Did you know that there is a publicly traded hostel company? That’s right: there is a hostel that you can buy and sell on the London Stock Exchange! This hostel company is Safestay, one of Europe’s fastest growing hostel companies.
Besides the fact that it’s kind of cool you can buy hostel stock, being a public company means we get a glimpse into Safestay’s inner workings; a peek under the hood that you don’t normally get with other big hostel chains. This week Safestay made an announcement on its performance in 2018. Let’s take a look and see what we can learn, not only about Safestay, but what we can apply to our own hostels.
*RevPAB is likely higher given that Safestay added beds over the course of FY18
So why would a hostel company want to be listed on a stock exchange? Safestay, like any other publicly traded company, listed in order to gain access to capital. The need to raise large amounts of capital relates to Safestay’s perspective on the hostel industry.
“We’ve seen a gap in the market: a very, very fragmented hostel market that is probably in the same place that the budget hotel market was around the years 1995-2000. We think we can go on a wave of consolidating the fragmented market. We think there’s an easy way to make an impact because it’s an underinvested industry.”
Getting listed on the stock exchange gives Safestay the access to capital they need to fuel their wave of consolidation. In fact, they just used shares to rake in an extra 10.36 million GBP in December to fuel their further expansion. With enough money behind them, Safestay estimates they can double in size every 18 months! It’s less impressive to hear about tech companies doubling in size but working with hostels, brick and mortar buildings that need trained staff to operate them, that speed of growth is extraordinary and rare.
Besides the fact that we should all buy shares of Safestay because it’s a great investment, what else can we learn from them that we can apply to other hostels? Let’s explore
40% of Safestay’s bookings come from OTAs, 40% come from group bookings and 20% come from direct bookings through the website. Right away that illustrates the value of working with tour operators, foreign study programs, and anyone else who can bring you group bookings, but for now, let’s focus on their OTA to direct booking ratio. For every 2 OTA bookings they get 1 direct booking. How?
First, they describe their digital strategy as “aggressive.” Their budget allocates 8% to OTAs and 2% to their digital strategy. This means that for every $4 they’re spending on OTA commissions they’re spending $1 on their digital marketing strategy. That’s a great Return on Investment if they’re spending only a fourth as much on marketing as they are on OTAs and yet 60% of their bookings come from non-OTA sources. How much is your hostel spending on its digital strategy relative to how much it spends on OTA commissions? Could your hostel be more profitable if it explored less expensive ways to find guests than paying big commissions to OTAs?
Is it better to own or rent your hostel? When stated so simply, the answer would be that it’s better to own your hostel because besides the business being an asset, you have the underlying real estate asset, and you don’t have to worry about what the landlord will do when your lease is up. However, Safestay, a growing company, sold two of the hostels they already owned. Why would they do that?
Safestay used an arrangement called a Leaseback (or a sale and rent back as it’s known in the United Kingdom) to gain access to more money. They sold two of their hostels, presumably to companies that want a reliable stream of rental income, and then they leased the hostels back from their new owners. That might sound crazy, but it’s a great way to fund your hostel’s expansion. Typically if you go to a bank for a loan, you’ll only receive a fraction of what your assets are worth. You won’t find many banks to lend you $500K if your hostel is only worth $500K. However, with a leaseback, you can use all the money from selling your property to fund your expansion. And don’t worry, when you sell it you can contractually give yourself the option to buy back the hostel later on.
If you operate a growing hostel company, either one that has opened new locations or has expanded the number of beds, hopefully like Safestay you are realizing economies of scale. As you add extra beds, obviously the hostel will spend more money on hot water, more money on peanut butter at breakfast, but the unit cost (for example, the cost of offering breakfast per guest) should decrease, making your operation more profitable. Today a quarter of Safestay’s budget goes to payroll. When the company was smaller, it was a third of their spending. Safestay estimates that by 2021 as they grow, labor will only make up a fifth of their costs. As your hostel grows, how will you find ways to save?
Why is this hostel company growing so fast? Yes, getting rich is nice, but there’s more to it than that. They are aggressively expanding because there is “a gap in the market” that they have the chance to fill. “Our view on expansion is opportunistic,” said their COO. They see an opportunity to consolidate the European hostel market and they’re seizing the moment. Many hostels are lifestyle businesses, meaning the owners are operating hostels because of the lifestyle it affords them. Expansion doesn’t always mix well with lifestyle. The Safestay team probably had a lot of late nights at the office in order to grow their revenue 39% in one year.
“The focus is to grow the brand and the Company has the capital to support an increase from the 13 sites today to over 20, at which point the business will become self-funding and increasingly gain from economies of scale and brand growth.”
In the coming years we will see many more of these market gaps getting filled as demand for the hostel experience increases. Some will be filled by business people who come to the hostel industry only because they see the potential profits. Others will be filled by traditional operators who have the ambition to expand. Jim Kennet owns only one hostel, Northwest Portland Hostel & Guesthouse in Oregon, but he started with 30 beds and over the years has expanded to 240. Adrian and Nathan Somerville started running hostels in Australia in 2013. Not content with seven hostels split between Sydney, Melbourne, and Brisbane, they’ll be opening a new hostel in Cairns this year. It will be interesting to witness where the opportunities are seized by traditional hostel operators and where the gaps will be filled by big business.
Byron has worked with hostels big and small, city and rural. His first job was as a receptionist in San Francisco and his favorite was leading the events for a 500-bed hostel in Sydney. Besides all things hostel related, he enjoys motorcycle riding, especially because it's the perfect way to get from hostel to hostel!
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