m of new loans from Apollo.
The group today consists of 21 hostels, offering 12,000 beds (averaging 571 beds per property) across Europe and the US, whilst generating an estimated €225m in annual revenue and €75m EBITDA in 2023 (numbers were a forecast given during the year).
Business model
Generator is different from many hotels, in that they own most of their properties, whereas most hotel operators are asset-light businesses who enter into management agreements with hotel property owners. The ownership of the underlying properties explains the high gearing of the business.
CEO Alastair Thomann in a recent interview, explained the company focuses on “compression markets”, which are characterized by a very high RevPAR (revenue per available room), high occupancy rates, in markets where demand outstrips supply. The typical guest is a 27-year-old Millennial/Generation Z traveller who values travel experiences, and is willing to stay in shared accommodation, rather than staying in a private room. Given the rampant cost inflation in recent years, many travellers have chosen to trade-down from Airbnb to budget hostels.
The compelling value proposition is offering travellers stylish yet affordable accommodation in convenient locations. Value, Style, Convenient.
Most of the accommodation is shared, with an average of 6-beds and 20m² per room, charging between 20 and 50 euros for a bed night, although the hostels also offer private rooms. Whilst charging low prices per bed, the company can generate the equivalent rate per room of what a 4-star hotel would be able to charge, but at a fraction of the operational cost, like what a 1* hotel would pay. This is the secret of the business model.
Upsell, Cross-sell
And then once a guest has been booked, the focus is on extracting as many dollars as possible through upselling and cross-selling ancillary products and services to that guest, such as through breakfasts, drinks, late checkouts, games and activities. Many hostels have started to rent towels to guests for €3 euros, instead of providing as part of the bed charge, and sell essentials like locker padlocks for €5, which all add to the RevPAR.
The average revenue per bed night based on 2023 projected numbers, assuming a 90% occupancy, was 46 euros. This would be a blended rate across the whole group, including shared accommodation as well as private rooms, and ancillary products and services.
Trends
At an industry conference, the CEO discussed a couple of trends happening in the budget accommodation market. These included:
- A move away from OTAs (Online Travel Agencies) such as booking.com and expedia to direct bookings through the hotel. These OTA platforms have seen drops in market share of hotel bookings in recent years, as hotel operators have focused on increasing the direct bookings segment, and customers have begun to appreciate the benefits of direct bookings through the property, such as lower prices and more flexibility to amend bookings. St. Christophers Inns, a competitor group which is part of the Beds and Bars Group, offer a 5% discount when booking direct, as well as a free drink on arrival and 25% off food and drinks at the property. Generator Hostels offers a flat 10% discount on direct bookings. Generator have seen an increase in direct bookings, which now make up to 27% of total bookings. This change in strategy really requires a sophisticated marketing campaign to educate consumers to book direct rather than through OTAs. Having stayed in 100s of hostels around the world, my default is to use booking.com or hostelworld.com, rather than to book direct. It is often only once you are at the property that you learn about the direct booking option. In addition, through these aggregator platforms, it is so important to get your ratings up, because most consumers, myself included are lazy and risk-averse, we will consistently choose the highest rated hostels, rather than take a risk and take time to read all the reviews and try something on a lower rating, without the price being commensurately lower.
- A move away from the “blended travel market” – Whilst blended travel took off during the pandemic, whereby remote workers stayed for a few days, perhaps on a combined work and leisure trip, Generator has shifted away from this customer segment, and deliberately made their hostels more into party and activity focused hostels, because these guests spend more and are more profitable than the blended travel guests, who typically want discounts for staying longer stays, and tend to sit in the lobby with their laptop whilst consuming less food and drink. As CEO Alastair Thomann says, the focus is to maximise revenue per m2, and therefore ROI.
What next for Generator?
In 2024, Generator will shift to an asset-light model, by targeting 10 news sites, where the properties will be rented rather than owned. This represents an interesting shift away from the own & operate model, and likely reflects the elevated interest rate environment at present which makes funding property purchases unsustainable.
The group plans to enter the Gulf area, where demand for shared accommodation is picking up, as they look to open their first hostel in Dubai.
