Is OYO Profitable? What lies ahead?

23 Sep 2019 Read 71 Views

If someday one wrote about the India Start-ups story, it would remain unfinished without the story of Oyo Rooms. Starting as any other company trying to find its space in the Indian dot-com revolution to now being dubbed as an 'Indian AirBnB,' Oyo’s story has become the case study for management institutions.

The success of Oyo comes on the back of Thiel Fellowship awardee Ritesh Agarwal and the funding arms of well-known names of Softbank Capital, Sequoia Capital and AirBnb itself! Many others are trying to ride upon the success of now the world's third-largest hotel chain.

Over a period of 6 years, Oyo now thumps its presence in more than 2000 cities across India, Japan, Vietnam, Indonesia, Malaysia, China, UK, Saudi Arabia, UAE, USA and more. Oyo also acquired the European vacation rental giant 'The Leisure Group.' They now even own Hooters Casino in Las Vegas!

Such an astonishing growth does enthuse the world about how this all happened. What drives the Oyo business? Is it that golden page in the new Indian industrial revolution or yet another fiasco in the start-up bubble just backed by some deep pockets.

Oyo is a two-sided facilitator platform

While on one side, it allows customers to book hotel rooms, on the other side, it facilitates hoteliers to enlist their hotels on Oyo. It brings the vendor and seeker on one page.

This created quite a revolution in the hospitality industry. It gave a chance for smaller hotels to showcase themselves; who otherwise, were outplayed due to lack of marketing potential or lesser capital.
In addition, it provided much-needed visibility to some good hotels that were not in the prime areas and mostly suffered against those around bus stations, railways stations, or airport. These hotels now had a whooping business, and you would see 'Oyo' lights on buildings that you knew ever existed!

Came as nectar to its customers

The traveling crowd always had an issue in finding hotels. First, in a new city, one can easily find hotel contrary to staying around railways stations because you do not know where you should search in this city.
Secondly, it resolved the issue against the oligopoly of these 'visible' hotels around railway stations. Their exorbitant prices came down because now they have a competition with some other hotel in the nook or corner only 2 km away from them. Thirdly, there is a vast availability of hotels. So no more' hotel is full' or peak/season pricing issues with customers.

There are always two sides to every business. One is the product, and the other is its service. Oyo knew it just well from the start. They set the standards for the each-and-every hotel of theirs. If you entered Oyo, you are 'entitled' for linen, Wi-Fi, and breakfast. This is what makes them different from Airbnb. This is what has created a large customer base and now; “Book an Oyo" is synonymous to "Book a Hotel."

I think it is not correct on my part to mention Oyo rooms as 'hotels of Oyo.' Actually, Oyo does not own a single hotel! It is just a facilitator platform and regulates standards of its hotel.

So how does it make money?

Oyo initially followed the 'Uber model.' Oyo would rent some rooms of its hoteliers. It would pay them a certain amount, and rest would be paid if that room gets occupied/rented. Oyo would then provide these rooms to the customers. It worked well for Oyo in the market capture.
The hoteliers were happy because they were always paid for a specific number of rooms. Oyo could now reduce the prices for the customers out of its own pocket. Post-market capture Oyo stopped the hefty discounts and let people book at the market price.

However, this model would soon prove unsustainable. They had to pay a lot of amount with increased numbers of hotels. Customers were rapidly growing, but it was still not enough. Some hotels went on to book their own rooms to show themselves in demand, raise their prices, and take the rest of the money from Oyo. Some even went ahead to accuse that Oyo was a hoax and it was showing some hotels in certain cities that were not even their partners.

It was time to change

The brand was established. It just has to be money minting. Oyo moved from Uber's 'Aggregator model' to McDonalds' 'Franchisor Model.' This was a game-changer for Oyo. Oyo now stopped renting any hotel rooms. It would now only license its franchisees. Oyo was no longer partners with hotels. It would provide training to hotels, and they will operate under Oyo brand name. Hotels would pay a fixed 'Minimum Guarantee Fee' and a commission of averages 22% per room booked.

Oyo now became a sustainable enterprise

It collaborated with Airbnb. Hero Motocorp made substantial investments. However, this model has come up with its own issues. Hoteliers are not happy now. They have lost the chunk they used to get earlier and now left to the mercy of the customers to sustain. Recently, The Federation of Hotel & Restaurant Associations of India (FHRAI) issued warnings over alleged large-scale breach of contracts by Oyo. They were forced to give-up earlier contracts (aggregator-based) to the one now enforced on new hotels (franchisor-based).

Dynamic pricing, high commission rates, minimum guarantee fee, opacity in Oyo money, and lack of internal dispute resolution has hurt their earnings. Disagreeing hotels accused Oyo of threatening them with legal notices. Oyo, on the other hand, says that complying on hotel demands would raise hotel rates by 40%.

The sustainability of Oyo in the long run under such circumstances would be under purview. What would happen to it when all its investors would be done investing and wait for yields? If anything wrong happens to it, the entire hotel industry will sink along. If it grows the desired way, it will be India’s contender at the world’s stage.

Well, what we missed in this entire story is, what does 'OYO' mean? I say, why don’t you find it "On-Your-Own."

About the Author: Vivek Tiwari | 16 Posts

Vivek Tiwari is a Software Engineer and a Data Scientist who hopelessly fell for Economics. His plans to move to Finance might now save mankind from his IITJEE selection story.

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