Two years after getting a U.S. private-equity injection, A&O Hostels now has as many hotel rooms as it does dorm rooms, but do not expect the Berlin-based firm to kill the hostel spirit even as it grows up along with its loyal customers.
BERLIN—A&O Hostels now has as many hotel rooms in its portfolio as it does dormitory rooms, but don’t expect the Berlin-based firm to migrate into becoming a budget-rooms provider, according to its CEO Oliver Winter.
“Originally, we had one double-bed room to every 40 dorm rooms. Now it is one to one, but we are hostel. We are proud of that. We did not drop the word ‘hostel’ from our name, as did Meininger and Generator,” Winter said, referring to two other major hostel companies.
“This is a good business. We are downturn-resilient, and it requires relatively low investment that leads to good margins,” he added.
The company’s revenue in 2018 totalled approximately €140 million ($157 million) from approximately 5 million overnight stays, which made it a record year, according to Winter, who founded the company A&O in 1997.
Winter said that both A&O and Meininger hail from Berlin, and that there is a reason for this. He pointed to the requirement under German law that each German high school should be offered a free trip to Berlin, the country’s capital.
Due to Berlin’s unique Cold War history, when the Berlin Wall fell in 1989 and for some years afterwards, there were not many accommodations options for those travelers newly discovering the city, which became the capital of a unified Germany in 1990.
Quality supply was a problem for the next decade or more, according to Winter.
“In Berlin in 2000, demand was more than supply, and 99% of supply was non-commercial accommodation such as churches, hostels and the YMCA,” he said.
That was the year in which the first A&O asset opened in Berlin, and it’s still open today.
“Meininger was formed three months before A&O was,” Winter added.
Winter said the need for hotel rooms in addition to hostels comes from what types of groups are traveling together, such as 10 children and one teacher, and that teacher would need a room separate from the students.
“Today our customers are the same, those former students, but obviously they are older now, and more sophisticated,” he said.
A&O’s demand now comes from leisure and city tourism, which accounts for 40% of its bookings, compared to 37% student and school group travel, 15% families and 8% business travel, Winter said.
A&O’s stock has changed across its two decades, Winter said. One factor driving that shift was a new design concept completed in 2018.
“Design is key,” he said. “You cannot avoid this requirement now, and of course we are price- and cost-focused. I’d say our space efficiency is just the same, but that comes naturally in the hostel space.”
The firm’s concentration on conversions helps with this process, and with profit.
Winter said one additional avenue in which he sees possible growth is a “super-lean” lodgings option, although he added in some markets probably it is not possible to drop a product below the line of what exists now.
“It is super important to know what it is that customers want, the new needs they want, but I always say that below us in the southern Mediterranean only are campsites, while in Berlin, all that’s left is sleeping under the bridge,” he said.
Winter also is proud that A&O is the only hostel firm to have its own in-house education academy.
New money, new markets
Winter noted another major shift in the market is the broad entry of institutional capital entering hostels, a move that received two major boosts two years ago, with the January 2017 purchase of A&O by U.S. firm TPG Real Estate* for an undisclosed sum and with Queensgate Investments’ March 2017 buy of Generator from Patron Capital for €450 million ($504 million).
A&O now has 35 assets in 21 cities in six countries, representing approximately 35,000 beds in approximately 6,000 rooms in Germany, Austria, the Czech Republic, Denmark, Italy and The Netherlands. A&O will open a property in Poland later this year in its capital Warsaw.
All A&O locations are centrally located in their cities with long-term leases on existing assets and forward deals for new developments, Winter said. Budapest and Barcelona are in the pipeline. The United Kingdom and Ireland are targets.
Secondary locations are fine, as long as they are adjacent to transportation hubs, Winter said.
The next round of focus is southern Europe, “right around from Istanbul to Porto and on to Tenerife,” he said.
*Correction, 3 April 2019: This story has been updated with the correct name of A&O Hostels 2017 buyer, TPG Real Estate.