SUMMARY
Betting big on the post-Covid surge witnessed in business travel, OYO, in February, said that it was planning to add 1,800 more premium properties to its platform in 2023
After scaling down its operations during the pandemic in some high-growth geographies like the UK, Europe, Malaysia, Indonesia and the US, OYO is back in these markets, with its focus on premium hotels and holiday homes
Despite lucrative opportunities in the premium hotel segment, OYO’s attempt at grabbing a market share is fraught with challenges as the segment is dominated by legacy players
OYO is going through a makeover. Synonymous with budget hotel stays, the SoftBank-backed startup is betting big on onboarding and providing booking for premium hotels along with setting up its properties.
Sources close to the development told Inc42 that the Ritesh Agarwal-led tech-first hotel chain is talking to premium 3- and 4-star hotels in India and setting up properties to get a juicy chunk of the country’s premium hospitality market.
Betting big on the post-Covid surge witnessed in business travel, OYO, in February, said that it was planning to add 1,800 more premium properties to its platform in 2023.
Bullish on expanding in the premium segment, which is dominated by a few players in India, the move can be seen as a major strategic shift by OYO, which was primarily founded as a budget hotel chain in 2012.
Interestingly, the reports of OYO’s plans to transition from the budget category to the premium segment have come at a time when industry experts are anticipating at least a few straight years of pent-up demand in travel, hotels and tourism verticals, after the Covid-19 lull that battered the hospitality industry.
By all means, OYO’s Agarwal wants to ride this wave, either by setting his eye on acquisitions for rapidly expanding into the premium segment or setting up OYO-owned properties. However, this effort will require moving to an asset-heavy business model and a lot of capital infusion. Well, that clears much air around the SoftBank-backed firm’s IPO plans.
OYO entered the premium segment in mid-2022 and added 400 properties to the platform in India alone. Since then, the Gurugram-headquartered firm’s revenue has shown steady growth, with the company posting its first EBITDA positive quarter in Q1 FY23.
What Fuels OYO’s Big-Ticket Bet?
According to industry experts, India’s hotel and travel segments are moving towards a natural progression of more demand and growth in the premium segment in both the inbound and domestic categories.
The CEO and founder of the Federation of Associations of Indian Tourism and Hospitality (FAITH), Ashish Gupta, told Inc42 that the travel and tourism, and hospitality industries are witnessing aggressive top-line growth for premium and mid-scale segments as India assumes a significant position globally.
“While the demand for budget hotels and cheaper stays has been high over the past several years, the luxury segment is now gaining a lot of traction as consumers look for better services, are ready to pay more in the name of leisure travel, adventure sports, culture tourism, etc. The growing market in the high-end segment will mean the entry of more players even as the vertical is largely dominated by a few players,” Gupta said.
In a recent note, ICICI securities reiterated a positive outlook for the luxury hotel segment in India. “FY23 began on a strong note for the hotel sector in terms of growth and margin expansion. With the full re-opening, corporate demand and MICE segment (meetings, incentives, conferences and exhibitions) joined the growth bandwagon in Q1FY23 while leisure continued to perform well,” the note read.
It added that many hotels have also raised room tariffs, without disturbing demand, which has led to a sharp revenue rise of over 24% versus pre-Covid levels.
Hospitality unicorn, OYO at the time of the announcement of its foray in the premium segment in 2022, had said that a lot of its corporate customers, conducting business over virtual meetings was a stopgap and sub-optimal solution.
“Such customers are leading the business travel revival. Meetings, incentives, conferences, and exhibitions are the other key use cases fuelling the growth of business travel,” Ankit Gupta, CEO, OYO.
Replicating Overseas Model In India
After scaling down its operations during the pandemic in some high-growth geographies like the UK, Europe, Malaysia, Indonesia and the US, OYO is back in these markets, with its focus on premium hotels and holiday homes.
The company also reported growth in its annual revenue run and gross booking values in these markets in 2022, after the impact of the Covid-19 pandemic waned.
The company said that it has recorded a 15x rise in the Indonesian market since 2018 when it started its operations there. In addition, the hospitality startup claims that its platform is the biggest hospitality tech aggregator in the region.
In the US, the firm has recorded a 46% increase in revenue per room ever since the pandemic hit the world. For the UK market, OYO claims to have received a 110% jump in revenue per room in 2022 versus 2020.
Last year, OYO acquired Danish vacation home Company Bornholmske Feriehuse for an undisclosed amount and Croatia-based hospitality service provider Direct Booker for $5.5 Mn.
The model that the Indian hospitality startup is focussed on in these markets is identifying the premium properties across key regions, equipping them with technological tools, increasing their visibility by onboarding them on its platform and helping them get an increased footfall.
“OYO will likely plan the acquisition model in India, too, against its minimum revenue guarantee strategy. The spurt in revenge travel and hotel bookings in the premium segment has led OYO to move towards this segment where the margins are also better compared to budget accommodations. However, this could also lead to an asset-heavy model, something which wouldn’t be cost-efficient,” a hospitality sector analyst said.
OYO’s premium hotel stay brands include Townhouse Oak, OYO Townhouse, Collection O, and Capital O.
While Townhouse is an amenity for millennial travellers with modern facilities, Townhouse Oak is a 4-star level accommodation provided by OYO’s partner hotels. Further, Collection O is a luxury hotel accommodation mostly for business travellers and Capital O offers 3- and 4-star accommodations.
Further, as part of its efforts to cut costs to become profitable, OYO quashed its minimum revenue guarantee plan last year. Under the plan, OYO would pay a fixed share from its gross revenue to its partner hotels.
“This was among some of the steps undertaken to cut costs and avoid litigations from hotel owners,” a source quoted above said.
There were challenges like violating the terms of the agreement, commissions share, etc. when OYO was earlier partnering with budget hotels, which attracted a lot of legal headache for the company as many hoteliers accused OYO of violating the clauses of its agreement with them.
However, the cost-cutting and re-strategisation efforts now seem to be bearing fruits. Last month, CEO Agarwal said that OYO was on its way to closing FY23 with a revenue of over INR 5,700 Cr as against INR 4,780 Cr in FY22.
He also added that the company was poised to achieve an EBITDA of nearly INR 800 Cr in FY24.
Can OYO Stand Neck And Neck With The Industry Mammoths?
Despite lucrative opportunities in the premium hotel segment, OYO’s attempt at grabbing a market share is fraught with challenges.
As per the ICICI Securities research note, the premium to midscale hotel sector is capital intensive, with higher operational costs. Furthermore, the segment is dominated by legacy players like Indian Hotels (which owns brands like Taj Vivanta and Ginger), EIH (Oberoi Hotels), and Lemon Tree Hotels in hospitality, and EaseMyTrip (EMT) in the online booking segment.
These players have been able to grab a maximum market share because they are cash rich and have the bandwidth to raise substantial capital to expand their operations.
“In particular, EaseMyTrip’s foray into hotel bookings will be an interesting thing to watch out for. Right now more than 90% of their revenue comes from air tickets booking, but hotel booking is a comparatively high margin business, so they may focus on the same,” a source said.
Therefore, Agarwal may have to raise money, achieve break-even, minimise operational costs quickly to focus on the next leg of growth and invest his money for the long term in India’s premium hospitality sector, an area where market gurus predict the growth to come from.
As of now, sources say that despite the headwinds that the public markets have faced, OYO still wants to try the IPO route to raise at least INR 4,000 Cr to fund its ‘premium’ ambition and pay off debts, including a $600 Mn Term B loan that the firm secured in July, 2021.
