Case CQniext

Zostel is India's first chain of backpacker's hostels. A company that claims not to have a
corporate environment, made up of seven people having a passion for travel and entre
preneurship and an adventure bug to set up this startup in late 2013. They believe that
travelis a form of meditation, a way of knowing yourself deep down-something, which has
profound effect on the way, you think and act in life. Their vision is to create an enterprise
that changes the travel and hospitality scenario in India; their sole ambition is to make
people travel more and to change the way India travels by wiping off al the muck present
in this sector. They believe in a simple philosophy of life-to live doing what they love
while trying to leave their mark by changing the face of travel and tourism sector. They
wish to create a strong community of travellers and entrepreneurs, a community that can
bring in a revolution. It may sound too good to be true, but it isa dream in progress.

INTRODUCTION
Started on Independence Day in 2013, Zostel was the first chain of backpackers' hostels in
India. Seven men between the age of 23 and 26 from IIMs and IITs came up with a vision
to change the view of Indians towards hospitality. What connected these men and led to the
formation of this company was their love for travelling. According to founders of Zostel,
"The inspiration of Zostel came during an Europe based internship exchange program." The
co-founders during their backpacking experiences in Europe and US enjoyed comfortable as
well as affordable stay at youth hostels. This was something in which India was lagging behind
despite the increasing numbers of backpackers. "Here, you either have to book a pseudo-
economic hotel, paying roughly Rs. 2,000 per night, or stay in some dingy guest house for
Rs. 300 to 400," says Akhil Malik, one of the Zostel's co-founders, and added "We wanted a
remedy to this problem."
All the seven founders of Zostel were graduates from reputed institutions in India and
could
have very easily taken up a high paying job but their passion for this
company led all of them
to decline the commonly chosen path. They created a
path for themselves and took up the
challenge of solving the accommodation problem commonly faced by travellers in India.
Hence, after coming back to India from their internships, they started Zostel to
able and comfortable stay to the backpackers at economical provide reli-
prices.
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Management
(4 Cases in Strategic
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to be successfl
idea is not all that ostel co-foundeneed
entrepreneurs need they need to
But having a good was mastered by the Zostel co-founde
know how to implement
the idea. This
difficult
art
task for them to fund
their management educaaly Initially
ation
when they started, it was
a
their start-up. Family and friends came to the and
their rescue
invest money in
at the same time worth $100 was raieSCue
was
Educational loans taken and donation were raised frofrom
during this time. also invested $10,000 that received ae
asa
Facebook. Dharamveer, one of the co-founders
founders had to capital in
heir highly capital
make for the prize inIn
a the
game, proving
investment that the
in
intensi
purposely set up first Jodhpur one of the Za
as
idea to become successful. Zostel
was

was already in
the hospitality business there The
co-founder family (Mr. Chouhan's)
could be judged from the fact that Jodhpur property having 25 beds broke even in first

month itself.
team participated in over 14 business-Dlan ce
There was no turning back after this. The pe
titions like Wharton India Economic Forum B-Plan contest and the ones run by the Richa
Ivey School of Business, Canada which gave them a platform to test their ideas, fine tune ther
and also find potential investors who were willing to invest in the idea.
The journey was not easy as it may sound. According to one co-founders, Mr. Akhil Malik
One of the biggest issue was to change people's mindset and promote the idea that even chean
rooms can meet the expectations and can be safe, clean and reliable." Besides these there Were
other problems like investing more time and maintaining the speed of business. Moreover.
there were operational andlegalisues. It was difficult to manage labour and get the work done
from them. Marketing was another area where the company needed to focus. The co-founders
intelligentdy handled most of these with their first-hand knowledge and these hardships made
Zostel grow bigger and better.
During the evolution process, the co-founders made it a point to remember their basic aim of
making travellers meet other travellers and providing them with a welcoming, well-maintained
and comfortable stay.

TOURISM INDUSTRY AND SCOPE FOR ZOSTEL

Zostel has initiated
expansion in the backpackers' accommodation sector, which was
developing India. Due to their special focus on
in Stu
the study of
deeply linked tourism sector became travellers, both foreign as well as
domesul
for growth.
According to the priority to understand the market ana
s
India in 2014, it was found thatreport published by the Ministry of Tourism, Governme
the number of annual
million and was
growing foreign tourist arrivals in India was
India from 2000 to 2012 yearly at 10.2 %. Trends in
the number of foreign
Exhibit 1.1. Domestic tourist tourists Indi
have been depicted in
to different states
number was
and union territories
accounted for 1282 million travellers visits wtthis
growing rate of 11.9%. The
at a
yearyP 123
lakh crores and was
expected industry marked an annual earning ol
While in 2014, the to rise by 14.5% in the coming **
total years.
had
already reached 5.13 number of tourist
million in the period
in India was
wa 7.68 million, the
mber
arrivals
approximately one-third (33.7%) of total
0 1 5 . Moreover,
from January to June, 2013.
expenditure of a tourist during a uP r i p was on
 ************************************************************************************** ********* * rre
Backpacker's Hostel
**srrrevretv*********************************** 5)
accommodation, i.e. on hostels. These statistics were a clear indication of the growth of industry
and immense scope that lay ahead for Zostel.
Zostel planned to target both international as well as domestic travellers. While the
backpacking culture was prevalent among foreigners, it was still in a nascent stage in India.
The market that Zostel was targeting was primarily the youth, i.e. people in the age group of 16
to 30, which basically included college students, sports groups, travel enthusiasts and travelling
clubs.
Zostel had set base in eight prominent tourist spots across India including Delhi, Jodhpur,
Jaipur, Udaipur, Varanasi, Agra, Goa and Jaisalmer. As in April 2015, Zo Rooms owned 100
hotels across 10 cities, but the company planned to support over 1000 hotels across 50 cities
by the end of 2015
While some believed that the backpacking industry was just a passing phase till the next
recession or inflation strikes, Akhil Makil, the co-founder of Zostel, had a different opinion.
He believed that the current generation was marked by a lot of uncertainty in terms of what
each individual wanted in life. The current youth had worked hard to get good education and
get a well-paying job in an MNC. However, as the propensity to spend grows, people start
buying goods and products they wanted for long which they think would make them happy
But Akhil, through his experience with hundreds of backpackers worldwide, mentioned that
sooner or later they are bound to realize that material happiness was what they were looking
for. When that moment strikes, it will be the time when these corporates will pick up their
tiny backpacks and move out to explore the adventure that is the world. This view was the
major driver of Akhil's confidence in the idea and the belief that it was not just a phase that
will pass, but was bound to stay around for some time and grow in the near future.

EXPLOITING THE GAP IN THE MARKET

According to a survey by a consulting firm PricewaterhouseCoopers in 2012, India's hospitality
service industry was short by 150,000 rooms. The market predicted a tremendous growth in
"price-conscious domestic travellers", thus indicating the fact that mid-market and budget
segments had the maximum potential. It was seen in market studies that there was a massive
shortage of short-terms rooms for under Rs. 2,000 a night in India. Surprisingly, rooms below
Rs. 1,000 enjoyed an abnormally high occupancy of above 85%. Thus, there is existed a gap
in budget options for leisure travellers.
This was where Zostel jumped in.
We not only endeavor to ensure our hostels meet the basic international standards of afford-
ability, security and cleanliness but they're also welcoming, well maintained and comfortable
for our guests to stay in," Akhil Malik, Co-Founder, Zostel said.
Thus, Zostel developed a completely non-existent domain of Backpacker's Hostels, aiming
to structure a largely unorganised market and become market-makers and market-leaders.
Anchored on an asset-light business model, they planned to aggregate
standalone budget hotels
in travel hubs of the country and associate with a common name. The idea was to develop a
brand name with backpackers' associate and to provide a standardised set of amenities and
comforts like any-other conventional budget hotel chain.
 6 Cases in Strategic Management
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Another move that was an immense hit among travellers was Zostel's approach of
f nee
providing
not just an accommodation but a holistic experience in itself. The atmosphere was
to lure the young, adventurous and the crazy. Its success was evident from the fact tEned
Advisor gave Zostel "5-star ratings" and placed it in the "Top four places to Stay" in all
where Zostel had hostel. This allowed Zostel to create a niche for itself and bring a new dime
cit
sion to the Indian tourism and hospitality scene.

COMPETITON FACED BY ZOSTEL

Zostel was facing competition from various market players like OYO rooms, Treebo, Zin z..
Zen,
StayZilla, etc. All these players were trying to capture the market by providing better amneni-
ties at the best rate possible. All these players had very huge potential to slash Zostel ma
share and profitability. et

OYO rooms was established in 2013 and

the biggest competitor of Zostel. The standard was
rooms provided by OYO rooms used to have al basic features like AC rooms,
breakfast, 24X7 Wi-Fi facility and customer support services. OYO rooms had complimentary
B funding of $100m and backed raised Series
up by investors ike Sequoia, Light speed venture
and green oaks capital investment. Facebook and partners
Twitter followers for OYO rooms were
increasing day by day also

COMPETITIVE ADVANTAGE
The tourism and
hospitality industry had a lot of individual and
making the market fragmented and discrete. Zostel was independent competitors
worlds. If we look at low-cost started so as to get the best of all these
affordable
entry Lodges and Guesthouses, 1 toaccommodation,
were
3 star hotels,
the main players
prior to Zostel's
Associations of India) hostels and Government YHAI (Youth Hostel
and YHA hostels were standalone small hostels.
very aftordable, they lacked even Although Lodges, Guesthouses
in obscure locations.
Their the basic facilities and were locatea
poor hygiene and
preferred avoiding them for the same reason. 1 security
were the main issues
to
and travellers
facilities but were 3 star hotels were
relatively expensive for backpackers. For
hygiene and facilities
hygienic and had decen
standalone hostels,
trust of travellers in
were a
terms of
positive but the lack of an established
name robbed them of tne
affordabilnty
Zostel worked on security and stay.
a
cross-selling establishing a brand across all major
opportunity.
Their rooms were tourist hubs to reap the benetits
secure thus
affordable and at o
youthful ambience and
intruding into the
market of Lodges and same time
hygienme of a the
name made it exciting engagement activities, Government hostels. The creatiod
possible for them to basic amenities like Wi-Fi and a
the penetrate Dr backpackers market.
THE REVENUE MODEL
Unlike most
up. The venture technology startups, Zostel
lay at the crossroads of required a great amount of
ground
hospitality and real estate. At the beginnin
work theyov we
t started
 Backpacker's Hostel
7
required to source appropriate properties, negotiate prices considering the price ceiling and
operational economics and work out plans to expand to other parts of the country.
Zostel followed a franchise model with all its properties rented out. It refurbished the prop-
erty with air conditioned bunk-beds and all basic amenities such as Wi-Fi connectivity. In
addition installation of board games, play station and chilled-out decor ensured it is a hot
favorite among young travellers. In some cases, the interiors were also done according to the
location.
In its expansion move abroad, the business model was tweaked to make it even less capital
It local personnel to invest in properties and personally take care of
intensive. allowed the
marketing and branding. It then charged 15% commission on all bookings made through its
app plus a monthly booking fee.
The pricing for the rooms was market-penetration pricing with the sole aim of establishing
a customer share in the Indian tourism industry. The tourism industry was price sensitive and
Zostel kept this in mind ensuring value for money for all the residents.

INNOVATION AT ZOSTEL
Right at the outset when it was conceived, Zostel faced the challenge of coming up with
new properties. Obviously, this would prove to be a costly affair and for a "startup, this was
certainly not feasible. This was where they took their baby steps in the world of creativity,
albeit small ones. Instead of coming up with their own properties, they consolidated a previ
ously segregated market by taking over several hostels across India to bring them under one
banner of Zostel.
The process of acquiring continued with time and soon, Zostel was a chain of hostels unified
under the name Zostel. They started operating these hostels at lower operating margins than
before by giving better amenities. However, due to consolidation, the irregular demand for
rooms at places averaged out slightly to compensate for the decreased operating margins.
Conceptualising the Zostel Experience
Zostel's to-do
Once the plan for market entry and capitalisation was in place, the next thing on
of hostels
list was market positioning. The problem here was if Zostel were to be just a chain
scattered randomly in cities, it would be seen as just another hostel among many competing
The question that Zostel founders, Pawan Nanda and others, needed
to
independent ones.
was how they would differentiate
their product Zostel from the rest of the
creatively answer
hostel market.
market had been driven by consumers looking for
Tillthen, the hostel accommodation
Hostel Authority of India (YHAI) provided just that.
extremely cheap places tostay,The Youth YHAl's insanely low prices, not by any stretch
Zostel could not have hoped to compete with
would not do the trick.
of imagination. Therefore, just being cheap

Cue innovation!
even today. Instead
What Zostel did in order to solve this problem, is what drives the company
of just being extremely cheap, Zostel decided to tap into the minds of these travellers and see
where their demands could possibly be expanded.
 8 Cases in Strategic Management
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****
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*************************************** **sseas.

Zostel discovered that most of the backpackers travelling would love to get a feel oe
*******************.
kers inside
they stay in. Therefore, Zostel decided to get this feel to the backpackers inside the the cities
the hoeCItes
They themed the ambience on the city they were in, thus greatly enhancing the evo
host 1tsel
these backpackers. Another discovery was of the fact that travellers love to interact
nce of
travellers and Zostel gives travellers just that! With an array of common areas towith
areas to h ther
in the hostel and with periodically arranged recreational activities, Zostel gives the hang out
ample opportunities to interact with the fellow travellers unlike any other hostel rs travelle
its innovative unique selling point. A fun yet cheap place to live where you can i n e r s this
fellow travellers in common areas and enjoy periodically arranged recreational
activitios , all
fine-tuned to suit the place that you are visiting.

BUILDING BRAND ZoSTEL

Having started Zostel and having a clear positioning in mind, the founders now
faced a
problem that new startups face, i.e. building the brand. commoe
on
ways in which Zostel founders innovated
There were two
primary innovative
ive
creatively to build the brand Zostel.
Brand Building and Cross Selling
Every time you stay in Zostel, you don't stay in Zostel Delhi or
Shimla. The founders firmly believed that Zostel Mumbai or
in Zostel. When Zostel
Zostel in Shimla, you were being sold Zostel you stay you were living in a
Delhi or Zostel Mumbai
a
great stay. This worked perfectly for the through good service and
these hostels were company because most of the people who
chapter of Zostel.
backpackers who were likely to travel other stayed in
places as well with an active
Brand
In order to maximise the
much more than individualadvantage being a hostel chain, Zostel markets branded
of
hostels coming under their Zostel
mentioned idea of cross banner. This combined with the above
selling Zostel's hostels was an
marketing and brand building coming from
the
amazing creative approach towards
their market audience The founders
backpackers and a vast majority of quickly was founders. realised that
travelers (age between 20 and
started building the 28). In order to tap into this backpackers were very young
market as much as they could they
The following are image Zostel as being by the youth, for the
of

1. Youthful
some
extremely interesting ways how youth and of the youth.
Portrayal of the Company: A they this.
did
that the major
company as being youthful. And part of satisfying the above was to por
the that they did! If you
company, you will find a visit the
website
complete with a mascot, all plethora of youthful bright colours, vibrant fext
youthful brand. The people factors that greatly benefit
the u
exactly what the founders hadalmost felt as if Zostel was justcompany' s porawa as

2. wanted them to feel. like them and

Partnerships: All
centric marketing oriented partnerships of the the
organisations and college
visibility for the company, festivals. All of this, company youth-

also helped in its apart from retcs eet youth outh

youthful portrayal. It had aiso artnered

rtnered
 Backpacker's Hostel 9

with brands like MTV and Red Bull, both seen as youthful brands, thus leveraging their
brand image to build that of Zostel.
3. Zostel Internships: Yet another creative marketing exercise that the company under
took was the concept of Zostel internships. These were 50 days' all expenses paid trips
for young adults across India with stipend of Rs. 50,000, disguised under the name
of internships. The company banked on the people doing the internship and talking
the company
to their peers, thus organically marketing Zostel. Through the program, indirect
again portrayed itself as youthful and at the same time garnering direct and
publicity for itself.
The
These are just some of the several creative innovation techniques employed by Zostel.
creative ways to do
company and its managers remained committed to unconventional
core

what needed to be done.

EXPANSION MODEL
Starting as aself-funded company, Zostel picked up its first round of investment worth INR 5
crores from a Malaysia-based investor, Presha Paragash in 2014. In May 2015, they picked up
their second round of undisclosed funding led by hedge fund Tiger Global in participation
million (INR 96
with Orios Venture Partners. Market sources peg it at somewhere around $15
crore). The aim was to achieve a leadership position in this naive market and majority of the
use of proceeds was going to be in building a strong brand, marketing, bolstering technology
and ground operations.
Zostel had also been constantly expanding across India. Having started in three cities across
Rajasthan - Jodhpur, Jaipur and Udaipur - Zostel had now expanded into Delhi, Varanasi,
Agra and Goa. The expansion was done strategicaly to capture all major tourist hubs as
even now, 65% of Zostels' occupancy comes from foreign travellers. Also, most Zostel hotels
were located within a kilometer's distance from the city. "We expand in tourist circuits.
Like, say, a traveller who goes to Delhi and Jaipur will also go to Udaipur. So these three
will be targeted", said the founders of
areas
Zostel
The company had also gone international with the launch of its first overseas hostel in
Dalat, Vietnam.
"We are planning to launch more international properties,includingin Nepal and Sri Lanka.
By the end of this year, we will launch three unique properties in each location, taking the total
number of hostels to 40 across national and international lestinations," said Akhil Malik.

CURRENT CHALLENGES FOR ZOSTEL

One of the major problems that Zostel is facing is changing people's perception about cheap
accommodation. In India, the reputation of a cheap accommodation is not good and they are
considered unsafe, unreiable and not so comfortable. Zostel needs to break this misconception
in order to gain popularity by using popular marketing strategies.
Another problem that is hindering Zostel's growth is proper management of the operations.
According to Akhil Malik, "It becomes difficult to interact with the people who do not
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Managemnent
Cases in Strategic
10 * ***
and regulations also ho
The local rules
********************

because they are

labourers." hal
understand you countries.
cities and
in various
Zostel is facing problems. They
expansion need to S .
lenge to the a r e a where
is another the necessar cght
Property scouting Zostel by providing it all
location and convert it to lities
property at a right comfortable.
that can make a person's stay from various competit
other industry, Zostel is also facing competition
Like any providing competis.
discussed earlier. In order
to gain an edge over competitors these by
remain profitable, Zostel needs to come
prices and facilities and at the same time to with
their business.
more innovative ideas
and should strengthen

WAY FORWARD
Going forward, Zostel need more capital for their expansion plans. They are trying to expand
their operations in domestic as well as in international market. They are tacing challenges from
all directions but they are determined to make an impact on the tourism industry by providin
all facilities that can meet the international standards of security and hygiene requirements
set by the industry western counterparts. Currently, Zostel is facing fierce competition from
other market players like OYO rooms, Treebo, Zip, Zen, StayZAlla, etc. But now the
company
is looking for a sustainable plan that can help Zostel to increase its market share.

**w wwwwwww.wewwww.w

QUESTIONs FOR DISCUSSION

1. What should the CEO of Zostel do to sustain the
2. Should Zostel enter into
advantage gained by Zostel?
joint venture or acquisition?
3. Why has Zostel been
successful and what are the
4. Analyze the aspects for future success?
competitive scenario of Zostel
EXHIBIT

Exhibit 1.1 Indian Tourism

Industry Statistics
ian Tourism
Number of Foreign Tourist
Arrivals in India
Industry Statistics
Annual Growth Rate 7.68 Million
Number of Domestic Tourist 10.20%
Visits to all
Annual Growth Rate States/UTs 1282 Milion
Foreign Exchange 11.90%
Earnings from Tourism
Annual Growth Rate INR 123,320 crore
Source: India Tourism
Statistics at a
Glance 2014, 14.50%
Ministy of Tourism, Govt. of
Indio)