Trendy hostels emerge as budget busters

The word hostel has the ability to generate different reactions, from dread to fond memories and everything in between. But the concept in Europe has evolved in the last decade.

Many hostels still carry the image of run-down properties, with only young backpackers on very limited budgets as guests. However, the European hostel concept has today become trendy and modern with extensive public areas and central locations, appealing to a much broader clientele both in terms of age and purpose of travelling.

Will this hostel concept spread beyond Europe? Here are some of the key issues and information to consider first.
The main European hostel operators include:

Generator Hostels in recent years has grown and expanded its presence across Europe with several new properties. The hostels offer an innovative and quality product in prime city-center locations, attracting everyone from young backpackers to families and business travelers looking for affordable accommodations that emphasize social interaction with extensive public facilities.

The management, consisting of both people with extensive hostel operating experience and senior executives with backgrounds in other industries, and the ownership, a leading private equity group, represents a shift from traditionally single owner-operated hostels into a professional hospitality segment.
The trend for the hostel demand is definitely shifting toward an older and savvier clientele, as shown below.

The segment with the largest proportion of guests staying in hostels (i.e. more than 50% of the total demand) is the 25- to 34-year old segment, with the exception of Oceania.
This can be partly explained by the emergence of the “flashpackers,” or the former backpackers who are now older and have the means to pay more for other accommodations but rather enjoy the atmosphere and social interactions found in hostels.
The type of tourist with the largest representation in hostels is the couples segment, whereas the backpackers segment has the weakest representation.
Those two facts showcase the misconception of hostels. Clearly, the demand base has shifted in terms of age and purpose of traveling.
So, what make hostels attractive in Europe?

  • Extensive and animated public areas providing a relaxed and hip ambience allowing guests—both individuals and groups—to mingle and meet. Frequent events, appealing bars and lounges and emphasis on use of social media technology creates new ways of social interaction.
  • Private rooms with their own bathroom facilities and female dormitories in the product mix that offer generally high-quality facilities, broadening customer segments significantly.
  • Attractive and affordable prices providing an accommodation option for the youth segment but also an alternative to more traditional economy hotels for families, business travelers, etc.
  • Central locations, close to public transportation and to a city’s main attractions, where few other economy accommodations are available.

The popularity of hostels in Europe also stems from their ability to accommodate various demand generators, as seen above.

They are one of the only accommodation options for the youth segment, but operators can just as easily meet demand from couples with the introduction of private rooms. Private rooms also cater to less price-sensitive guests (e.g. business guests) who are looking for an accommodation offering a thriving social environment.
Finally, the modern and trendy product fits the requirements of an older clientele, including flashpackers, who seek attractive public areas and the possibility to participate in fun events.
Hostels versus budget hotels
The latest economic downturn had a direct impact on the hospitality industry. While hostels did not escape the crisis unscathed, they generally performed better than the broader hotel industry in terms of market value growth. Hostels also recovered at a fast pace or higher rate.
“Designer hostels represent the single most interesting and innovative concept to hit the hospitality market in the past few years,” said Josh Wyatt, investment director at Patron Capital, which owns Generator Hostels.
“Given the economic challenges in Europe, the hostel model allows investors and operators to drive above average yields by taking advantage of distressed real estate, then layering in boutique hotel design concepts for the youth market. Generator, which Patron has backed for four years, is a prime example of using cutting edge design, art, music and fashion to deliver excellent value to customers as well as the investors.”
That said, hostels and budget hotels can be similar in several aspects. In terms of operating economics, they both benefit from lower volatility and achieve high margins. In terms of target markets, they both aim to attract guests looking for affordable accommodation.
Therefore, where do budget hotels stand vis-à-vis the European hostel segment in reinventing itself?
Budget hotels typically offer limited services to justify the cost of rooms. As public areas are key in the hostel concept, will budget hotels eventually follow a similar trend? Should they target the youth segment further? The emergence of the boutique/lifestyle budget hotel segment proves that budget hoteliers are shaking things up on their ends as well.
CitizenM is a lifestyle budget hotel offering a product that would appeal to some of the guests staying in hostels: Stylish and spacious public areas recognized as a meet-up point for travelers; the lobby area is considered the living room of the hotel.
However, as the budget hotel sector remains rather traditional and is dominated by chains with standard products, it will experience increased competition from the hostel segment, which taps into the core segments of budget hotels.
Competition is key to a healthy business environment, as those with the most adaptable product coming out as the winners. With a highly adaptable product combined with an understanding of its guests, hostels are definitely here to stay. And the trendy hostels found on this side of the pond will probably find their way across to North America shortly.