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Recession: Prepare your hostel now, or suffer later

Bushfires are a fact of life in Australia. Everywhere you go, there are signs letting you know what the current level of fire danger is. In Australia, there isn’t a question of IF there will be a fire. The question is rather, WHEN will there be a fire. Because bushfire is an inevitable part of Australian life, the fire service constantly encourages the public to have a plan in place. If you have a plan for how your family will react to a bushfire, you’re much more likely to survive. Economic recessions are a lot like bushfires in that they occur regularly, you can’t predict precisely when they’ll begin, but if your hostel makes a plan now, it stands a much better chance of not getting burnt down. Today lets talk about how you can prepare your hostel for a recession.

BackpackerBiz Takeaway:

  • Recessions are a natural part of the economic cycle. We are due for a recession but don't know when it will start
  • Preparing for a recession will help your hostel survive
  • Create a contingency plan for staffing levels during a downturn
  • Can you diversify your hostel's customer base to lower your risk?
  • Invest in your hostel while you have the resources to do so
  • Always look for ways to make your hostel more efficient
  • Future bookings hedge against possible downturns
  • Consider the effect on the guest experience when making plans for austerity measures

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The economic cycle

Something that older people know painfully well, which younger people may not fully grasp is that the economy is cyclical. It’s called the boom-bust cycle and it explains why we have periods when the economy grows interspersed by periods when the economy shrinks.

The Current Travel Index, put out by the US Travel Association, shows that the travel industry has been growing for 107 months straight; we are nearing a decade of steady growth in the sector. The National Bureau of Economic Research shows that the average expansion lasts 58 months. We are approaching the record for the longest period of growth. The longest expansionary period in U.S. history occurred from March 1991 to March 2001. Now, who knows how long the good times will last? If anybody knew for sure, they would be very, very rich. Perhaps we’ll smash the record and the travel industry party will swing on for years to come. The world is facing record-shattering temperatures and the US is going through a record-breaking government shutdown. Perhaps there is no more normal!

However, the longer the party lasts, the more impending a slowdown for our industry feels. Skift states,

“Given that we are 10 years into this economic expansion, it’s possible some may begin to ask, 'Have we reached the top?' In our view, recessions are not caused by age of the economic cycle alone and, therefore, so long as key indicators remain positive and a negative shock to the global economic system doesn’t occur, we should be in for another solid year of economic growth and travel.”

Naturally we all hope that will be the case, but today I’d like to talk about how to get your hostel in order so that should the music stop, you’re not left unprepared for the party to end.

Have a labor contingency plan

fire service

Labor is always one of the highest variable costs for a hostel. How would your hostel be affected if your revPAB were to shrink and you’re no longer able to afford your current staffing levels? Taking time now, while it’s only a “what if” enables you to put together a contingency plan. With a plan worked out, your hostel will be ready to act, instead of forced to react after your payroll is already bleeding your hostel dry.

At what occupancy level would your hostel go from two receptionists during the day shift down to only one receptionist? At what revPAB would you stop having an overnight shift? What tasks might be changed from staff duties to volunteer duties during a decline? Which receptionists can be cross-trained if you’re no longer able to afford an assistant manager? These are tough questions and we’d all like to put them out of our heads, hoping that the hostel will be full, now and forever. Thinking about them now gives you a competitive advantage. If the bottom falls out six months from now, you’ll be working through your game plan while your competitors are still running around with their pants on fire.

Diversify your customer base now

family hostel

Anyone who has money saved for retirement has been told the importance of diversifying your assets. It’s important not to “put all your eggs in one basket.” If your hostel has appeal for a narrow range of travelers, your business is exposed to more risk. 

Every hostel is different, and some hostels have legendary reputations because they have a narrow but deep appeal with one type of traveler. The goal of diversification is not to water down your hostel to be all things to all people. If you have a party hostel in Ko Pha-ngan, keep having those full moon parties. If you have an eco-hostel in Costa Rica, keep living off the grid. However, if there are small changes that your hostel can make to widen its audience to new segments of travelers, it will diversify your risk. 

If your hostel is all leisure guests, could a little improvement in your private rooms widen their appeal to discount business travelers? If your customers are 70% from one nationality could a deliberate marketing strategy help you get broader appeal? Widening your hostel’s client base will protect you if a global event causes a certain type of traveler to stop coming.

Invest in your hostel while you can

Is your bathroom sorely in need of a renovation? Has your website not been touched in a decade? Is the guest fridge on its last leg? Don’t put these projects off any longer. When a recession begins, a business's discretionary spending evaporates. Austerity measures in place, you don't spend money unless you absolutely must. The best case scenario is that your to-do list gets put off even longer. The worst case scenario is that the investment you’ve been postponing becomes an emergency at the worst possible time. For example, your hot water system finally dies and now, with the hostel more than half empty, you are forced to pay for its replacement. Your hostel has to have a budget for these projects. Get that budget together now while the economy is still strong. For projects that require outside lending, you'll have a much easier time getting credit when the economy is strong and your financial statements show the hostel making good money than if you try getting a loan in the midst of a financial meltdown.

Improve your efficiency

gas gauge

Make your hostel more efficient before its running on empty

Productivity always grows during a recession because companies are forced to do more with less. While the economy is strong and the hostel is full, it’s easier to get complacent. It feels alright to be a little wasteful because you can afford it. However, you should not wait until the gasoline gauge is on E for empty before worrying about whether your car is getting good fuel economy. It’s important to always be looking at your systems to make sure your hostel is operating efficiently. Whether it’s making sure you get the best price on cereal or ensuring your check-in process doesn’t take longer than necessary, the goal is to always look for ways to improve. Having a keen eye on operations now while times are good gives you a better perspective than if you wait for a slump and then desperately panic, looking for ways to urgently cut costs.

Sell beds ahead

Getting some reservations on the books now can help you if the cycle swings from boom to bust later. Groups are particularly good for this reason. Can you start locking in their business now for later in the year? You might hesitate, thinking that you’ll get better rates if you wait, watching the demand grow higher and higher. However, this is a risk. You can pursue a more conservative strategy by taking advanced bookings for groups and non-refundable bookings that will give you guaranteed revenue, shielding the hostel should the economy take a turn for the worst.

Don't sacrifice the guest experience

hostel dinner

As you can see, it’s very important to identify areas where a hostel can cut costs during an economic downtown. That being said, cost cutting must be implemented in ways that minimize the impact to the guest. For example, imagine Hostel A decides they can easily save money by canceling breakfast and all the hostel’s weekly events, while Hostel B decides to change the staff schedule. Evening shift will end one hour later, Morning shift will start one hour earlier, and instead of having an overnight shift, guests will have access to an emergency number. Which cost cutting measure would you guess will affect guest ratings the least? When evaluating methods of saving money during a recession, consider the impact of each potential change, both on the hostel’s bottom line and also on the guests’ experience. Creating a plan in advance allows you to consider each change and its impact instead of acting hastily out of desperation. 

Preparing is easier than repairing

Nobody knows when the next recession will occur, how severe it will be, which countries will be affected, and how it will impact the hostel industry. Regardless of when, where, and how bad the next recession is, it's so much easier to make a plan for hard times then to repair the damage once your hostel is already suffering. 

What's in your hostel's plan for a potential recession? How will your operations change if you have a period of very low occupancy? Leave a comment below.

About the Author Byron Bunda

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. Today he's a Market Manager at Cloudbeds. 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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