Low Margins And Hidden Costs: Why Small Hotel Owners Are Feeling Cheated By OYO

When OYO first shifted to the hotel franchise business in 2015, it seemed like a great proposition for budget hotels. Struggling with lack of visibility and guidance on how to upgrade their properties, small hotel owners ticked along thanks to word-of-mouth referrals and an unorganised system of touts, tour operators and agents.

But lately things have taken a turn for the worse.

Protests have erupted around the country against the platform as its business model and the terms it signs with hotels have left many owners upset about dwindling margins and profits.

Independent protests by small hotel owners are springing up in mid-tier towns like Nashik, Pune, Kota, Manali, Jaipur and Ahmedabad as well as Bengaluru and Delhi. Hoteliers claim that OYO has been cheating them of their promised returns and minimum guarantees by levying a slew of charges, often without informing them. Many of these charges are not specified in the contract between the owner and OYO, hotel owners that Inc42 spoke to, alleged.

The issue first surfaced in January this year, when the Nashik Residential and Hotels Association. Many hotel owners, new to OYO’s accounting practices, had let it slide at the time hoping for more clarity in the months to come. However, the pattern of unpaid dues continued in February and March. Six months later, the Nashik group says that OYO has still not cleared dues worth INR 2 Cr.

OYO has said that listing on its platform has given the hoteliers the ability to get a higher return on investments, access easy financing opportunities, transform their hotels, and offer good quality customer service, thereby significantly increasing occupancy and profitability.

Where’s The Minimum Guarantee?

For hotel owners, the biggest pain point is that OYO reduces payments owed to them on the pretext of deductions, which they say are not specified in their contracts. The protestors say that OYO’s accounting and auditing process, and the penalties associated with minor faults and errors, are so heavy that they sometimes find themselves owing money to OYO at the end of the month. 

At the heart of this matter is OYO’s promise of “Minimum Guarantee Fee”. This promises a certain amount to the hotel owner each month in lieu of allocating some of the room inventory for OYO users, irrespective of the bookings the hotel gets from OYO users or the occupancy rate. This is how OYO has managed to bring many hotel owners to its platform, since hotel owners were promised a fee regardless of how many bookings they get from OYO. Many now call this model unethical.

(Month end account statements sent by OYO to hotels. The Data, Boost, Smart charges are not listed in the contract, hotel owners say)

Hotel owners say that since January, OYO has not paid out this minimum guaranteed fee promised to them. They allege that the company uses a range of hidden and surprise charges, such as promotional fee, convenience fee, walk-in fee, audit fee and forced check-ins. 

Speaking to Inc42, Amitabh Mohapatra, a hotel owner and president of the Gurugram-based Guesthouse Welfare Association, which is also protesting against OYO, said that across India, about 100 budget hotels have come forward with pending dues amounting to over INR 5 Cr.

Shrinking Margins Due To OYO’s Hidden Charges

Mohapatra gave the example of OYO’s contract with a hotel owner with a 20-room property with a minimum guarantee fee of INR 4 Lakh for a month. This means that irrespective of whether the rooms are occupied or not, OYO is bound to give the hotel owner INR 4 Lakh. 

However, that’s not always the case. From the INR 4 Lakh, OYO charges 2.5% as a platform fee and 18% as GST. But when a hotel owner cannot meet the number of bookings needed to hit this minimum payment threshold, OYO applies arbitrary charges to bring down the fee owed to the hotel, the owners told Inc42. Moreover, OYO also charges the hotels for audits that it conducts, and has three different charges for its business analytics tools at 1%, 1.5% and 2% of the total booking amount, they added.

Mohapatra added that due to excess inventory in cities, hotels are not able to hit the occupancy needed to match the minimum guarantee fee. If, for example, the hotel only manages to get INR 2.5 Lakh worth of bookings through OYO, then the company invariably tends to deduct the remaining INR 1.5 Lakh — often arbitrarily — through various undisclosed charges, Mohapatra claimed. 

On top of this, the discontent of the hotel owners has been aggravated further by OYO’s penalties on bookings done outside of its platform (known as walk-ins) and failure to respond to customer complaints.

“For example if a guest complains of a bad experience, OYO charges the hotel three times the amount paid as room rent and deducts this from the fee. This charge is not shown until the month end when the statement of accounts is received,” he said, a problem that was voiced by another Delhi-based hotelier who did not want to be identified.

Acknowledging the penalties, OYO said that “yes, we have a strong mechanism in place to ensure every network hotel meets our quality standards and delivers the OYO hospitality experience customers expect from us,” adding that it will do “all it can” to ensure that customer experience is standardised.

What irks hotel owners further is that OYO’s cost for conducting audits are passed on to them.

Responding to the allegations, an OYO spokesperson strongly denied these statements and said that all hotel owners associated with OYO are informed well in advance and at regular intervals about the charges, about its contentious 3C programme — which is used to determine penalties and rewards — and how hotels can avoid the penalties. OYO also said that while the company deals with hotel owners on a one-on-one basis, it does not make any deals with hotel associations and neither does it negotiate terms for hotels as a group.

In June, OYO had won a stay against some Uttar Pradesh hotels in the Delhi High Court, which asked them to refrain from boycotting OYO

Hotels Vs OYO: Price Of Technology Or Predatory Practices ? 

After months of small protests pan-India, some hoteliers are banding together and considering legal action against OYO, in which Japanese conglomerate SoftBank is an investor. The hotel owners, that are now in talks with lawyers to explore legal options, told Inc42 that they cannot compete with the might of the hospitality behemoth individually.

On its part, OYO has also invested heavily in its franchisee hotels, working to train the staff, making the properties look more upmarket and providing them with the kind of visibility that was not available before. OYO offered a seamless service in a sector which has often left customers and travellers in the lurch, bringing about standardisation in facilities and clarity in pricing. This year, OYO said it has also started a new initiative under which hotel owners will receive 18% interest on delayed payments, and that exceptions will be clarified before the due date for the next payment cycle.

All of these were sorely missing from the Indian budget hotel market, but while OYO has changed many of these things for the better, hoteliers are demanding transparency about the charges. 

So is OYO right in levying such a heavy cost on hoteliers for working with it? It is not reasonable for hotel owners to expect to reap the benefits of OYO’s technology platform and its business model without being ready to bear the cost. But for small hotels, margins can be a matter of life and death — something which SoftBank-backed OYO with its huge capital reserves can afford to overlook, at least for the time being. 

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.