Oyo tries out co-living for growth, but will the biz model work in India?

The Gurgaon-based Unicorn recently marked its entry in the fast-growing co-living space

Last month, Oyo announced its entry into long-term rental via a business arm called Oyo Living. It was out of character. Oyo has traditionally been a company that built its balance sheet around short-term rentals — hotels. But this was different. There was the usual fanfare. It was seen as another feather in the cap of a company whose valuation has soared to $5 billion almost overnight.

The knee-jerk reaction is to compare Oyo with less funded players such as Nestaway and CoHo. And ask what the others have to fear. But a bigger question is this: Will the business model work in India?

On the face of it, India’s demand for rental apartments is increasing. According to The Economic Survey released in 2017, migration in India from rural to urban areas doubled between 2011 and 2016. There was a 9 per cent increase in population in 90  major cities in the country. And reports indicate that most of these people have been living in houses with little or no legal framework, such as a contract. The rents, meanwhile, according to analysts, have been on the rise in cities such as Delhi, Mumbai and Bengaluru. The wages, however, have not kept pace with rentals.

Co-living is being experimented with across the world. Workspace sharing company WeWork calls it WeLive and in China, a company called Harbour Apartments is trying to find an answer to the solution. According to reports in China, Harbour invested $1.5 billion to build apartments on leased plots. It has been enjoying phenomenal success. The average time to build these buildings is just about a year.

How do these companies work? Simply put, they renovate, and in some cases build from scratch, existing apartments so that they can house multiple people in one unit (usually six). Each customer is allocated a unit, which consists of a bed, a cupboard and in some cases a desk and a chair. There is access to washing machines, air conditioning, heaters, bathrooms and common areas. Most companies charge for value added services such as internet and electricity. Some don’t. Essentially, it is a student hostel without the student part. If it needs large-scale renovation, the operator (Oyo) bears the capital expenses; other times, the landlord is given access to capital via debt. There is a revenue share agreement with landlords and the lease lasts from two to seven years. The rent and revenue share agreement depends on who invests more capital in the property.

All of these companies, including Oyo, have seen it as space where there is money to be made. In India, the biggest customers in this space are students and single working men. They’re already online, so the cost of acquiring customers should be low.

It was a natural progression for Oyo, says Kavikruit, the chief growth officer of the company. He insists that there is enough demand and supply, which can help Oyo profitably scale this part of the business. 

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So, will this model work in India? NestAway, the biggest player in the sector, recorded a loss of almost Rs 1 billion in FY17. According to sources close to the company, it is in the market to raise capital once again and is struggling. According to an investor deck accessed by Business Standard, the sector loses 50 per cent of its customers and 50 per cent of its landlords annually. So, the cost of acquiring customers shoots up. There is a reason both churn as much as they do.

“As soon as their customers see a raise at work, they leave,” says an entrepreneur in the space. He asked not to be identified as one of his investors is interested in the space. Companies find it difficult to hang on to customers in the long term because people want to live with people they know.  So, as soon as these men make a little more money and find friends at work, they pack up and move out. “Also, people are much more transient. The time for which they hold down a single job is down to a year now,” says the entrepreneur. This creates a huge churn and every time a company wants to get new customers, it has to spend all over again on marketing and discounts. “Operating at slim margins becomes a challenge,” the entrepreneur adds.

Harbour Apartments, however, has better margins because they build their apartments from scratch and, therefore, have better control over costs. They also have long-term lease agreements which are weighed in their favour so they can set rents and take a bigger portion of it.

It gets worse because, according to people in the know, the company has also started talking to brokers to get customers to Oyo Living. Now, consider this. Of the Rs 8,000 that Oyo takes from the customer, it has to split between the landlord and the broker, pay for the maintenance of services and pay back capital expenses. All of this, within four years of the lease. 

Oyo admits there is an inherent risk in the business model. But Kavikruit maintains that there is enough consistent demand to fill up the empty beds.

“Yes, there is a gap but we get entire apartment buildings and that reduces the cost and we can cut down on the rent,” he adds. “If someone wants to upgrade to an entire room, the cost doubles and at scale the company makes money.”

The industry on an average charges Rs 12,000-Rs 14,000 per unit. And still isn’t profitable. Oyo charges Rs 8,000. The company will not go into details on exactly how the Rs 8,000 breaks down to help Oyo make money. Employees at Oyo say that the real cost is Rs 12,000- Rs 14,000 per room.

“It can make money but Oyo will have to hit almost 100 per cent occupancy in every location to break even let alone make profit,” says a former Oyo executive who is aware of the company’s plans. Add to that, it will have to maintain a steady supply, to keep up with demand as and when it comes up. 

“There is a lot of unused inventory in India and we utilise that. And it is not just students and working professionals, this model has the flexibility to cater to the premium segment or go the other way and be further cost sensitive,” Kavikrut adds. “We can build for the retired community, blue-collar workers or even premium housing.”

While demand may not be a problem for a country like India, Oyo’s make-or-break moment will come when it has to leverage experiences to keep customers loyal. It may be one of the bigger reasons why customers are attracted to Oyo or stay with it. Kavirkut says that the company is working on an app, which would allow customers to raise tickets on problems faced.  

But that may not be enough. “This space isn’t solved by just technology, it is built around communities. You need to build a physical Facebook in something like this. Oyo will need to change its DNA to become a company about experiences than prices,” said Gaurav Sachdeva, managing partner of JSW Ventures.

Apart from changing its DNA, Oyo will have to acquire new skills: experiences. So far, Oyo has been the bridge between hotel owner and customer. The part about providing experiences has been left to the hotel owner. Now, Oyo will have to do that as well.