This article has been written by Pramod Nair for FinMedium Research Desk.
One of the few Indian startups with global recognition, Gurugram-headquartered hospitality giant OYO Rooms has been creating several new niches for its business, even as it continues to expand in the budget hotel category.
However, this rapid global expansion has not happened without its share of controversies. In this article, we try to understand Oyo’s journey and the current challenges it faces.
The History of OYO Rooms
Before we trace the birth of OYO Rooms, it is important to put in perspective the Indian Hospitality Sector and what lead OYO Rooms to grab the opportunity.
Before OYO Rooms, the Indian Hospitality Sector consisted of
- A large unbranded budget hotel segment
- Tourism to traditional sectors comprising mainly of Himalayas, Agra, Rajasthan, Kerala, North East and Varanasi alone.
- Highly fragmented in terms of demographics and cultural norms
- The problem of predictability and standardisation leading to fractured customer experience
- The outdated model which was not aware and too slow to make the shift by the market demand of individualism and use of technology
Ritesh Agrawal is the founder of OYO Rooms. During his youth days, he had traveled extensively across Himachal Pradesh, Jammu & Kashmir, Rajasthan and chanced upon staying into various kinds of budget bed & breakfast places.
It was during this phase, Ritesh launched Oravel Stays in 2011.
Oravel was basically an Indian version of peer to peer lodging website Airbnb. However, Ritesh’s search for one time online ‘product-market fit’ solution for the bed and breakfast travel segment was still on.
The major break came in the same year when at the age of 19 he was chosen for the Theil Fellowship started by Peter Theil – a venture capitalist also Paypal co-founder and Facebook investor offering $1,00,000 over two years together with guidance and other resources aimed at creating a start-up by 20 under 20 college dropouts.
Ritesh felt “This was amazing, that you get paid for no to go to college”.
Back to the business at 19 with the fellowship fund and learning Ritesh who had already had a hands-on experience of having stayed at 100 bed and breakfast rooms while running Orawel found that ‘ Discoverability’ is not the problem rather it is predictability and standardisation of experiences that the customers are missing.
With a vision to bridge the gap, he offered ‘OYO – rooms experience’ to every human, Leisure and pilgrim traveller across 100 cities through a network of 10000 hotels.
The group started in 2013 was based on technology leverage and partnered with Greenoaks, Sequoia capital, Light-speed India, and DSG. They invested in the company to “help build and scale the company”
OYO Rooms are a network of a tech-enabled budget hotel. The company is an aggregate of these hotels like Ola into their cabs.
Payless live long for free wifi, air-conditioned, technology-driven, Hassel free check-in /check out designed especially for the backpackers most of who, are mainly foreigners.
The name and virtual branding of the accommodation is such that it brings together similar kind of people
OYO Rooms – The TakeOff
From starting as a budget hotel chain to being a real estate company with businesses ranging from hospitality to co-working to cloud kitchen to the coffee chain, OYO Rooms so far has had an eventful journey.
Further, being backed by global investors such as SoftBank, Lightspeed, Sequoia, etc, the company has had no dearth of capital in the bank and hence, has been able to invest heavily in the asset-heavy business it has built.
OYO Rooms were among the first to identify the opportunity to initiate the process of branding the domestic budget hotel segment, in the price range of Rs 1000 to Rs 3000.
The electronic presence of this segment earlier was very vague, the quality and standards seldom met the promised parameters. The pictures of the rooms, bathrooms, beds, on the website, fell short to keep the intended imagery; it created in the minds of customers.
OYO Rooms doesn’t own any of these properties, instead invests in marketing and management of quality improvement for the hotels under its fold.
It’s a win-win for OYO Rooms and the hotels, many of who just don’t have the network, knowledge or the budget for smart marketing, which is why they run empty. OYO helps them improve their yields.
They work with small hotel entrepreneur, to standardise offerings, conduct physical quality checks every three to seven days, and train the staff on etiquette with a provision of cash benefits when customers give them good ratings.
Their technology platforms handle the inventory, predicting and generating demand, and adjusting prices accordingly. And for all this, the firms charge between 15% to 20% as commission on every booking.
OYO Rooms – The Flight
In 2019, OYO Rooms grew total properties to 43,000+ hotels and offered customers access to over 50,000 vacation homes
- FY19 Revenue – 4.5x increase in total revenue to USD 951 million, led by India and China
- The consolidated revenue for FY19 stood at USD 951 million, which is 4.5X YoY growth over FY18.
- Nearly 36.5% or USD 348 million of fiscal revenues were from outside India.
- India contributed nearly 63.5% or USD 604 million of our revenues and a 2.9X YoY growth in the market.
- Valuation : $10 Billion
OYO Rooms started as a hotel aggregator and used to lease some rooms and sell them under its brand name.
However, it changed its business model from the aggregator to the franchise model. It involved partnering with hotels, asking them to operate as a franchise, and selling their rooms to customers at competitive prices.
OYO Rooms does not own hotel properties that are listed on their website. OYO Rooms renovates the hotels according to its checklist of standard services, and make the hotel property a part of its “standardised budget hotel chain” with Oyo’s branding.
What makes OYO Rooms business model unique and different from other hospitality companies is its standardised hospitality services. It focuses more on user experience rather than only the hotel’s room availability and prices.
Oyo Rooms – Corporate Video
To become Oyo’s partners, every hotel has to meet a set of guidelines for services, pricing, staff quality, features of rooms, security, etc.
OYO Rooms – Resources
- Hi-tech app architecture
- Customer Database – OYO Rooms has a large database of loyal repeat customers
- Employees with technical knowledge like programming, development, and maintenance, and other staff for business management.
- Venture Funding – OYO Rooms has secured funding from many venture capital firms such as Sequoia Capital, SoftBank’s Vision Fund, etc.
OYO Rooms – Revenue Stream
As of the fiscal year 2019, OYO Rooms has an annual revenue of $951 Million.
- Commissions – OYO charges around 22% of commissions every month from hotels owners. Commissions may vary as per the services and features offered.
- Room Reservation Fee: Customers pay a room reservation fee according to their services chosen. The room fee is charged with a few percentage margins of the hotels’ prices. For example, if a room is priced at Rs. 1,000 per night, Oyo makes only 10-20% commission from it, and that is their actual revenue.
- Membership fee: Users who subscribe to Oyo Wizard memberships are charged with premium fees ranging from Rs 500 to Rs 3000.
- Advertising: Oyo also charges different companies to place their ads on Oyo’s app and website. It also generates sizable revenue for Oyo.
- Sponsors and Partnerships: Oyo also charges some amount from its sponsors and key partners by promoting their brand name through advertising on their app.
- Consulting Services: Oyo charges for its business consulting and data analysis services, it provides to its clients, including hotel, clubs, organizations, etc. It provides these services as it owns an extensive database of locations, hotels, event organizations, users, and their preferences.
OYO Rooms – The Turbulence
Since last year, the company has been facing several issues as a result of its business model and its terms and conditions which have not sat well with hotel partners.
- Complaints of unpaid dues by Indian hotel partners
- Police complaints by hotel groups and hoteliers
- Protests by US hotel owners over OYO’s entry
- Lack of profitability
- Scrutiny by Competition Commission of India
- Questions about the asset-heavy model
The cause for conflict of hotels, associations, and OYO came to light in December 2018 and since then has continued to cause mayhem in the hospitality industry.
In January 2019, the Federation of Hotel and Restaurant Associations of India (FHRAI), a pan-India body of hotel owners and operators, alleged that more than 200 hotels have ended agreements with OYO over mismanagement of contracts, arbitrary charges, and other disputes, industry associations said, adding that others want to exit contracts but are stuck for various reasons.
The Complaints Against OYO
- OYO reduces payments owed to them on the pretext of deductions, which they say are not specified clearly in the contracts.
- Hoteliers have alleged that OYO’s accounting and auditing process, and the penalties associated with minor faults and errors, are so heavy that they sometimes find themselves owing money to OYO at the end of the month.
- OYO’s promise of “Minimum Guarantee Fee”. This promises a certain amount to the hotel owner each month in lieu of allocating some of the room inventory for OYO users, irrespective of the bookings the hotel gets from OYO users or the occupancy rate.
- Cheating Against Oyo – One of the hoteliers had alleged that he entered into an agreement with Ritesh Agarwal in June 2017, where OYO would give them reservations and take 20% of the share and give him 80%. However, he alleges that Agarwal and his representatives in Bengaluru had taken 80% of the share instead of 20%. He accused the trio of cheating him of more than INR 1 Cr and lodged a police complaint. However, OYO has refuted the claims
- Further in November, another Bengaluru-based hotelier filed a first information report against Oyo representatives. The hotelier alleged that OYO hasn’t paid them assured benchmark revenue of INR 7 Lakh each month, assigned under contract on May 23, 2019. He said that OYO has created multiple non-existent room bookings which it marked under no-show and cancellations.OYO has refuted the claims
- After India, the discontent of hotel owners with OYO came to light in the United States of America. Reports surfaced that several US OYO hotel partners raised issues ranging from poor software, loss of revenue as well as criminal activities within rooms that are managed by OYO.
- The hotels have also alleged ignored or missing payments, even though they had been promised a certain amount as a guarantee by OYO. Moreover, hotel partners have claimed that they have no rights over the booking or room charge.
- The OYO spokesperson said that to solve the issue of poor quality of customers, the company is working on a rating system for the customers.
Lack Of Profitability
- Even though cash burn and losses have been a common sight in the Indian startup ecosystem — just look at the e-commerce unicorns bleeding money — investors have now started questioning the lack of profits for these companies. As a result, OYO is also facing huge pressure from investors, mostly SoftBank to achieve profitability.
- OYO’s path to profitability is under the spotlight, especially after the mayhem caused by WeWork and the less-than-stellar IPO of Uber. The terrible start to Uber’s public listing and WeWork’s postponement of IPO plans and ouster of CEO have created further trouble for Japanese conglomerate SoftBank.
- Earlier, Softbank CEO Masayoshi Son in a private gathering of portfolio companies told chief executives to focus on profitability now and build the business accordingly. Son told portfolio company leaders that public investors aren’t going to tolerate gimmicks, like super-voting rights or complicated share structures, that privilege founders over other stakeholders.
- In terms of revenues, OYO’s operational revenue grew to INR 6456.9 Cr in FY19, a jump of 3.56X from INR 1413 Cr in FY18.
- At the same time, OYO’s operational expenses were INR 6131.65 Cr in FY19, a 3.9X increase from INR 1246.8 Cr in FY18. OYO as a group aims to turn profitable in 2022. The company is expecting $285.9 Mn in losses for 2020 but aims to turn a profit of $45.2 Mn in 2022.
Scrutiny Of Competition Commission Of India
- Amid continuous protests by hoteliers and allegations of abuse of dominant position, in July 2019, FHRAI filed a complaint with the Competition Commission of India (CCI) against OYO. The hotel body alleged that three months after OYO promised its partners an 18% interest on delayed payments and launched complaint redressal solutions, the issues continue to be unresolved.
- In October 2019, CCI said it will continue to examine the hoteliers’ complaints against three big players in the hospitality sector — MakeMyTrip, Goibibo and OYO — for affecting their businesses, due to predatory practices, high commissions and non-uniform commissions. CCI then directed a government official to carry out a detailed investigation in the matter and submit a report to the commission within 150 days.
- In another case of 2017 at CCI, a win for OYO came in August when CCI noted that though OYO may be a significant player in the hospitality market, presently it cannot be said to hold a dominant position. CCI noted that the relevant market would be ‘Market for franchising services for budget hotels in India’.
Questions About Asset-Heavy Model
- SoftBank has had a troubling experience with its portfolio companies this year. The biggest concern being co-working space provider WeWork’s failed IPO. In August 2019, WeWork made an enthusiastic filing of draft papers for IPO, which, however, was postponed following the responses of investors. The investor sentiment with draft filings had made it hard for WeWork to even get a valuation of more than $20 Bn with potential public investors.
- It is to be noted that earlier this year SoftBank valued WeWork at $47 Bn in the last funding round. However, after a negative investor outlook due to corporate governance issues, SoftBank gained control of the coworking business.
- This has impacted OYO in multiple ways, one being profits and another being its asset-heavy model. Multiple experts have argued that OYO’s business model resembles WeWork’s as a tech-inflected real estate business that has expanded far beyond its initial concept.
The Way Ahead
OYO Rooms, which was once a budget-chain, is now across hotels, homes, resorts, vacation rentals, weddings, co-working, and much more.
The company has gone international making acquisition and heavy capital investments in real estate, far and beyond its original business idea. Is it stretching itself too thin in its pursuit for diversified growth?
What OYO Rooms and its investors should have realized that the takeoff and the flight would be have been smooth but how it navigates the turbulent headwinds will very much determine its landing.
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This article has been written by Pramod Nair for FinMedium Research Desk.
Cover Image: Agoda