In The Big Chair - Gary Morrison of Hostelworld

Thinking back to your time at Expedia, what experiences and learnings did you bring with you to Hostelworld? Did they help you through the pandemic?

I think there were two out of many that were really important. One is the importance of data-driven decision making. Everybody is long on opinions, but ultimately, I remember working with Dara (Khosrowshahi) and he would say, "This is all very interesting but what does the data say?" I learned the fact that you can do so many small tests if you don’t know what the answer is and get to the facts and use that to drive where you put the investment.

The other one is that Expedia was extraordinarily good at using technology to automate processes and decision making. They were very early adopters of things like machine learning to drive decisions about things like how you optimize pricing for package products and so on.

Certainly that second piece around data has been pretty instrumental for us. In 2019, we would have had just over 300 people, now it’s 220, while some of that is COVID, we can run the company very successfully. We have invested a lot in automating things that used to be manual in nature.

When you joined Hostelworld you laid out the strategy, so what has gone well and what has been put on hold?

I joined in late 2018 and there was a Capital Markets Day in November, and I basically said there’s two years' work here to fix the core OTA business, which would have been 2019 and 2020.

So, by the end of Q4 2019, we had already got the business growing again and EBITDA margins, and I had said to investors, back in the Capital Markets Day, I’m going to come back to you with what the growth strategy is for this company because it can’t be just a niche OTA.

What I did tell them is that there are two things we were going to build upon, two fundamental insights, and they were as true 20 years ago as they are today. People go hosteling as a means to meet other people, not because it’s cheap, and there is no solution to help people find others to hang out with. So that was the very simple one-sentence insight. 

The other one was in looking at these trips, which are multi-destination in nature, staying at hostels is not the only thing they do.

These travelers want to look at volunteering opportunities, working in a surf resort where they get lodging for free but teach for a few hours a day - again, fairly niche experiences but very relevant to this customer base - so in March 2020, I went back to our investors and said we we’re going to build solutions for the first: helping people find others to hang out with organically, and we’re going to accelerate rounding out the portfolio with acquisitions.

We had an acquisition ready in the wings. That was March 4, and two weeks later COVID hit, so we looked at what are the priorities now and clearly the big priority was improving liquidity - enough immediate liquidity over the longer term - to be more able to weather a storm. Obviously we didn't know how long the storm was going to last.

The first thing we did was put on ice acquisition-based means of rounding out the portfolio, but we thought we could continue that second year of fixing the core and start working and doubling down on the social side, so that’s what we basically did.

During those two years, in June 2020, we did small equity raise on the basis of this is probably going to be a year-long phenomena, which it clearly wasn’t. As we started getting toward the end of 2020, we thought there’s potentially another year here, what’s the right capital structure? So we went back to investors and said we thought a long-term debt deal would be the right answer, which we secured in February 2021 and we borrowed €30 million over a five-year term.

Now, fortunately, liquidity is a thing of the past, everyone is focused on the P and L again, which is good. 

In reality the strategy never changed, it was just the order of operations. We did manage to round out the portfolio in an interesting way with G Adventures.

We developed a product with G Adventures that is a combination of their short adventure tours, swapping out the accommodation choice for these travelers going from place to place who wanted to add on a a short tour but still wanted the hostel experience.

Lots of companies have done the social features and lots of startups have come to the fore saying they’re going to be the social network for travel, but none have been successful. Why did you think pursuing that is the right strategy?

There’s two main reasons. Through an awful lot of surveying work and testing we know that 80% of our customers use hostels as a means to meet other people and 60% of them are traveling solo.

The core piece of why wouldn’t some of these other social networks be able to do it is that you have got to know where people are going in the future.

If I’m going to choose a hostel in Seville and I’m going in a week, the core thing I want to know is out of those 50 or so hostels in Seville, what kinds of people are going to be staying at the dates that I am anticipating I’m going to stay. In order to solve that problem you really need to have a social network fused with an OTA. Facebook doesn’t know where you’re going to be - we do. 

You’ve built out the social side and done the deal with G Adventures, do you consider the two-pronged strategy as done or do you think you’ll go back to acquisitions? Or are there other things you’re looking at?

Acquisitions are just a means to executing rounding out the portfolio, you can do it organically. We are very much still committed to that dual-pronged strategy which is rounding out the social features, but this is a journey.

We did a lot of testing last year and launched version 1.0 a couple of weeks ago on iOS , Android is today and on our website PWA, we are running 50/50 tests.

This is the version one product feature set, so there’s going to be a huge amount of very exciting optimization and testing over the next year to 18 months before I would ever declare it’s done. It’s a really exciting journey because we see it as very different to what’s on the market out there.

On the adding on different product categories, the category we have now - the short adventure tour category -  took a long time to build something, which was pretty unique and differentiated with G Adventure and you can only start to traveling on those in May.

I think for the balance of this year we’re just going to be strongly focused on that, and then maybe as we get into 2023 we’ll look to acquisition to build out that portfolio, if it makes sense.

Hostelworld made several investments during the past few years, what have they brought to the company?

There were a couple of joint ventures we did back in 2019 to round out the supplier-facing part of the company. Historically, Hostelworld started as a PMS company and over the years pivoted more toward the OTA and didn’t continue investing in the PMS, which is very different to a standard PMS because you’re not selling rooms, you’re selling beds among other things.

We had a lot of stuff to do on the core OTA platform, and if we had assembled a couple of joint ventures to accelerate that independently it’s probably the best way of solving that.

In terms of Goki and where they are now, we restructured our agreement. Originally, over a three-year period we would have first rights to acquire the balance of the shares that we did not own. During the pandemic the management team of Goki said it was getting a lot of inbound interest from independent hotels, property managers who have listings on Airbnb as well as hostels, and we think those segments are going to be much bigger - which caused me to say that it wouldn’t make sense to buy the shares we don’t own for a business which is moving into a space where we have no interest.

So, we decided to restructure it to remove that right and cap the funding. We still own a significant minority and we’ll be cheering from the sidelines and hopefully helping them grow in hosteling.

With Counter we established that joint venture in November 2019 with the same structure - we had 51% - and in November this year we would have had the right to buy out the residual 49%.

As Counter progressed, it’s now double the size of the old product it replaced, which was our legacy PMS - and increasingly as we were looking at our strategy, we felt it was probably better to bring forward the acquisition date. We could bring the product very much into our own ecosystem and start driving it more the way we wanted align with our own development strategy.

What are the greatest challenges for Hostelworld currently?

There are two things that keep me awake at night right now. We launched this version one set of social features, and we talked to our hostel partners about them and the team is excited about them and we’re getting lots of unsolicited emails from customers about what we should do.

The challenge is just staying focused. There are so many things we could do, but what we absolutely have to do, with limited set of resources, is just stay laser-focused on those things that are going to drive the most value for our ecosystem whether our partners or our customers.

The other thing keeping me awake at night is trying to get this balance of working from home and working from the office.

We have employees in London, Porto, Dublin, Shanghai, Australia and increasingly in Italy, in Spain - people working remotely and the challenge is during the pandemic it was very much about the right model based on everybody's needs and desires, which then was very much hybrid. Now the challenge is how do you make sure you maintain a company’s culture, but you really do need to spend some quality time face-to-face.

That’s not just thinking about how you solve the business problems but just personal relationships, which are necessarily face-to-face. I don't think we have got the balance right just yet but we’re thinking about different models.

There must be a pressure on you, and a challenge, that you went from this €81 million in revenue in 2019 to now in the high teens?

Of course. Not unlike any other company in the travel sector who had to take extraordinary actions to maintain themselves, unprecedented pressure. But that said, we did preliminary results for 2021 recently and also took the opportunity to show people the first 12 weeks of this year were like.

The fact is nobody is interested in what happened last year. They want to see what’s happening in the first 12 weeks post-COVD and how you’re recovering. Those trends are super encouraging and are without having the social features to pour petrol on the fire.

You have all of these other giants circling, if that’s the right word to use, and they’re all talking about perfect trips and the customer experience end-to-end and providing everything. How do you stand up against that type of threat?

No, it’s a good word. One is always respectful of the Googles who are not only a competitor but also a valued partner and the Expedias, the Booking.coms etc., but the core objective of a really solid management team is to figure out the strategy that plays to your unique strengths so you can compete in a differentiated manner and that’s what we’ve done.

An analogy I use with investors quite a lot is that if you’re staying in a hostel as a solo traveler, going down to the bar and starting a conversation is an accepted practice. If you were staying in one of the big branded hotels, people would somewhat question your intentions.

The other perspective is that we know from all the testing we have done that being able to show travelers who else is going when they are shopping is super important - proportion of solo travelers, where they are coming from, if they are on longer trips, gender - all those things.

Nobody cares who is staying the Hilton or the Marriott so for us being able to meet what is a huge, unmet need amongst our youth traveler base, going on these very much life-changing journeys, where they’re really looking to meet people and providing an experience through the product is what differentiates us.

It is a hard pivot, but if you’re doing a soft pivot you probably won’t be successful if you really didn’t need to think about how you created a strongly differentiated proposition, so much so that people think that you’re the natural entry point. If you’re going hosteling, you just come to us, you just download the app and you have all the tools to help you meet people on the go.

As online travel giants have returned to significant marketing spend, you also have returned to significant online marketing spend. Why did you feel you needed to do that? 

The rule of thumb is 50%, but that’s an outcome not an input. We have a pretty unique ability to predict what the value of a new customer is relatively quickly in their life.

Every day we recruit a ton of customers and look to see what we think the predicted value of those customers is in the future. We know how much we spend, so we can work out what the customer acquisition cost is, at any point in time - daily, weekly - it reflects the amount of spend in different areas across our business and we look to see how many customers did we buy and what is their customer lifetime profitability, which is expected revenue minus customer acquisition cost.

You’re constantly hunting for where the maximum is. Maximum customers and maximum lifetime profitability. If you overspend customer lifetime, profitability will come down and maybe you don’t buy enough customers to be able to offset that. And then the reverse is true - you spend a bit less but you don’t acquire as many customers. That is the way we run our marketing economics, which as an output is about 50% of revenue.

But if you were this strong differentiated entry point, would do you need to do that? 

If you’re the natural entry point because you’re providing these features to deliver against a very large, unmet need, that’s going to translate into two things: 1) More people will come to you directly and 2) When they are using your platform they will probably use it more frequently so you have lower customer acquisition and higher retention.

If you imagine that creates more direct margin so now you have a choice, you can drop that incremental to the bottom line or reinvest it in more customer acquisition.

What trends have you seen emerging from the pandemic? What has changed and what’s here to stay? 

What we see, which is in part still driven a bit by restrictions, is the business is still concentrated in Europe and the U.S.? Asia is still 20 to 25% of 2019 levels, Europe is 80 to 85%, but within southern Europe it’s much higher and Central America is about 200% of 2019 levels so there’s a different geographic spread.

The second thing is we are also seeing pretty strong bed price inflation. If you normalize for everything else the unit price for a bed is significantly higher than it was in 2019.

The other one that is interesting is length of stay. In the bracket of five days, it is meaningfully higher than it was in 2019. The unknown is why. On the one hand, some would say is this the emergence of working from anywhere, the digital nomad and so on. While I do think that’s a factor, I think it’s a small factor.

Part of the reason, I think, is that flight prices are pretty expensive and I think it could easily be a reflection of the fact that instead of people going from city to city they are staying in fewer places for longer.

I don’t know if there’s going to be a wholesale revolution of working from anywhere, I think at the margins it is going to change, and I think that elongated length of stay will probably be the new normal.

We’re not seeing much in the way of difference in booking window, it’s still 65% or so within seven days of stay date, the proportion of business between dorms versus private very slightly skewed compared to historical rates toward dorms right now but you would expect that.

The hostel product has been improving significantly in recent years. Do suppliers now want to sit beside hotels and some of the alternative accommodation products or are they happy to be in that hostel category?

Mainstream hostels, the bulk of the industry, absolutely do not. When you look at OTAs, in order to make properties comparable for a user, they've got to describe properties in very standard ways. If you look at the property details page on any OTA, it’s price, availability, location, amenities - it’s very lowest common denominator stuff.

The business that most hostels are in [is that] most are set up by travelers who have finished their traveling years, they really enjoyed the experience and then looked to take their first building and that’s how they get started and CapEx is low.

They look at the business as they are in helping young travelers, especially solo travelers, to meet other people to hang out with. This is why they have all those events, this is why they have beer pong, why they do walking tours and all their excursions.

All of those things drive reviews, and reviews drive selection and really the bed portion, as long as you meet minimum criteria, it’s a means by which you try to get as many people in and then you overload on the experiences side.

When you look at the world like that, the last thing they want is being compared on the basis of price with other budget accommodation because that’s not the business they’re in. 

When you look at hosteling as a $6 billion industry, if you look at 2019 figures, I think youth and student travel is about $330 billion and it takes a lot of courage to go solo traveling. One of the things we talk about with our hostel partners is the benefit of these social features for our category - we ought to be able to persuade more people to go solo traveling out of that $330 billion pot.

So, we are far more focused on presenting the proposition as if you’re a youth traveler looking to go traveling and meet people along the way, hosteling is for you.

What moves has Hostelworld made toward sustainability, internally and as part of the wider industry?

They are sitting on the most amazing asset, which is dormitory accommodation. Square meter per square meter there is no debate that hosteling has the least impact on the environment from a carbon emissions perspective. We’re committed to putting some numbers around that. 

In terms of our own strategy there are a couple of things we think about - one is eliminating our own carbon emissions. We have already fully offset all of our 2021 emissions so we’re carbon neutral and we’re working with an organization called the South Pole to go through the accreditation.

With our hostel partners, we signed up to GSTC - the Global Sustainable Tourism Council - to figure out how we can get a means to move hostels along a sustainability journey.

Their ability to spend versus the hotel industry is limited, so we need some thing that is right-sized for the industry but also gets them on a path where there is a commitment to improving sustainability in a measurable way so that a third-party accredited certification agency could say the property has these characteristics. It’s a complex area and it’s a multi-year program. 

What's your own, biggest personal learning from the pandemic?

I’m going to say two. Look after our people. People have been under extraordinary amounts of personal stress. The impact on mental health, some will have lost loved ones, some will have found themselves working from home with children in the background, and you might think people are happy and stable but you don’t know. 

The second one is that over an extended period of time where you’re trying to navigate yourself through what seems like a never ending, wave after wave after wave, you have got to create a simple, little story to help everybody maintain belief that the company is going to make it.

You say it to yourself, to your employees, to investors, to your board, to anyone who will listen. It needs to be credible but people, in times of massive amounts of stress, upheaval, fear, people need something to cling on.