OYO Rooms: The Pitfalls of Expanding Too Fast

- By Puneet Kakkar, Deepak Kushwaha, Yash Goyal, Anjali Ladwal

On 13th January 2020, Ritesh Agarwal, the founder and CEO of the fastest growing unicorn hospitality
chain in India and South Asia, penned downed a heartfelt letter to his employees and stakeholders,
addressing the headlines of large scale loss of partners, mass layoffs and toxic work culture. He wrote:

"As we enter 2020 together, I'm writing to update you on our strategy which OYO leaders agreed upon
when we came together for the 2019 Global Leadership Meet in December. We had a single-point
agenda -- to plan on how OYO will continue to drive its success in 2020 and beyond."

Some reports suggested that- Oyo was getting the heat from Softbank, one of its largest investors, to
phase out all its EBITDA-negative entities before the first quarter of 2020. These speculations seem to
be grounded in the fact that Softbank, after getting huge setback from its recent bad investment
decisions, was trying to set its home back in order. Agarwal and team had to make some tough
decisions to right-size the organization moving forward. Will they be successful in their efforts to
address these crucial issues plaguing OYO’s future?

Hospitality Industry in India and South Asia

India is a massive part of the global hospitality industry. India Brand Equity Foundation (IBEF) in its
report mentioned that the direct contribution of hospitality industry in 2017 was 23.6% of the GDP. It
is often said that hotel industry in India is second to only China in the region of Asia Pacific.

The massive increase in occupancy of the hotel rooms is in part boosted by increase in the business
travels to India. “World Travel and tourism council” in its report said that India ranks 18 th in business
travel globally and will be 5th very soon. Several factors like macroeconomic stability, expanding middle
class, innovative technologies and millennials entering the arena are acting as catalysts to the success
of the business travels industry. Global business travels association in its reports states that India’s
annual growth in business travelling is fastest among top 15 business travel markets globally.
According to KPMG, India is $30 billion business travel market in 2019 and is bound to triple by 2030.

Other major engine propelling the growth of hospitality industry in India is tourism sector. According
to World Travel & Tourism Council (WTTC) report in 2019 travel and tourism industry contributed 9.2%
to the GDP and employed more than 42 million people accounting for over 8% of the total workforce.
Total contribution of this sector is even going to increase to $275 billion in 2025. An increase in medical
tourism is also a key driver of the surging growth in hospitality business.

The massive surge of demand in hotel industry in India resulted in an increase in occupancy rate
(percentage of days for which rooms have been booked) by 65% between 2017 and 2018. Further
according to “Care Rating” the occupancy rate will only further increase in future and will hover
around 68-70% in 2023. Accordingly, the hotel industry will see a revenue growth of 10-12% CAGR
over the upcoming years.

Hotel industry is not just a thriving prospect in India but also in South-east Asia. According to U.N.
report the area expects a total of 535 million tourists by 2030. The online travel sector in South East
Asia grew to $34.4 billion from $29.7 billion in 2018. The regions travel market comprising of flights,
hotels and vacation rentals is projected to grow to $78 billion by 2025 from $25.5 billion in 2019. The

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rise of budget hotel brands in the form of OYO and RedDoorz have led to this journey. The continued
rising middle class, ever increasing internet connectivity and popular tourism destinations like
Malaysia, Thailand, Singapore and Indonesia has fuelled this upswing. Further the emergence of
business centres like Kuala Lampur, Hanoi and Taipei, as well as the established centres like Hong
Kong, Singapore are going to push the growth of business travellers further.

Efficiency, construction and location are three most important factors that will decide the success of
any investment in hotel industry in future.

Background of OYO Rooms

An engineering aspirant in Kota (Rajasthan) who was pulling all his weight to get into an IIT always
imagined himself as an entrepreneur. Ritesh Aggarwal, the CEO of OYO Rooms was a college dropout
and decided to do something on his own. In the zeal of starting his first venture, this 19-year-old roam
places for months staying at budget hotels, attending customer calls daily and tried to indulge himself
in every possible experience that will teach him about budget hotels, customers and their
expectations. This on-the-ground learning certainly has helped him pivot Oravel to Oyo Rooms. Ritesh
started his entrepreneurial journey when he was just 17 years old. He managed to launch his first ever
start‐up Oravel Stays Pvt. Ltd. in the year 2012. Oravel as a model was a platform that was designed
to enable customers and hoteliers in listing and booking of budget accommodation. Ritesh, being
himself a traveller, soon realized that this industry of budget hospitality was ascertain and
unpredictable. Therefore, he grasped the idea behind Oravel and started OYO Rooms in the year 2013
with the key proposition of offering standardized accommodation in reasonable price.

The idea of Oravel Stays seemed lucrative to many investors and in 2013, the CEO received a funding
of $100,000 from Peter Theil (The founder of Paypal and an early investor at facebook). But the
business didn’t go well as it was expected. He brainstormed day in and day out, then he realised the
biggest struggle that travellers have to face is finding a good hotel in affordable price to stay in.
Therefore, he ended up creating an online platform where people can add their good and bad
experiences about places they have stayed in, which was later named as OYO Rooms. The name OYO
is an abbreviation of the phrase ‘On Your Own’. Subsequently in 2014, the company managed to raise
a sum of 4 Cr from LightSpeed Venture partners and DSG Consumer Partners at a money evaluation
of 14 Cr. And in the series of funding, OYO also received $25 million from Sequoia and others. Later in
2015, OYO’s mobile App went live to customers and since then it gained popularity. The success of
OYO was not bounded in its own boundaries and expanded to other countries as well like Nepal and
China.

Funding Amount Year

Series A $25 million 2014
Series B $100 million 2015
Series C $90 million 2016
Series D $250 million 2017
Series E $1.1 million 2019
Series F $1.5 million 2019

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Operations
With more than 450,000 listings spread across 5,000 cities in India, China, Nepal, Malaysia, Indonesia
and UAE, OYO Rooms is one of the biggest network of hotels chain in the world. The company started
off its business operations as a simple hotel aggregator. OYO’s aggregator model was slightly different
than Airbnb’s business model, as they focused more on providing a standardized quality of service to
its customers. Earlier, the company used to partner with hotel owners, lease some rooms and provide
them to their customers by advertising them under its own name. However, in order to become an
OYO network partner, the owners must adhere to a certain pre-defined quality standard.

The company has seen a complete shift in its business strategy after 2017. Now they are banking on
their own brand equity to work on a pure franchise business model. In fact, 90% of their current
revenue is coming from franchise hotels. They offer exclusive tie-ups to hotels, and sells the whole
inventory of hotels under its own brand name. Hotels benefit by this tie-up because it helps them in
acquiring more business and traction in the market.

Marketing
To sustain its leadership position in the market, OYO is focusing on digital as well as mass marketing
techniques very aggressively for lead generation and customer acquisition. It is strategizing to use all
means of social media by targeting potential customers based on their behaviour, interest and other
parameters which are readily available via digital marketing. The brand boasts to have over 10 million
app downloads with a good number of active users. It has a strong social media presence with over 1
million page likes on Facebook and more than 56000 followers on Twitter. On pricing front, OYO’s
strategy is to attract customers with a lower room price in comparison to the base price of the hotel.
The main goal is to offer at an unmatched price and which matches with the budget of user.

Global Expansion

In 2019, OYO reported losses equivalent to 35% of its annual revenue, this was a 10% increase from
2018 when OYO incurred 25%. These losses were majorly attributed to the international expansion
story of the firm. The company claims of hosting over 180 million guests from 120 countries from
January to December, 2019.

In South Asia, OYO has acquired over 300,000 rooms until December 2019 which is 210% increase
from the previous year. In South East Asia, OYO has 100,000 rooms and over 3300 buildings. Also more
than 17,000 rooms have been acquired in 32 Middle East Asia cities by OYO. While in USA, the firm
has expanded its presence across 39 states and acquired 280 buildings. In UK the firm has over 200
buildings listed and in Japan over 6000 apartments have been acquired under the brand of OYO Life.
The firm has also expanded in Brazil and Mexico where it has 400 and 334 buildings respectively.

Services

OYO has started widening its pool of customer offerings by diversifying its value proposition. These
are some of the offerings that OYO currently has under its umbrella:

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OYO Flagship
In order to earn higher profit, some partners would book their own hotels when they see lower prices
on OYO website or app. This loophole was identified by OYO soon and hence they started leasing
hotels and places where OYO has full control over all the day-to-day operations.

OYO Townhouse
It is primarily aimed at catering to the demands of millennial travellers with ‘Smart Needs’. The
offering includes ‘Smart rooms’ with specially-designed beds, formulated toiletries, voice controlled
sockets, Smart TVs with Netflix and 24/7 Smart kitchen services.

Oyo Studio Stays

Through Studio Stays, customers can book rooms for their corporate stays, internships or jobs. They
can rent rooms for either single occupancy or twin sharing.

Oyo B Direct
Particularly aimed at Business Professionals to provide simplified reimbursement by GST ready
invoices.

Oyo Homes are fully designed private homes for people who are on their holidays.

Oyo Silver Key

It’s another exclusive service that provides corporate clients executive apartments with private,
spacious, and multi-utility services.

Weddingz.in
Oyo has also partnered with several banquet halls’ vendors to allow people to book their wedding
venues through its easy booking services and within best prices.

Oyo Wizard
It is basically a subscription model where wizard members can avail exclusive discounts, cashback
and other exciting deals.

Competitors
Treebo
Founded in 2015, Treebo has the main focus on providing high-quality hospitality from its
headquarters in Bengaluru. The company won an award for the “Best Budget Hotel” category in the
lifestyle Leadership award in 2017. Backed by SAIF Partners and Matrix Partners Treebo has raised $57
million. It has more than 800 hotels covering 113 cities as of January 2020. By 2019 the company
successfully provided stay to 28 lac people. The company suffered a loss of Rs.114.94 crore in FY 2017-
18. To increase the revenue and make a profit in the future, it is adding Hotel Management CMS to
cater to the hotels that are not under Treebo Brand. Seeing the high growth rate of the market, In the
year 2019, it increases the number of properties by 100 percent from 413 to 820 properties and
increasing. In India, Treebo is the biggest competitor of OYO Rooms.

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Airbnb
Brian Chesky, founder of Airbnb, built a chain primarily focusing on the customer in low price segment
but focusing high on quality. Starting from san Francisco in 2008, it has developed its network to 29
lac hotels with more than 7 crore rooms and a presence over 1000 cities worldwide. Its free
cancelation and full refund on cancellation policy within 24 hours before check-in time gave it an edge
over its competitors. After launching its platform in India in May 2016, it has burgeoned and currently
has a network of about 54,000 listings across 110 cities in India. By launching IPO in this calendar year,
the company plans to grow its network over India as well as other fast-emerging countries of the
world. Besides accommodations, they also offer unique experiences like food tours, Pottery classes,
Homestay, Museum Tours, etc. Airbnb believes in quality at the best price. Airbnb has recently
confirmed its funding of about $200 million to OYO Rooms which will lead both to work in the same
sector as competitors as well as Partners and OYO growth will also increase profits of Airbnb.

Fab Hotels
Starting the company in 2014, the company always segmented and targeted the lower segment of the
country. Currently, it has more than 600 hotels and more than 10000 rooms. The company has a
widespread network of over 50 cities in India. Fab Hotels has recently launched a loyalty program to
increase its regular customer loyalty towards the hotel and gives a special discount to them. It has
served more than 20 lac customers by 2019. It has observed a revenue growth of 30% and has revenue
of 20.9 crores but suffered a loss of 13 crores. Seeing the growth and potential in the company,
investors funded it with $37.3 Million. The company mainly focuses currently on expanding in this
competitive environment with increasing its margin to be a profit-making organization and more
valuable for its stakeholders.

Zostel
Dharamveer Singh, founder and current CEO of Zostel, built a chain primarily focusing to bag packers,
who make a large segment of the customer for the hotel industry but were not in focus to the hotel
industry. The main target of the company is on the age segment 18-30 who wishes to travel a lot and
especially the solo trips and trekking. As the target audience prefers to travel mainly in hilly areas and
new areas, the location of hotels provided by the company is mostly in places where others don’t have
much presence and convenient for the Bag packers like mountains, islands, etc. The company calls
itself a pioneer of travel, not a Hostel operator. It provides hotels as well as a hostel for its customers
which are cost-effective. The company was in the profit from its 1st year in 2013 and has a profit of
Rs. 5 lac in the financial year 2018-19 over revenue of 3.3 crores. It has a wide network of 750 hotels
and hostels covering 60 cities. This wide network allowed the company to serve more than 2 lac
customers until now. After legal case going on with OYO, the company is again focusing on its Zostel
model and is expanding at a high rate to cope up with the loss caused due to the case. It also has its
Zostel in Nepal and is currently expanding to other South Asian countries like Bhutan.

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Recent Crisis
A recent flurry of accusations has worried the founders and stakeholders of OYO, not only because it
has resulted in ‘bad industry reputation’, but also because it has raised serious doubts in the mind of
investors about the business model and very vision of the company. But looking at the history of OYO,
one can easily say that it is something that was bound to happen. OYO, since its inception, has solely
been focusing on its rapid expansion plans, without addressing the pile of issues that has plagued its
business operations. In a sense, it seems like an inevitable ramification of unrealistic growth
expectations.

Several major business clients and corporates like Tata Consultancy Services, L&T Info-tech, Idea-
Vodafone have already pulled back from OYO Hotels and Homes as a partner to provide
accommodation to its employees. Their major concerns, including the dismal service quality, women
safety and frequent employee complaints remained unaddressed from OYO for a long time. Corporate
alliance contributes to almost 18% to the offline business of OYO, which after cutting ties would bring
down the overall revenue of the company.

OYO has to deal not only with the discontent of its corporate clients, but also with the resentment of
its partner hotels and employees. Some hotels have filed lawsuits against the platform for wrongfully
charging them with extra fees, citing the vague reasons like ‘lack of proper services and customer
dissatisfaction’. For instance, in November 2019, Betz Fernandez, a Bengaluru based hotel owner, filed
a case of fraud and cheating against the OYO founder, Ritesh Agarwal and six others for withholding
the rent amount for last 5 months. This practice is not something new for OYO, as confirmed by more
than half a dozen former and current employees, including Saurabh Sharma, the former operation
manager from 2014-2018. International media has reported several cases of unethical business
practices like bribing and offering free rooms to police and other government officials, to easily get
away with the legal actions over unlicensed properties.

Further, to make matters worse, the company is on a mass layoff spree from last few months, which
they called as ‘rightsizing efforts’ after the period of relentless growth. They laid off 5% and 12% of
their staff in China and India, respectively. This decision directly points towards the perils of expanding
too fast, too early. Industry experts says, that this is done under the pressure of investors, especially
the Softbank group. Almost all the Softbank backed start-ups are on the similar path of mass layoff.
This came after a huge backlash for Softbank for ballooning up the valuation of the failed start-up,
WeWork. Whatever the reasons might be, the decision has definitely hit the reputation of the
company, after the emotional accounts of impacted employees went viral on several social media
platforms.

To address the growing discontent in the partner community, OYO has recently opened its first partner
support centre in Gurgaon, where partners can walk-in if they have any issues. The company has also
launched programmes - OPEN and Sambandh programmes to ensure transparent payment protocols
under which asset owners will receive 18% interest on delayed payments and resolution.

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Moving Forward
OYO has realised that profitability should be their number one priority going forward, because if they
want to sustain in the market and achieve a successful IPO, they must be profitable. But becoming
profitable is next to impossible, if they do not take measures to address the deeply rooted problems
in their business operations and work culture. Regaining the trust of its investors and stakeholders
after such a severe crisis is not going to be easy. Every step that OYO takes after this tipping point is
going to be a crucial one and will decide the fate of the company in the long run.

Exhibits

Exhibit 1: Hospitality Industry in India

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Exhibit 2: Timeline of OYO

Exhibit 3: Competitors by Market Share (as of May, 2017)

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Exhibit 4: Business Model Canvas

Exhibit 5: Revenue of OYO over the year

Revenue (INR Million)

80000

70000 65,470

60000

50000
REVENUE

40000

30000

20000 14,130
10000
5.1 24 328 1,021.90
0
2014 2015 2016 2017 2018 2019
YEAR

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Exhibit 6: Annual Losses

Losses (INR Million)

30000

25000 23,840

20000
LOSSES

15000

10000
4,963 5,118
5000 3,253
208
0
2015 2016 2017 2018 2019
YEAR

Exhibit 7: Operating Expenses

Operating Expenses (INR Million)

70,000
61,316
60,000
OPERATING EXPENSE

50,000

40,000

30,000

20,000
12,260
10,000 3,901 2,269
0
2016 2017 2018 2019
YEAR

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Exhibit 8: Transforming Travel

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Exhibit 9: Growth over the years

Exhibit 10: Global Footprint

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fire-more-staff/59169.html
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 https://trak.in/tags/business/2020/01/30/l-tcs-vodafone-britannia-are-
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