Oyo makes room for revival, tweaks strategy for sustainable growth

SoftBank’s Masayoshi Son, one of the chief financial backers of Oyo Hotels and Rooms, called it the jewel of his fund. His expectation from the budget hotel chain start-up, in which SoftBank has a 46 per cent stake, founded by Ritesh Agarwal was simple: Become the largest hotel chain network in the world in terms of rooms.
 
Initially, Oyo justified Son’s faith. In 2019, Agarwal with 1.2 million hotel rooms across the world was just behind Marriott in the pecking order (1.4 million) and bigger than Hilton (1.01 million). Since then, however, the hotel aggregator has struggled with heavy losses from poor decisions, Covid-19 and a huge write-down of its China business. A $1.2-billion initial public offering planned sometime next year could test the mettle of the revival strategy that has involved essentially learning from its mistakes.
 
Oyo’s principal problem was reckless growth. From the time it was set up in 2013, it spent heavily on incentives such as a minimum guarantee scheme to woo hoteliers and invested in hotels’ capex and management. When the pandemic hit, Oyo’s hotel empire shrank, as hotel owners left in large numbers. Its rank amongst top global hotel chains (in terms of rooms) fell precipitously from number two in 2019 to number nine in 2021, according to Hospitality-on.com. And the number of rooms halved (0.53 million).
 
In March 2019, the last year it disclosed financials, the company announced losses of $335 million, a six-fold increase, 60 per cent of it on account of the hit from China, forcing it to retrench a sizeable portion of its 30,000-strong global workforce. There were reports that SoftBank had cut the valuation of the company sharply.
 
That was when Agarwal and his team decided to revisit its strategy, talking to hundreds of hotel partners and listening to their tough conversations. The upshot was a major revamp of its business model to make it cost-light and partner-friendly.
 
First, it replaced the minimum guarantee assurance, a major source of friction with owners, with the more workable revenue-share model in which Oyo receives 30 per cent of the room tariff.
 
Second, it took on board hotel owners’ complaints that Oyo’s practice of fixing low tariffs squeezed their margins. Now, it would offer an indicative price, giving owners a 20 to 40 per cent flexibility to charge above or below it. In that spirit, it is planning to reduce payment reconciliation time with partners — another area of friction — from twice a week to every day.
 
Third, it put a stop to the practice of investing in and managing hotels, reducing the cash burn (25 per cent of its Indian hotels were of this nature).

Fourth, it has also shifted its positioning from being an online budget hotel chain to a technology platform and consultancy to help partners run their hotels efficiently, control inventory, get the best price and save costs. An Oyo Partner Academy will provide help in identifying locations for more hotels, in formalising lease agreements and in handling large numbers of hotels through technology.
 
Rohit Kapoor, CEO of Oyo’s business in India and Southeast Asia, said that the changes are working: “In terms of rooms, we are reaching pretty close to pre-pandemic levels. Our strategy is to bring back all those who went out. And there is huge scope for growth with the capex-light new model.”
 
Evidence of initial success is that the India operations reported positive earnings before interest, depreciation, tax and amortisation in the first quarter of 2021, when many hotels opened up. Other analysts say gross India margins, which were as low as 4 per cent, hit around 25 per cent in the quarter as a result of the new strategy.
 
This strategy is being backed by geographic realignments. As Kapoor explained, “Our capital allocation will be focused on India, Southeast Asia and Europe where we have a reasonable market share and gross margins and a clear upside. In markets like the US and China, we will continue to build the partner franchises. But if you are asking whether we will double down on these markets, the answer is no.”
 
That, analysts say, signals a focus away from China where Oyo, Agarwal had declared in 2019, had become the largest single-brand hotel chain in the market with 500,000 rooms within a year in 337 cities. Yet, in 2020, hotel owners descended on the Shanghai office alleging that the company must pay them for lost business. A report by China Hospitality Association said in 2020 Oyo was still the largest foreign hotel brand but its numbers had dwindled to only 114,185 rooms (three Chinese hotel brands were far bigger).
 
But Oyo is tweaking its play for better margins. Abhinav Sinha, chief product officer, Oyo, said: “We are focusing on premium brands — so 40-45 per cent of incremental hotel additions will be in TownHouse Oak and Belvilla.” The target is to have a chain with almost half the hotels in the mid-market and premium category in two years.
 
Though the asset- and capex-light model, which is at the heart of the strategy, is yet to be tested, there is an upside to the business. The addressable market for budget hotels across the globe is huge, estimated at 200 million rooms, and Oyo has scratched the surface with only 190,000 partners across the globe. This potential appears to have investors interested.
 
Talks are on with Microsoft for raising a fresh round of funds, which could push up its valuation back to $9-10 billion from $3-4 billion, at which some analysts had pegged it. The company has also raised $660 million in debt recently to refinance its loans, including from Boston-based Fidelity.
 
According to Kapoor, the company has $600-700 million of cash in the bank and is in no hurry for more funds. With the Covid-19 pandemic yet to run its course, that can certainly be considered a confident prediction.