Backpacking hostels are the new thing in hospitality

When Rishabh Gupta and his friend Aadil Muscatwala went backpacking in Australia, they ended up sharing rooms with strangers in hostels across the country.

This sparked the idea of starting a similar model in India. In 2011, they quit high-paying jobs at Merrill Lynch and Deloitte Consulting and with a seed capital of ₹50 lakh, launched the ‘Vedanta Wake Up’ hostel in Kerala.

Four years and six hostels later, the duo is now nursing hopes of becoming a pan-India operator. To do this, they are scouting for venture capital of ₹30-50 crore).

Another chain, Zostel, started just over a year ago by a bunch of IIT-IIM alumni, has hostels in eight locations, including Udaipur and Goa. Zostel wants to go global and is getting ready for its second round of funding. In the first round last year, it raised ₹5 crore from a Malaysian angel investor.

While the hospitality industry is struggling to break even across formats, the hostel start-ups have turned profitable — even though the billing on a single bed is as low as ₹500 a night.

“The net realisation per room with six beds at ₹500 is higher in a hostel format compared with a budget hotel room charging ₹3,000 a night,” says Gupta, Director, Blanket Hospitality Ventures, which owns Vedanta Wake Up.

Zostel says its hostels have operating margins between 35-55 per cent, with a payback period of 8-15 months.

The new operators are ensuring that they improve the hostel experience through the use of technology. For example, Vedanta Wake Up, with a capex of ₹45 lakh for every hostel (20-30 rooms each), operates on an asset light model where it does not own the property but invests in technology and housekeeping facilities.

“We have hit the market for VC funding and hope to close it in the next 2-3 months. Our target is to have 100 hostels in the next three years. We are also investing $100,000 in technology solutions,” says Gupta.

Zostel plans to have 30 new hostels and wants to take the concept to Nepal, Bhutan and Sri Lanka. “We have valued our business at ₹100 crore and are now looking forward to a second round of funding,” says Paavan Nanda, Co-Founder Zostel.

But raising funds can be a stiff task. “Hostels are at the bottom of the hospitality pyramid and funding may be difficult as it is not a tried and tested model in India,’’ says Achin Khanna, MD, HVS, a hospitality consulting company.

Meanwhile, there is speculation that Cox & Kings may introduce its acquired Berlin-based Meininger group of hostels in India soon.

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