Analysis

Not all is well with OYO

Logo - Oyo

The celebrated startup has analysts, industry veterans and investors praising OYO for its fund raising prowess, its rapid expansion in territories, its Thiel scholar and founder Ritesh Agarwal and fast track growth to being one of the biggest startups in the country. One of the few unique business model based companies which has expanded globally from India.

However, despite all those glowing news stories, there has been a few people raising concerns that not all is good in the third largest hospitality chain in the world.

The story started with this Linkedin post back in 2016 by Sumanth Raghavendra. An IIM Bangalore pass out and an entrepreneur himself, Sumanth analysed the financial reports and other day released publicly by OYO and its rather proud investor Softbank. He analysed the business model, picked at the gaps in the narrative created by the company and its investors and highlighted omissions.

This piece got a lot of attention followed by the same writers who could not praise OYO enough, who went to their local OYO properties and discovered serious issues faced by OYO partners across the country. Terms like Ponzi scheme, scorched earth policy, destroying the hotel industry in India were commonly seen in business and tech focused publications across the world.

Start-Up NationAfter the cacophony and industry experts chimed in jumping on the anti-OYO bandwagon calmed down, it was followed some serious PR damage control by OYO. Ritesh Agarwal went all out on interviews, press conferences held and more PR resources hired. New funding was raised, Softbank could not contain itself on OYO’s potential and international expansion brought the conversation back on track for the company. However Sumanth was still not done. Exactly a year later, he wrote another piece. Sticking to his “OYO is a Ponzi Scheme” summary, he went further, seriously questioning OYO’s carefully created defence.

However this did not get the same traction as the first piece. The analysts and experts did not clamor around the issues raised by Sumanth. That should raise alarm bells for most in the industry. Two years later situation has changed a lot, the business model has evolved and OYO has definitely moved up the value chain. That has brought its own challenges.

Massive Capex

The business model has become more capital intensive. Ownership and leasing of properties requires renovation and upkeep which is never cheap and involved massive costs when done over thousands of properties, across the globe. Operational costs reduce but margins need to be increased with massive gain in revenue to turn these hundreds of millions of investments, profitable.

Industry Resistance

One of the major source of ire for the OYO PR team is the long list of lawsuits against it. OYO partners with hotel rooms with 1 year contracts. Cases due to delayed payments, residential areas listed as hotel rooms, arbitrary charges against the hotel owners plus floating commission rates. Federation of Hotel & Restaurants Associations of India (FHRAI) is one of a few associations and groups that have dissed it out with OYO. They recently sent a notice claiming OYO jeopardised safety of consumers and violated laws. This comes along with Budget Hotel associations across India forming alliances to fight OYO through legal and other means. These are thousands of owners banding together where the Budget Hotel Association of Mumbai alone consists of 250 properties while the association in Gujarat represents 400 properties.

Logo - Oyo and Zostel

OYO – Zostel Tussle

And the cherry on top is the end of 2 year ceasefire between Zostel and Oyo. The complicated and long winded legal tussle started during acquisition negotiations. OYO trashed the deal and it has been a sparring match ever since costing both sides dearly in legal costs and brand goodwill.

Every heavily funded, hyper-growth start up faces issues in its growth. And the long list of issues faced by OYO are definitely far from fatal. But what is most concerning is a significant portion of these problems deal with the operational style of the organisation. The hotel owners are up in arms because of breach of contracts and re-negotiations before the contracts have lapsed. The commissions as claimed are too high and the margins claimed by OYO, too low. These lawsuits are expected to only increase and remain on-going in the near future.

Losing Product and Market Focus

OYO started its journey with focus on budget travelers. And with recent additions like SilverKey, the company is moving away from its core expertise developed over years.  Currently with products like OYORooms, Townhouse, SilverKey, Collection O, Capital O and Palette Resorts, the company does seem to be diversifying and hedging its bets. But this creates its own problems. The various products being launched need talented and experienced manpower. The organisation has tried to keep this problem at bat by setting up its own training institutes but the talent shortage remains and is expected to be not go away any time soon. Apart from lateral expansion, the company is also expanding to other new markets. There is a huge difference in how you approach a developed and modern market like Japan and an emerging budget tourist destination like Sri Lanka.

Precarious Brand Image

The OYO brands depends on seamless functioning and execution of all aspects of the customer journey. Despite millions of satisfied guests, a handful of negative reviews, lazy property owners, un-cordinated staff among other experiences are enough to permanently scar the OYO brand for good. The same thing happened with Ola when there were rapes committed by drivers, a local food delivery guys partaking in what they deliver for Zomato, a single streamer broadcasting inappropriate content can shut down the whole app among many others.

The underlying risk is high, however the pot of gold at the end of this hospitality business rainbow in the fastest growing region in the world, South East Asia might end up being a windfall for investors. A windfall that only comes once every decade. And if everything falls into place, with the many challenges currently faced and with some incredible luck, OYO could be one of those success stories which can change the face of hospitality across the world.

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