Mystery of the Oyo Rooms

First, it laid off about 20 per cent of its 12,000-strong staff in India in end-2019, and cut down 5 per cent of the 12,000-strong workforce in China as part of a restructuring. In India, it pulled out operations from 200 of the 600 cities. Just as the world was coming to grips with the sudden scale-down at the fast-growing Oyo Hotels & Homes, more retrenchments were announced at the US operations.

Meanwhile, the anger and dissatisfaction among hotel partners continues to swell. Reports suggest that nearly 500 hotel partners, of about 20,000, have snapped ties with the company since April 2019, alleging hidden charges and lack of transparency (though Oyo claims its partner churn is less than 1 per cent). On top of that, earlier this year, the Income Tax Department arrived at its Gurgaon headquarters to inspect the books of accounts, which the company called a "regular TDS audit".

Since the beginning of 2019, a raft of bad news emerging from Oyo has raised a question mark over the company's astounding growth story. Last year, a major controversy erupted around Founder Ritesh Agarwal's decision to buy back shares at a whopping $10 billion-valuation from the money lent by three Japanese financial institutions that are reportedly close to its lead investor SoftBank. The share buyback doubled Oyo's valuation - and made investor SoftBank less miserable after the WeWork debacle - despite no major improvement in the underlying business.

Oyo's business model of capturing marketshare and building scale is hinged on enormous cash-burn - primarily funded by marquee investors such as SoftBank, Sequoia Capital, Lightspeed Venture Partners, and most recently, Airbnb. The hotel chain has been reporting net losses for several years in a row (see table Cracks in the Wall). Losses increased from $52 million in FY18 to $335 million in FY19, according to the company.

With the firm still to declare a deadline to profits, cost cuts became inevitable. The dramatic cut in staff strength in India and abroad point to a desperate effort to slash costs after an unsuccessful attempt at building a roadmap to profitability.

Has the unique hotel platform begun to falter after an unbridled run?

After all, these events undermine the Oyo story its founder Agarwal had envisaged. Agarwal told Business Today in a meeting last year that Oyo was on its way to becoming the largest hotel chain in the world by 2023 (by room inventory) led by three pillars: customers, employees, and the leadership team. But in a recent meeting with BT, Oyo's newly-appointed CEO (for India and South Asia), Rohit Kapoor, hinted that the ambition may be out of reach now: "Everybody has a right to change their plans". So, has Oyo given up on its grand plans?

Caught Speeding

There are indications that Oyo may be faltering. While there was always a question mark over its break-neck speed of adding hotels to the platform at the expense of service quality, the expansion over the past three years has hit a speed breaker, especially in India and China, its largest markets. Today, Oyo operates in over 800 cities in 80 countries - a huge ramp-up for a start-up that was set up only in 2013. Not just that, it has pivoted its model several times besides rapidly diversifying into areas such as co-living, co-working, vacation homes, tour packaging, cloud kitchen, weddings and cafes.

"They are in a space that nobody understands because never in the history of our industry has somebody grown so quickly. Theirs is a story that will unfold with time. But what one sees with interest is their audacity to be able to do this," says Manav Thadani, Co-founder of hotel consultancy Hotelivate.

As part of the company's recent restructuring, which invited a lot of undue attention, some of the businesses have been brought under a single leadership structure. For instance, its frontier businesses Oyo Townhouse, Collection O, Oyo Life and Oyo Home were separate verticals. These were combined in December 2019, and brought under the leadership of Ankit Gupta, a former senior partner at McKinsey, who joined Oyo in the same month. "I don't think we are exiting any business right now," says Kapoor, rubbishing reports of the company's likely exit from the weddings business, and reported merger of co-living business (Oyo Life) with the flagship hotels (Oyo Rooms) vertical.

Overpromise, Underdeliver

During the heydays of the tech giant Infosys under Co-founder N.R. Narayana Murthy, it was a favourite of the stock markets for a simple reason. Like other tech companies, Infosys would give guidance to investors, and in almost every quarter, the published results were better than the outlook given in the previous quarter. Infosys was playing with the psyche of the investors, and in turn, they rewarded it disproportionately.

"The important change is not that we set a deadline... But to make sure that through the restructuring exercise, we go back to the basics and say which parts of the business will make money structurally," says Rohit Kapoor, CEO (India and South Asia), Oyo

The story playing out at the aggregator-turned-hotel-chain Oyo is quite the opposite. Over the past four-odd years, it has become the poster boy of the Indian start-up scene, and has drawn a lot of attention. In October, its valuation touched $10 billion that made it the second-most valuable start-up in the country after Vijay Shekhar Sharma-controlled Paytm (valued at around $16 billion). In just over two years, Oyo's valuation has grown more than 10 times, and since September 2018, it has doubled.

Though Japanese investment firm SoftBank first invested around $100 million in Oyo in 2015, the big break came in September 2018 when it poured another $1 billion along with other investors. This put Oyo on the global stage - not just within the start-up and PE/VC community but also in actual presence.

Since then, Oyo has expanded furiously beyond India into markets like China, the US, Japan, Indonesia and the UK. In China, for instance, where it entered in November 2017, it became the largest single hotel brand last June. Between January and June 2019, its room count in China more than doubled to over 500,000. In the US, it crossed the 100-hotel milestone in September across 60 cities. "The US is fastest growing for Oyo. Every night I go to sleep, there's one Oyo hotel that opens in the US," Agarwal told an audience at the THINC Indonesia 2019 conference last September.

Oyo now boasts of being the world's leading chain of hotels and homes. Its combined portfolio, in late January, comprised more than 43,000 hotels with over 1 million rooms. In December, the number of hotels stood at 44,000, and a month before that, it was 35,000. Surprisingly, the number of rooms has stayed the same in all these months.

As per a valuation report filed with India's Ministry of Corporate Affairs (MCA) last year, Oyo reported that it would turn profitable by 2022 - a projection that has been rejected by nearly every industry analyst. "I think no such target has been set. Like any other business, we create an annual operating plan... The important change is not that we set a deadline - because that's artificial - but to make sure that through the restructuring exercise of the last two months, we have gone back to the basics and said which parts of business will make money structurally. Now it's a question of executing and getting the team along and executing to that outcome," says CEO Kapoor, adding that Oyo is already profitable in some businesses. For instance, says Kapoor, at business EBITDA (earnings before interest, tax, depreciation and amortisation) level, co-working and homes businesses are profitable. "In some other parts, it may happen in three to nine months. We are willing to make that investment," he adds.

A major focus area for the company needs to be customer experience. A disgruntled customer even started a website (oyo-ruined-my-anniversary.com) to share his bad experience with Oyo. A common strain in complaints is poor quality of rooms and services, and that the rooms don't match what appears on the app.

"What has gone wrong for them is that they still haven't got their hands on quality control, which is why a large number of guests are complaining of service issues at their hotels," says Hotelivate's Thadani.

To get things in order, Oyo will need to make more changes. "Oyo's business strategy requires a shift from a singular focus on growth and scale to operational efficiencies, customer experience, workforce training and much improved asset management leading to improved yields. A company that claims to be the second-largest hotel player globally by number of rooms cannot use that as its calling card without stopping its cash burn and demonstrating its ability to be profitable," says Mandeep Lamba, President, HVS Anarock, the South Asia arm of global hospitality consulting firm HVS.

A leading hospitality consultant, who did not wish to be named, said their numbers are opaque about a lot of things and the company is likely to be a long way from earning a profit. On being asked about profitability in Indonesia in September, Agarwal had said, "It's hard for me to give guidance about the potential timeframe. At the building level, we are making margins worldwide. We are investing heavily on the corporate side... On an year-on-year basis, our net losses have reduced by 50 per cent." The numbers, however, tell a different tale.

Agarwal likes to compare Oyo with Marriott International, Hilton Hotels and IHG, but the truth is that it's nowhere close to these global chains. Marriott's room inventory is over 1.3 million (slightly higher than Oyo), but the company registered revenues of $20.76 billion and profits of $2.2 billion in 2018. In comparison, Oyo reported revenues of just $951 million in FY19 and losses of $335 million, as per the latest numbers declared by the company.

One may argue that Oyo is a start-up, and a comparison with legacy operators like Marriott is unfair. But since Oyo has ambitions to lead the global hospitality market at some point in future, all parameters, including revenues and profits, are under the scanner. "We are opening 14 times more keys worldwide in comparison to Marriott, Hilton and IHG combined. It is not a fair comparison because IHG is primarily in economy and mid-scale, and Hilton is primarily mid-scale; we are primarily economy. It's not the most like-to-like comparison but that's the closest comparison that we could find," Agarwal said.

According to a hotel association member, Oyo could have perhaps avoided many of its troubles by just operating at a low key, however that route would have gone against its valuation game.

Bed of Thorns

Back in 2013, Oyo actually started off as a full-service hotel operator. But it was competing with Zo Rooms, Treebo and Fab Hotels that were aggregators. All these players were fighting for the same kind of supply. Thanks to the aggregation model, where operators take part inventory in a hotel, Oyo's competitors were signing up more hotels. This led to Oyo pivoting into aggregation in 2015. The scalability in aggregation was faster as mom-and-pop hotels were guaranteed income on their leased rooms. In any case, a part of their inventory always remained unsold. Many online travel agents like MakeMyTrip, Goibibo and others had also followed a similar model, but pulled out later.

Oyo's plan was to ensure minimum service standards, put its branding, and sell it on the app at rates between Rs 1,500 and Rs 3,000, which is affordable to a bulk of travellers. The branded hotel market in India was an inverted pyramid for long where luxury and upscale hotels had the largest share. But things have changed over the past 10 years with a significant mid-scale and budget inventory coming into the market.

Broadly, hotels in India fall in three categories: branded legal hotels, standalone unbranded but legal hotels, and guest houses which are not always legal. The unbranded legal hotels are estimated to be below one million rooms while the guest houses are about two million. Oyo is focusing in these two categories. "Who needs Oyo? The person who cannot sell because his location is wrong or product is lousy or there's too much competition or he is not distributing well. Oyo can probably help in distribution," says a mid-scale hotel promoter.

Back to another pivot. By 2016, Oyo had become a dominant player - backed by funding from marquee investors like Sequoia Capital and Lightspeed Ventures - and had nearly killed all its competitors. It pivoted again; this time to becoming a hotel operator.

Over the past three years, Oyo has gone one by one to 10,000-plus hotels, and moved them from the aggregation structure to a manchised model (franchise with a general manager), taking full inventory under its control. While the managers are deputed by Oyo and their allegiance lies with the company, the salary comes from the property owners. Oyo has moved as much as 85-90 per cent of its total inventory to this model to build scale.

Interestingly, this 85-90 per cent inventory (called Oyo Rooms in India) put together does not generate even 25-30 per cent of the company's total revenue, experts say. The other 10-15 per cent inventory is in the new projects that the company has started over the past three years. This includes Oyo Townhouse, SilverKey, Capital O, Edition O, Palette Resorts and Oyo Flagship. All the newer brands are either management contracts or leases - the traditional models followed by the branded hotels segment.

Large chains like Hyatt Hotels, Marriott International, Accor and others are operating most of their properties under management contracts. In a management deal, the hotel owner keeps the profit and pays a fee to the hotel brand. In a lease, the brand pays rent to the owner, and keeps the profit. Less aggressive hotel owners typically choose the lease model.

"They still haven't got their hands on quality control which is why guests are complaining of service issues," says Manav Thadani, Co-founder, Hotelivate

"Most of their million-plus rooms are still under manchisee model. They have put all their new brands under one of these two models (leased or managed). About 65-70 per cent of their revenues are believed to come from the new brands. These are also the models they will grow domestically," says a hotel consultant, not wishing to be named.

But why pursue the manchise model when it is generating poor revenues? That's because the model gives them scale, marketing muscle, visibility, and boasting rights to be the world's leading hotel company. Experts say the company might see this manchising turning into leasing or managing at some point. "The scale is with them. If they are able to prove to owners across thousands of hotels that the new models are profitable, they will be able to convert the bulk of the inventory," says a hotel consultant quoted above.

But the problem with the manchisee model is more than just low revenues and profits. In order to keep these hotels under its fold, Oyo has to constantly burn money in deep discounting, which is where it's getting a bad name. Take an example. An average guest who always stayed at a particular hotel used to pay Rs 1,800 a night to it. The property owner tied up with Oyo, which is now selling the same room at Rs 999 on its app. The same guest now books through Oyo. The owner complains to Oyo for selling rooms at such huge discounts. Oyo, in return, says that it's reimbursing the difference from its pocket, and there's no reason for owners to grumble. The problem is that Oyo is perhaps eroding the market: the customer is getting used to the Rs 999 price. What happens when the cash-burn stops?

"Hotel owners believe that they are at the mercy of Oyo. Online travel agents and e-commerce companies have been deep discounting. People are saying that this is not in the spirit of fair market conditions. Oyo is getting rapped for that," says a senior executive at a large OTA.

Oyo, however, claims that the actual room prices - prices that customers are willing to pay - tend to be lower than the owners' self-assessed rates. The start-up looks at RevPAR (revenue per available room) - an industry metric which is a combination of rates and occupancy, rather than just tariffs - to drive growth for its partners. Oyo says that once it takes over a hotel, occupancy shoots up substantially. So, even if room tariffs are lower than before, overall revenues of that property grow.

Up in Arms

Not just deep discounting, a half-dozen hotel owners that BT spoke with said that employees at the local level are using unfair means to increase hotel sign-ups. Oyo's staff, they say, are being given impractically high targets, which is forcing local teams to get contracts signed without disclosing full terms to the owners. Small hotel owners trust the Oyo name, and sign contracts without reading or understanding the fine print.

Last September, Delhi-based hotel operator Vijay Tiwari became the leader of 'victimised' owners in Delhi's hospitality hub Paharganj. After being allegedly cheated by Oyo, Tiwari made a video asking other hoteliers to boycott Oyo. The video went viral, and nearly 90 hotel owners in the vicinity joined the protests. Oyo slapped cases against some owners, but later asked for more time from the court to pursue these cases.

"Oyo's business strategy requires a shift from a singular focus on growth and scale to operational efficiencies," says Mandeep Lamba, President, HVS Anarock

Tiwari had signed the contract for three properties with Oyo last February. "Initially, I was told that Oyo would sell 5-10 rooms out of each property, and they had also set the floor price. We signed the deal at 12.5 per cent commission with no hidden charges," he says. Tiwari's contract with Oyo, which BT reviewed, was a franchisee agreement for his entire inventory, and not for partial inventory that he says the Oyo executive had promised. Tiwari also claims that Oyo used a different name on its app to sell these hotels so that he could sell his inventory on other platforms as well. "Oyo started penalising me for not honouring the contract. It's only after we went to court that we realised that they had all the rights on our properties," he says. "They were penalising me (for selling part inventory on my own) more than the business it was generating for me. After four months, they told me that the penalty cannot be reversed as their policy has changed. I e-mailed but they stopped replying. They have not refunded the amount yet," he says.

The tribe of distressed hotel partners is growing, making it another big problem that Oyo has to deal with. In September, for instance, an FIR was reportedly filed against Agarwal by Bengaluru hotelier Natarajan V.R.S. accusing the company of unfair business practices. Less than two months after that, another Bengaluru hotelier, Betz Fernandez, reportedly filed a case of cheating against Agarwal and six others alleging non-payment of rent for rooms for five months. There are over a dozen WhatsApp groups of Oyo 'victims' (this writer is member of two groups) where hoteliers across the country share latest developments on Oyo, and the status of their varied complaints against the chain. One analyst says that since many of these are small businesses, they don't have pockets deep enough to wait for six months for payments.

Oyo's Kapoor admits that issues at the local level is an area where the company has to improve. "There are two factors to it. Do my [employees at the] last-mile understand the product they are selling? The second is simplification at every level. The core [issue] is around both sides understanding what it takes to run the partnership because there are obligations on both sides," he says.

Credibility at Stake

The company's accountability in the industry is also taking a beating as many hoteliers say that Oyo artificially pumps up its number of rooms. They say the number of available rooms is actually much less because Oyo doesn't unlist properties even after the contract with them has ended. A case in point is Delhi's Capital O 22145 Hotel BB Palace, which snapped ties with Oyo last October, but was still listed on the app - although the booking status stated was 'sold off' - at the time of writing the story.

Another hotelier, requesting anonymity, accused the company of having a lot of fake listing. "Oyo doesn't ask for any legal documents or hotel licence. They just ask for bank details, GST number and PAN card. Several of their properties have duplicate listings on other platforms. I am still getting reconciliation statements for bookings months after ending the contract with them," he says.

But that was not the case a while ago; earlier many property owners were eager to sign up. Oyo convinced small-time hotel owners to follow its model. The playbook was set: Oyo would take over unproductive assets, renovate them with good design, operate them well, and boost the occupancies. Agarwal told BT in 2019 that the assets that joined Oyo's network saw occupancy go up from 25 per cent to 75 per cent in a maximum of three months. In markets like India, the lead time is just a month. And despite the rise in occupancy, the cost didn't rise much - 10 per cent maybe - which resulted in a 15-16 times jump in profits for hoteliers.

This is also the formula that Oyo has followed in other countries. "Once they take a strategic decision to enter a country, they are able to scale up fast. They are process driven. Credit goes to them for having created tech-based platforms that enable everything from signing up a hotel in 48 hours to opening it in 14 days to actually doing Greenfield development in less than a year. They have software for revenue management, quality assurance, yield management, and distribution. All of this is developed by a team of about 1,600 data scientists, who are coders with a business mind," says Hotelivate's Thadani.

Then why are hotel partners leaving Oyo now? The start-up says that it's largely because owners are not able to deliver quality experience to guests. "It is often about the customer service standards that we expect from partners. A large part of our partner base does a fantastic job of serving the customer. But a small part is not able to match up to the requirement. When that happens, we have to take them off the network till they make the correction and come back," Kapoor says, adding that he is personally meeting 2-3 unhappy partners every week in an attempt to resolve issues. Oyo claims that despite partner issues, its partner base has grown 30-40 per cent in India last year, and currently stands at nearly 20,000 across different cities.

Over the past one year, the start-up has also been actively engaged in launching new programmes - OPEN (Oyo partner engagement network) and Sambandh - to stem the growing discontent in the partner community. It has recently opened its first partner support centre in Gurgaon, where partners can walk in if they have any issues. More such centres are planned to be opened in other cities.

The 'Soft' Corner

Recently, in an interview, Agarwal said that by merely putting superstar Marilyn Monroe's posters in some hotels improved the RevPARs in the US. While Monroe might be adding to Oyo's fortunes, SoftBank is perhaps spoiling it.

No matter how much Agarwal tries to downplay SoftBank's influence on Oyo, recent events hint at growing control of Masayoshi Son, the founder of SoftBank. Son's authority is not just evident in Oyo's business strategy but also in the way he seems to be using the company for his mega $97-billion Vision Fund.

Son's strategy is to fund investee companies with a minimum of $100 million, drive them to becoming market leaders, and then list them. It seems a similar model is being attempted at Oyo, too - expand in different geographies, turn profitable and go for public listing.

However, in October, when Oyo announced a fresh round of funding of $1.5 billion, it raised questions on SoftBank's influence at Oyo. A part of this funding - $700 million - was infused by Agarwal to hike his stake in the start-up. That's not all. Agarwal has plans to purchase Oyo's shares worth $2 billion, which would increase his shareholding from 9 per cent to about 26 per cent.

While the company had said the funds raised in the last round would be used to expand in the US, and grow the vacation rental business in Europe, in reality, it is largely a matter of shares changing hands between the existing shareholders. And in the process, the transaction added another $5 billion to the Oyo's valuation. Added to that is the fact that Agarwal's $700 million comes in the form of loans from Japanese financial groups such as Mizuho, Nomura Holdings and one unidentified bank, all of which have deep links with SoftBank.

These moves are in stark contrast to what Agarwal had told BT last year about his shareholding reducing. "I have diluted my holding but I have no regrets. I feel that I have the opportunity to make such a big difference, which is what inspired me in the first place to start it," he had said.

SoftBank's Vision Fund, which is under fire for the WeWork debacle and the poor Uber IPO, reported its first-ever quarterly loss of $8.9 billion in 14 years in the September quarter followed by $2 billion loss in the December 2019 quarter. "Oyo's lofty valuation has helped SoftBank. Pinning hopes on Oyo is obvious after two of its big investments came a cropper," says a VC founder.

"SoftBank was backing Oyo blindly. But Son is in a jam, and that's why there was a need for restructuring. Now, suddenly, SoftBank is unable to raise another $100 billion for Vision Fund-II. Oyo's metrics are wrong. All these start-ups grew in the era of gross merchandise value. Nobody thought about unit economics, sustainability, and profitability. Oyo is no longer a tech play. That was also the biggest problem with WeWork. The public market said that this is not a tech company but a real estate business. They were borrowing assets for long term, and selling it on short-term leases. There was this lustre and glamour of SoftBank. WeWork has sorted out everything," says a mid-scale hotel promoter quoted above.

US-based co-working giant WeWork was one of the largest investments of SoftBank. Last year, when WeWork tried to list on Nasdaq, its valuation tanked from $47 billion to less than $5 billion in a matter of weeks as investors got spooked over its flawed business model. As a result, SoftBank had to take a severe beating on that investment, and orchestrate a $9-billion bailout.

"They [SoftBank] are the largest shareholder. We operate like a Board-run company. Theres a perception out there that SoftBank is sending instructions to Oyo; that's completely untrue. It's like any other company where you continuously engage," explains Oyo's Kapoor.

The other part of the valuation puzzle is its diversification into other verticals such as co-working, co-living, student housing, and weddings. Experts say, the idea is to confuse investors as it is difficult to value each vertical separately and arrive at a fair number. If the company was just in hotels, it would be easier to value the company accurately.

Oyo, however, maintains that all these verticals are fast-growing segments. "The wedding business has upside. The demographic trends in India are so favourable to it, and there's no organised player of our size and scale. The co-living business is a strong growth area too. Thirty-five million people move cities every year - either for first and second jobs or for studies. That's a large population that is not going to buy houses. Our job is to take care of partners and keep the equilibrium going? It is never perfect," says Kapoor.

What's Next?

It is now clear that if Oyo has to survive, it needs to focus on profit-making businesses. The unprofitable segments have to be either shut down or their formats changed. The future of Oyo largely depends on its ability to turn profitable, and hopefully list on bourses in future. But that's going to be a long journey with several imponderables.

One of the 'ifs' is Oyo's $10-billion valuation, which holds water in just two instances. One is if the company goes public or if a third-party buys it. "If Marriott or Accor or Hilton buys Oyo, I would be extremely surprised. These companies like the growth story but not the quality and they will not want to be associated with that. Look at Accor, which bought OneFineStay, which was the upper end of the Airbnb model; it's suffered a setback," says a hotelier.

The IPO route seems to be the only possible option.

"The restructuring at Oyo is a step in the right direction. Exponential growth always leads to some collateral damage and it was inevitable that Oyo would need to course-correct. Given where it is in its life cycle, Oyo needs to raise the next round of funding from capital markets, for which it requires better operating capabilities for analysts to find favour with the stock," says HVS Anarock's Lamba.

While there are companies that have gone for an IPO in the US and China without being profitable, regulations in India are typically strict for listing.

Apart from that, "in India, there are credibility issues with someone like Oyo. SoftBank will make them go for an IPO somewhere else. With WeWork, they were not able to build the book, and the IPO crashed. Will there be buyers for Oyo? I don't know," says Hotelivate's Thadani.

For now, Agarwal's mission has hit a speed breaker. Nobody said his journey would be easy, but nobody had thought that it would be puzzling either. Setting things in order could be Agarwal's key to solving the Oyo puzzle.

@manukaushik