Understanding Oyo’s Business Model Amid Efforts To Cut Losses

In 2013, when a teenaged Ritesh Agarwal got selected for Thiel Fellowship, there were plenty of questions and hype. The fellowship is given to entrepreneurs below 20 years of age who skipped college to run their own business. Ticking all the boxes, Agarwal’s idea went from nothing to a global brand and much more is in the works for Oyo as it looks to overcome recent losses to go towards an IPO.

Agarwal was among the select few chosen for the two-year mentorship programme run by Peter Thiel, cofounder of PayPal, early Facebook investor and the man who many call the global tech industry’s most influential figure.

Since its launch in 2013, Gurugram-based Oyo has become the largest hotels and rooms platform for travellers looking for no-frills, comfortable accommodation at affordable prices.

While Oyo has changed a lot over the years, tweaking and remodelling of the original business idea for Oyo, the core idea is to connect travellers with hotels. It originally started out on an asset-light model but over the years, with investments across various businesses within Oyo. The company has gone from budget hotel aggregator to a hospitality chain and a real estate business too.

How Does Oyo Rooms Work?

Oyo started out as a hotel aggregation and booking platform, signing up hotel partners who would allot a few rooms to Oyo in exchange for a monthly fee. The company would lease the hotel rooms and revamp it to a standardised format, enable booking via its website or application. However, in 2015, the company started shifting to a franchisee model, wherein, instead of leasing rooms, it started offering partnerships to hotels. Here are the various verticals that Oyo has added over the years:

1. Hotel room aggregation
2. Franchise model
3. Owned hotels
4. Coliving

Hotel Room Aggregation

Oyo in 2016 had 5,855 hotels in its network with a total inventory of over 68K rooms, whereas today it has a portfolio of more than 35K hotels and 125K vacation homes, and over 1.2 Mn rooms across 80 countries and 800 cities. Its verticals vary from holiday homes, business hotels, casinos and coworking spaces.

That growth has also been made possible because the startup kept iterating the model and ensured that it does not remain confined to the budget hotel space. With multiple rounds of funding secured from major investors such as Softbank, the startup ventured into newer categories and has constantly launched new ventures or brands under its umbrella.

Franchise Model

In 2017, Oyo CEO Agarwal announced that the company has “evolved its business to 100% exclusive franchise, manage or operating. We do not anymore do hotel aggregation and have become a full-scale hospitality company.” Oyo’s shift from hotel aggregation to franchise model came mainly to reduce its operational costs and to improve serviceability, the company stated.

For instance, Oyo Townhouse is planned and built around the needs and wants of millennial travellers ranging from specially designed beds, TVs, open spaces for meetings and more. While products like Collection O is a mid-scale business hotel offering with bigger and spacious rooms with premium furnishing and linen, on-request laundry, unlimited breakfast, 24X7 in-room dining, high-speed WiFi, workstations in every room etc.

These products have been a separate Oyo product, where the company leases out buildings and renovates them based on the needs and plans. So, overall, the company has stopped booking particular rooms for Oyo guests, but rather, books the whole hotel or flat under its name and rents it out to customers.

Owned Hotels

Further, the company offers its hotel partners the option to run the property either themselves or let Oyo run the operations. The company also offers financial support through its partnership with financial institutions, which have disbursed loans to more than 100 properties. Loans are available for upgrading space, working capital and other needs.

Coliving

As per a combined report by Jones Lang LaSalle (JLL) and the Federation of Indian Chambers of Commerce & Industry (FICCI) the Indian coliving market is expected to increase at a strong CAGR of 17% in the next five years. Identifying the market opportunity, Oyo entered the segment in 2018 with Oyo Life, which operates fully-furnished rental housing arm of Oyo.

Oyo believes that the major advantage of coliving spaces, as opposed to paying guests or serviced apartments, is that it significantly cuts down the cost of living because not only do people share the rent but also enjoy add on services such as daily housekeeping, laundry/ on-call resident facility management; curated meals, etc.

Oyo works with large developers and independent asset owners to take over an entire building, tower or an independent house. Oyo Life is not an aggregator and takes responsibility for end to end management of spaces, lease entire buildings, furnish, clean, transform and maintain them.

How Will Oyo React To Hotels Protesting?

Even as Oyo continues to face protests from hotel owners, the company’s founder has said that it is ending the contracts of numerous hotel partners over quality issues. In an interview, founder Ritesh Agarwal said that those protesting are industry groups and not hotels, and that these groups are trying to use the situation to increase property rates.

Oyo claims to have over 18K hotels and 2.70 Lakh rooms in India and South Asia, but many of the hotel partners are unhappy with the terms and conditions of Oyo’s contract — not just in India but across the US and a few other countries Oyo operates in. However, 2020 didn’t start on a good note either as it is now facing major questions for its investment in Indian hospitality unicorn Oyo. Multiple experts have argued that Oyo’s business model resembles WeWork’s as a tech-inflected real estate business that has expanded far beyond its initial concept.

Over the last year, we have reported several times about Oyo’s unpaid dues to hoteliers, protests against the company and police complaints. The latest report by the New York Times has now reported that former employees have alleged a “toxic” work culture. At the same time, several other hoteliers, former and current employees have reportedly alleged that Oyo offers rooms from unavailable hotels, etc.

About the complaints, an Oyo spokesperson told Inc42, “We are committed to growing OYO the right way — by meeting the needs of property owners and of the guests we serve together. We work hard every day to ensure that our values are upheld by thousands of committed employees around the world, and we are subject to regular external audits to ensure proper compliance and adherence to our code of conduct.”

The company added that with regards to complaints of a small section of property owners in India whose payments are disputed, multiple escalation mechanisms exist to resolve them. “We are also investing in technology and in building stronger partner support teams to ensure reconciliations happen faster. We will also continue to utilize the provisions in our contracts that allow us to incentivise and recognise thousands of owners who consistently deliver a high-quality guest experience.”