Larsen: Weak Rental Market Forces Accommodation Businesses to Change Business Model

According to Larsen, one of Estonia's largest accommodation companies, weak demand in Tallinn's rental market is forcing accommodation businesses to revise their sales plans and seek a balance between short-term and long-term accommodation. The company believes it is now more difficult to rely on the traditional hotel model in the capital's accommodation market.

Larsen founder Janek Busch stated that last summer clearly showed that even during peak season, accommodation companies in Tallinn can no longer count on the market conditions and classical hotel business operations of the past. "For some time now, we have seen that the classical hotel model no longer works in Tallinn, and anticipating weaker short-term demand, we directed a larger portion of our capacity to long-term accommodation early this summer. Whereas at the end of August last year we had some 300 accommodation units for short-term rental, at the same time this year we had about 60. This was a deliberate choice to keep our revenue base more stable and improve profitability," Busch explained.

For Larsen, a more flexible business model meant lower revenue over the summer, but helped improve EBITDA. Although July revenue was 13% lower than the previous year, EBITDA increased by 2%, and along with the fifth property, Larsen achieved its second-best result in company history in both revenue and EBITDA.

"The short-term accommodation market is characterized by strong price competition and low occupancy rates even during peak season. At the same time, the hybrid business model allows us to offer the same accommodation space for different periods and different clients depending on what demand is currently in the market. The changes we initiated in spring also had a positive impact on how we organize costs, labor, and sales activities," Busch explained.

While June results fell short of projections, in July the average daily price for short-term accommodation in Larsen's properties increased from 59 euros last year to 82 euros, and occupancy rates and demand for long-term contracts also increased. August's financial results were supported by earlier active sales and flexible pricing management, and the EBITDA margin rose from 43% to 54%. Among other things, Larsen started selling accommodation for Ironman earlier compared to last year and at a higher price level. Sales for autumn long-term accommodation also started earlier.

Busch pointed out that the difficult economic situation also forced the company to change its work organization, and labor costs for administration and customer service were reduced this year by approximately 40 percent.

"Our further goal is to grow our portfolio in such a way that our team costs do not grow at the same pace as the number of properties. The early changes we made in sales, pricing, and work organization are also preparing us for managing larger volumes as we develop a new building in the city center," added Busch.

By the end of this year, Larsen will complete a lifestyle accommodation building with a novel concept on Väike-Ameerika street, and the number of studios managed by Larsen will grow to nearly 800. The investment in the new building totals over 12 million euros. Currently, Larsen's portfolio includes five buildings in Tallinn with a total of over 600 studio-style accommodation units with kitchenettes. The company's services are aimed at both short-term and longer stays.