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Millennials the way forward for Safestay's hostels business

Safestay operates ten hostels in various European cities and the flexibility of its guests means there are some unusual (and prime) locations
Millennial girl
Just want to hang out and chill

How many millennials does it take to fill a hostel room?

No, it’s not a modern update on the lightbulb gag but the thrust of AIM-listed hostel operator Safestay PLC’s (LON:SSTY) business model.

WATCH: Safestay Plc 'reinventing the hostel market'

Millennials are loosely the 18-34 age group (for anyone who has been living on a desert island for a while) and an area of fascination for many including Nuno Sacramento, Safestay’s chief operating officer.

They feature extensively in their plans largely because they are so different from normal hotel guests, he says.

“MiIlennials are invested in leisure, so for us they are a really interesting population.”

Whereas a family travels maybe twice a year - including one major holiday - millennials travel four times a year and are far more flexible about accommodation.

That does not mean they are less choosy says Sacramento, rather the places they will stay are very different from the mainstream, which provides opportunities for companies such as Safestay.

Vibrant places

They want the opposite of what you might get in a standard budget hotel, Sacramento says.

‘Vibrancy’ is the key. A hostel must primarily be a ‘cool’ place to be, where sleeping is less important than being able to network, talk, or just hang out.

Safestay operates ten hostels (2,600 beds) in various European cities and the flexibility of its guests means there are some unusual (and prime) locations 

One hostel in London is in a Grade One listed building in Holland Park for example, while Sacramento is not kidding when he says he can see accommodation in future in redundant tube stations or decommissioned military bunkers.

For its millennial customers it would be a fantastic experience, he says.

Two more hostels are set to open shortly and the key for the company is to get annual usage of its beds up to as close to 85%, which effectively full occupancy, as it can.

Prices on average were £20 per bed last year but without the need for en suite facilities, Safestay can get at least four beds/two bunks in a standard room, which often takes the gross well above what a budget hotel operator might earn for similar space.

Safestay has even has trialled triple bunks in some of its rooms.

More to spend

The rationale for the visitor is that the money you save can be spent on why you were visiting the city in the first place such as theatre, restaurants, a concert, night out etc.

Sacramento says hostels are gaining momentum generally and even in the less developed UK market.

Continental Europeans understand and have already embraced the concept.

Latest numbers illustrate the effect better occupancy rates can have on the financials.

In the year to end December, Safestay raised the bed usage rate to 73% from 65%, which helped total revenues rise by 43% to £10.5mln, while room revenues increased by 15% to £8.5mln.

While a handy increase, raising it nearer to 85% is when the business will really hit its straps, Sacramento says.

At that point, revenue generation, cashflow and profitability all become compelling.

Getting to that point will not be easy, but Sacramento says by an analysis of the habits of its clientele it is getting a good idea of how it can be achieved.

Tighter controls on rivals

A helping hand might come from tighter restrictions on the competition.

Sacramento fully expects short let renting service Airbnb will be regulated at some point and be brought fully into the tax regime. 

Places such as Barcelona, meanwhile, are also clamping down on new openings, so the market is not going to expand. 

Safestay has three hostels in Barcelona and one in Madrid and four in the UK including one in Edinburgh, two in London and one in York.

The company is still loss-making, £870,000 in 2017, largely due to interest charges on its debts of £18mln and its finance leases, which are set against properties in Edinburgh and the Elephant & Castle.

Great product

As occupancy inches up and new properties come on stream, Sacramento expects both the underlying profitability and the share price to pick up momentum.

Hostels may have lacked attention in the past, but he believes it’s a great product.

“Once we start putting scale to the operation, that’s when larger companies will start to take notice.”

At 48.5p, the company is valued at £17mln.

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