One of the few Indian startups with global recognition, Gurugram-headquartered hospitality giant OYO has been creating several new niches for its business, even as it continues to expand in the budget hotel category. From starting as a budget hotel chain to being a real estate company with businesses ranging from hospitality to coworking to cloud kitchen to coffee chain, OYO has had an eventful journey.
Further, being backed by global investors such as SoftBank, Lightspeed, Sequoia, etc, the company has had no dearth of capital in the bank and hence, has been able to invest heavily in the asset-heavy business it has built.
However, in the last one year, the company has been facing several issues as a result of its business model and its terms and conditions which have not sat well with hotel partners.
What Are The Major Challenges For OYO In India?
- Complaints of unpaid dues by Indian hotel partners
- Police complaints by hotel groups and hoteliers
- Protests by US hotel owners over OYO’s entry
- Lack of profitability
- Scrutiny by Competition Commission of India
- Questions about asset-heavy model
Protests By Indian Hotel Owners And Associations
The cause for conflict of hotels, associations and OYO came to light in December 2018 and since then has continued to cause mayhem in the hospitality industry. At the time, the Hotel and Restaurant Association of Gujarat along with associations in Mumbai, Delhi, Mysuru, Bengaluru, Kolkata and Hyderabad came together to explore legal action against OYO.
In January 2019, the Federation of Hotel and Restaurant Associations of India (FHRAI), a pan-India body of hotel owners and operators, alleged that more than 200 hotels have ended agreements with OYO over mismanagement of contracts, arbitrary charges and other disputes, industry associations said, adding that others want to exit contracts but are stuck for various reasons.
Since then, several protests have taken place in Pune, Nashik, Kota, Manali, Jaipur and Ahmedabad as well as Bengaluru and Delhi. 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 clearly in the contracts.
They have alleged 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.
Police Complaints By Hoteliers
In September 2019, OYO founder and CEO Ritesh Agarwal along with two company representatives—Anand Reddy and Prathik Singh— were booked by the Bengaluru police. One of the hoteliers had alleged that he entered into an agreement with Ritesh Agarwal in June 2017, where OYO would give them reservations and take 20% of the share and give him 80%. However, he alleges that Agarwal and his representatives in Bengaluru had taken 80% of the share instead of 20%.
He accused the trio of cheating him of more than INR 1 Cr. The Whitefield police booked the trio, including Agarwal, under IPC Section 406 (criminal breach of trust) and 420 (cheating). However, OYO refuted the claims and said “OYO Hotels & Homes has always maintained the highest level of integrity, transparency and commitment to its asset owners. We at all times follow the laws of the land and operate keeping in mind the best interests of our asset owners, customers and employees.”
Further in November, another Bengaluru-based hotelier filed a first information report (FIR) at the Ulsoor police station in Bengaluru against Agarwal as well as others in the company. The complainant has alleged “criminal breach of trust”, “cheating”, “criminal conspiracy”, “abetment”, “computer related offences” under Section 107, 120B, 405, 420 Of The Indian Penal Code 1860 and Section 66 of the Information and Technology Act, 2000 read with Section 156 of the Code of Criminal Procedure.
The case has been filed against Rohit Srivatsava, head of southern India for OYO, Madhvendra Kumar, head, business development; Gourab De, head, business development and in charge of property; Prateek Agarwal, finance, OYO and Manjeet Singh, finance, OYO and Mrinmoy Chakraborty, business development manager at OYO.
The hotelier alleged that OYO hasn’t paid them assured benchmark revenue of INR 7 Lakh each month, as signed under contract on May 23, 2019. He said that OYO has created multiple non-existent room bookings which it marked under no-show and cancellations.
OYO spokesperson again refuted “the claims made in the complaint that has been wrongfully filed against our founder and six other office bearers, based on false allegations and exaggeration on a regular commercial dispute.”
Protests By US Hotel Owners
After India, discontent of hotel owners with OYO came to light in the United States of America. In June 2019, OYO Hotels and Homes announced its expansion in the US with over 50 OYO hotels in 35 cities across 10 states. This includes the cities of Dallas, Houston, Augusta, Atlanta and Miami.
For further growth of its services, the company has committed to invest $300 Mn over the next few years. This investment will be used to grow in the region, acquire talent, build competency and develop infrastructure. The plan for the growth continues to partner, manage and open the doors to one hotel building per day on average.
However, the success was short-lived as in October, reports surfaced that several US OYO hotel partners raised issues ranging from poor software, loss of revenue as well as criminal activities within rooms that are managed by OYO. The hotels have also alleged ignored or missing payments, even though they had been promised a certain amount as a guarantee by OYO. Moreover, hotel partners have claimed that they have no rights over the booking or room charge.
Many partners have claimed that due to the low pricing, which is controlled by OYO, the hotels have allegedly attracted “prostitution, druggies and kids looking to party,” according to reports. The OYO spokesperson said that to solve the issue of poor quality of customers, the company is working on a rating system for the customers.
Lack Of Profitability
Even though cash burn and losses have been a common sight in Indian startup ecosystem — just look at the ecommerce unicorns bleeding money — investors have now started questioning the lack of profits for these companies. As a result, OYO is also facing huge pressure from investors, mostly SoftBank to achieve profitability.
OYO’s path to profitability is under the spotlight, especially after the mayhem caused by WeWork and the less-than-stellar IPO of Uber. The terrible start to Uber’s public listing and WeWork’s postponement of IPO plans and ouster of CEO have created further trouble for Japanese conglomerate SoftBank.
Earlier, Softbank CEO Masayoshi Son in a private gathering of portfolio companies told chief executives to focus on profitability now and build the business accordingly. Son told portfolio company leaders that public investors aren’t going to tolerate gimmicks, like super-voting rights or complicated share structures, that privilege founders over other stakeholders.
Even though, OYO’s parent company Oravel Stays hasn’t filed its annual performance financials with the ministry of corporate affairs yet, a valuation report from June 2019 by the company’s valuers hints at burgeoning losses for the global company.
In terms of revenues, OYO’s operational revenue grew to INR 6456.9 Cr in FY19, a jump of 3.56X from INR 1413 Cr in FY18. At the same time, OYO’s operational expenses were INR 6131.65 Cr in FY19, a 3.9X increase from INR 1246.8 Cr in FY18. OYO as a group aims to turn profitable in 2022. The company is expecting $285.9 Mn in losses for 2020, but aims to turn a profit of $45.2 Mn in 2022.
OYO didn’t respond to Inc42 queries on the matter till the time of publication.
Scrutiny Of Competition Commission Of India
Amid continuous protests by hoteliers and allegations of abuse of dominant position, in July 2019, FHRAI filed a complaint with the Competition Commission of India (CCI) against OYO. The hotel body alleged that three months after OYO promised its partners an 18% interest on delayed payments and launched complaint redressal solutions, the issues continue to be unresolved.
In October 2019, CCI said it will continue to examine the hoteliers’ complaints against three big players in the hospitality sector — MakeMyTrip, Goibibo and OYO — for affecting their businesses, due to predatory practices, high commissions and non-uniform commissions. CCI then directed a government official to carry out a detailed investigation in the matter and submit a report to the commission within 150 days.
In another case of 2017 at CCI, a win for OYO came in August when CCI noted that though OYO may be a significant player in the hospitality market, presently it cannot be said to hold a dominant position. CCI noted that the relevant market would be ‘Market for franchising services for budget hotels in India’. CCI noted that OYO appears to have valid business justification and that the terms and conditions of the agreement were fair based on the evidence presented by OYO.
Questions About Asset-Heavy Model
SoftBank has had a troubled experience with its portfolio companies this year. The biggest concern being coworking space provider WeWork’s failed IPO. In August 2019, WeWork made an enthusiastic filing of draft papers for IPO, which, however, was postponed following the responses of investors. The investor sentiment with draft filings had made it hard for WeWork to even get a valuation of more than $20 Bn with potential public investors.
It is to be noted that earlier this year SoftBank valued WeWork at $47 Bn in the last funding round. However, after a negative investor outlook due to corporate governance issues, SoftBank gained control of the coworking business.
This has impacted OYO in multiple ways, one being profits and another being its asset-heavy model. 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. OYO didn’t respond to Inc42 queries on the matter till the time of publication.
OYO, which was once a budget-chain, is now across hotels, homes, resorts, vacation rentals, weddings, coworking, and much more. The company has gone international making acquisition and heavy capital investments in real estate, far and beyond its original business idea. Is it stretching itself too thin in its pursuit for diversified growth?