Why you’re wrong about OYO Rooms
“Capitalism in India is primitive.” — Kunal Shah
1/7. PREFACE
OYO — the world’s 3rd largest branded hotel chain and a company in fashion, is plagued by issues that in absolute terms are not new to the world. A lot of material on the internet is however suggesting that it is. The purpose of BU#3 is to share a different interpretation about the core issues within the company.
Before proceeding, I would suggest that you do not assume, like most others, that OYO does not know what it’s doing. It’s a billion-dollar business [on paper].
As outsiders, enough benefit of doubt needs to be given before oversimplifying the situation at hand to the populous and naive conclusion that “OYO no longer knows what it is doing and has lost direction.” To identify the core problems within the company, it is essential for us to believe that OYO is indeed making calculative decisions or that it does have a few reasons for making these decisions. I have to tried interpret a few of these reasons in this account.
Disclaimer: This account consists of views and opinions that are merely the writer’s personal interpretations of the facts already present in public record. It is not intended to cause disregard or shame any individual or entity.
2/7. PROBLEM WITH THE STORY SO FAR
The news and online communities are saturated with information about the $10 billion startup and its streak of poor service in both its B2B and B2C fronts. The situation basically comprises of 4 key elements — unhappy partner hotel owners, unhappy customers, unhappy employees and very happy rodents.
There are essays written about how the company has failed on multiple fronts such as maintaining cordial relations with hotel owners, legal authorities, providing great customer service, maintaining a great work culture and so on. Any issue that you might think of is very much there. So much so that if you were to organize a lottery on “Guess The Issues That OYO Does Not Have”, you would find it really hard to win.
However, one needs to understand that fixing electrical fittings, forming better terms with hotel owners and getting rid of rats is not rocket science. These aren’t problems you cannot fix or are dreadful for a company to have. One has not tried interpreting the company beyond the surface level problems if the problem cum solution that they see is: OYO is growing too fast, it is expanding beyond its means and it should try to stabilize.
OYO does not and will not understand the language you are trying to speak to it in if your only point is that it’s growing too fast. It’s a company of more than 20,000 employees. Surely there are enough people across levels who feel that OYO is growing too fast too. However, it is not the winning argument or the mother of all problems. In BU#3, I share a broad interpretation of the real problems within OYO.
3/7. FUNDAMENTALS OF PROBLEM IDENTIFICATION
Before we get down to OYO’s real problems, let us understand that no efficiency or inefficiency arises out of thin air. A combination of tangible and intangible factors coupled with actions or inactions, collaborate to create both satisfaction and dissatisfaction. This is more so in the service industry.
It is no joke when experts recommend that you get to the root of a problem. However, what most miss out on is the distinction between a problem and the outcome of a problem.
Let’s say you run a departmental store and you’re seeing that a lot of your customers are leaving unhappy. You see it as a problem and ask yourself “Why are the customers unhappy these days?”. This is great because you’re trying to identify the cause of a problem — which is exactly where you start getting things wrong too.
Your customers being unhappy is not the problem. It’s the outcome or result of a problem. This isn’t a matter of wordplay. It’s a matter of technicality. You will not be able to do much about the outcome on a long term basis if you do nothing about the core issue itself. To do so, you would have to connect the dots as backwards as you can to understand the “root”. The problem that resulted in the outcome of unhappy customers could be that you have:
· Discontinued some products
· Hired a poor sales representative
· Dropped the overall feel and experience of shopping
These ‘problems’ too are merely outcomes of a different set of problems. The problems that are causing the aforementioned outcomes can respectively be:
· Change in supplier
· Fault in judgement made while hiring
· Change in store layout, lights, in-store fragrance and so on
As you keep connecting the dots backwards, you might notice that the decisions you made earlier might have nothing faulty about them. They’re fairly simple decisions taken in the best interests, given the situation at hand and facts present. However, the more fundamental a particular decision is and the more layers of subsequent decisions get added to it, the resultant poor experience gets compounded. This applies to any apparent problem — your girlfriend being mad at you, your child scoring low in his exams, your business making losses and so on. None of these are real problems. They’re just outcomes.
Having connected the dots backwards, you now need to identify which of the decisions you took can be revised, based on how controllable and uncontrollable the decisions are. You will then be able to take corrective measures to create subsequent positive outcomes in the form of a chain reaction with a positive multiplier effect.
As you must have guessed by now, OYO’s newsworthy incidents of electrocution, poor customer service, hotel owners being upset, etc. aren’t real problems. These are only outcomes.
The commonly known notion is “OYO’s quality and ethical problems are arising out of rapid expansion. Hence, if OYO stabilizes or takes it easy, the problem gets solved.” This isn’t a complete solution. You cannot identify or solve a problem by directly focusing on or targeting the outcomes. To devise a sustainable solution, you need to dig deep, connect the dots backwards and identify the right set of contributing factors.
4/7. THE DOTS THAT CONNECT OYO
This diagram is to back-track the visible, surface level problems in the company to the surprisingly lesser mentioned root cause of all the problems — the culture and influence in the top level.
In the subsequent parts, we will be mapping the possible problems with their definite outcomes. To enunciate where I am coming from, we’ll take it from the root of the problem — the culture.
5/7. CULTURE AND THE WAY YOU LOOK AT A BUSINESS
The culture of a company plays a strong role in what it does and what it believes in. I believe that the root cause of OYO’s problems, as visible in the above figure, is the set of business beliefs that enable its decision making. The primary concern here is the way the top level of the company and key influencers of Ritesh Agarwal look at how a business should be.
The manner in which the top leadership of a company looks at how a business in general needs to exist is a critical driver of decision making, culture and subsequent outcomes. For instance, Richard Branson, Founder of the Virgin Group, was proud to build businesses and verticals that were not number 1 in their respective industries. Reason being that he did not want any business of his to become too large to manage. He was happy compromising on the size, scale and bragging rights of a large business in exchange for its efficiency and impact. On the contrary, Jack Welch, former Chairman and CEO of General Electric, instilled a sense of extreme competitiveness within GE. If an enterprise wasn’t number 1 or number 2 in its respective sector and market, GE was to fix, sell or close the underperforming business. These key ideologies about how their business should exist drove their strategic and operational decisions. So, what’s happening with OYO?
To understand this, we need to have a look at the key influencers of OYO who have played a pivotal role in shaping OYO’s understanding of a business. Let’s take a closer look at the 3 key personalities one can associate OYO with:
1.1] Softbank/Masayoshi San
1.2] Peter Thiel
1.3] Ritesh Agarwal
1.1 Understanding Softbank/Masayoshi San
The model of most investors is simple. Invest in 10 startups and while 8 of them fail, the other 2 should reap super profits to make up for the losses incurred from the other 8. However, all 10 at face value, should be capable of earning super profits.
Softbank is Masa and Masa is Softbank. I doubt there are individuals as popular as him within the investment firm. The firm is driven by his experiences, ideologies and intentions. Let’s look at them in brief:
1] Masa lost investments of close to 70$ billion dollars in the dot com burst. Softbank Group’s value dropped by nearly 93% by the end of the year 2000. This experience led to have made Masa into not an investor who is more risk averse, but into one that would try identifying founders and businesses that are more sustainable and gutsy over a few shocks.
2] Softbank’s modus operandi is to invest in technology driven businesses as a part of its Vision 1 fund, reap enough profits and returns from big valuation exits, and then gain the necessary funds and track record for a successful Vision 2. To make this happen, Massa primarily evaluates the founder and his ability to do so.
3] The valuation of Softbank’s companies like Uber, WeWork and OYO represent the promise of monopoly profits. But -
4] The valuation of these companies means nothing unless they exit or trade at that value. Startup valuations that do not have the business or numbers to back up the valuation are based on hope and promise. With Uber trading much below its listed value, Masa was cautious to not go ahead with WeWork’s IPO, set deadlines of positive EBITDA for OYO, and push for profitability amongst its other investments like Paytm as well.
There are 2 things here. Firstly, Softbank would behave like any other investment bank at this point of time and try reaping returns from its other investments after WeWork’s game changing collapse in value. To address this, as mentioned earlier, Softbank has already set its expectations of cash flow and profits to its companies. Secondly, it still needs money and a high valuation exit for a Vision 2 to seem in sight. That won’t happen without pushing the valuation of OYO — the only company that can remotely accomplish Masa’s 2nd $100B dream. Consequently, there is plenty news about OYO’s valuation increasing — with Softbank more than willing to pump in more money. This way, a jump in valuation backed by actual and ideally monopoly profits for a possible IPO seems to be the direction Softbank is headed towards.
The ethos that operates Softbank is to arrive at high valuations that can ideally represent monopoly profits given the scale and userbase of a company, which would then allow it to make massive exits for future investments.
Having understood Softbank’s investment philosophy in brief, let’s talk about our next influencer — Peter Thiel.
1.2 Understanding Peter Thiel
Peter Thiel is most famously known for having co-founded Pay Pal. What’s relevant to the context is the Thiel Fellowship Program which is a platform where ‘young people who want to build new things instead of sitting in classroom’ are given a grant of $100,000 in exchange for no stake in the company. It is a 2-year program for individuals aged 22 and below. Interestingly, one would need to mandatorily drop out of formal education in order to accept the Fellowship, if considered eligible.
In the year 2013, 19 year old Ritesh was selected for it and he aptly described it as a “turning period of his life”.
Anyone who has followed the work and teachings of Peter Thiel, would know how he looks at a business and its growth. His fundamental belief, which is also expressed in his bestseller ‘Zero To One’, is that businesses should strive to first become a monopoly. Competition is seen as a waste of time, energy and resources and as your business grows, it should ideally make any and all forms of competition redundant. Monopoly is seen to be the condition of every successful business. The book being such a huge influence would make it hard to disagree that a 2-year program designed by Thiel could be the same influence but on a lot of steroids.
No surprises here that these are very strong words of wisdom for any 19 year old who would potentially grow his company into the mammoth it is today. However, an advice/teaching works only when the receiver of it truly believes in it and embodies it. This brings us to final piece of our puzzle, Ritesh Agarwal.
1.3 Understanding Ritesh Agarwal
A boy wonder, Ritesh started his first venture Oravel at the age of 17. It replicated AirBnB’s model of a marketplace and had about 3,500+ listings at the time of being shortlisted for the Thiel Fellowship Programme. Fast forward to Ritesh now being the 26-year-old poster boy of the Indian startup ecosystem, the CEO of OYO Rooms tends to describe his role simply as — to guide what the company will do and what the company will not do.
If you read enough about him and watch enough interviews, you’ll know that you don’t need to be an expert to understand his way of looking and conducting business. Ritesh is a man of undying ambition and carries a single-minded objective of playing the bigger game.
To illustrate the same, let me share an example. In a 2017 briefing to students at IIM-A, Ritesh shared his strategic reasoning about how back in mid-2014, there was the target to expand to over 1,00,000 rooms within the next 1 year. In his own words, Ritesh went forward to say:
“We built what we internally called a canon. A canon to go out and take any freaking country and win that country as a part of product and experience”
In the same briefing, he shared his experience of competing with Zo Rooms who was replicating everything about OYO. Seeing how Zo Rooms was capturing a considerable portion of the market, a meeting was called for on a Sunday afternoon.
With over a 100 colleagues showing up, it was a houseful. The question on the table was “How many properties do we need to sign in the next one month?” Numbers flew across the room with the maximum being 35. Ritesh acknowledged the same and set the target to a 100. With his colleagues apparently going crazy on hearing this, he adds how they mostly saw it as “another young entrepreneur losing his mind.” It is a different matter altogether that the company in fact overachieved its target. Flip a few pages of the calendar and it’s no surprise that he now speaks of how OYO plans to add close to 100,000 rooms every 30 days.
Not to denigrate any of his beliefs and traits, there is ample evidence to highlight that Ritesh is a firm believer of ‘Go Big or Go Home’. His tendency to aim high, an overarching self-belief in his ability to execute and uncompromising self-confidence is what makes OYO what it is.
OYO is the result of the ideologies of Peter Thiel, Masa and Ritesh seamlessly weaved into an enterprise that does not believe in taking it easy. The need to make monopoly businesses, the intention of reaping monopoly profits and the ambitious attitude of Ritesh enables the enterprise to function the way it does. OYO is not in a rapid expansionary phase. OYO is carrying out business as usual and is conducting business the only way it believes it should.
Taking this idea forward, lets trickle down Fig.1.0 and understand the more systematic problems that arise out of this belief. These problems in combination and at scale have resulted in OYO being the hot topic of the startup ecosystem.
6/7. OYO’S EXPANSION
OYO became the world’s 3rd largest branded hotel chain in terms of room count in July 2019. It aims to become the largest in the world, topping Marriott, by 2023 and it is eyeing a room inventory of 2.5 million. OYO is looking to make sizable investments in the US, Europe and Japan to materialize these targets. Let’s have a better look at what contributed to its journey so far and what the outcomes have been.
The sections under which every defunct outcome of OYO can be discussed are as follows:
2.1] Corporate Governance
2.2] Brand Image and Product Categorization
2.3] Workforce Quality
2.1 Corporate Governance
There is no such thing as a free lunch and there is no such thing as a business becoming the 3rd largest anything in the world in less than 7 years — by ethical means. The company is facing acute backlash from hotel owners and regulatory authorities across countries. This has mainly been due to OYO’s alleged manner of conducting business by not abiding by contract terms, unreasonable penalties, lack of promised value addition, hurting monetary and non-monetary interests, listing unregistered hotels, false information on the application and so on.
When you’re trying to grow a company at the size and scale that OYO is, these issues are bound to happen. While OYO claims that these are less than 1% of the hotel owners who are essentially facing consequences for not providing quality services, the hotel owners beg to differ. With every hotel partner having to abide by a lock-in period of at least 1 year, the experience of working with OYO has taken the news by fire and the popular notion is that this is not what they signed up for. However, we need to again understand that none of these problems are by themselves a big deal. These problems are very much solvable but given OYO’s scale, these problems are only seeming to be larger than they are.
Given the basic nature of the problems at an absolute level, there is a fundamental need to empower the company’s strategic decisions and operational level behavior with positive governance and an attitude that exists to serve all. The poor practices of corporate governance are only increasing the B2B churn rate of the company. This would make it harder for somebody else to trust their business to OYO and that’s a situation they rather stay away from.
2.2 Brand Image and Product Categorization
You cannot debate with the effectiveness of “unmarried couples are welcome” as a customer acquisition strategy.
OYO was quick to understand not just the need for privacy and leisure amongst unmarried couples, but also the censure people experienced in these hotels and accommodations. Regardless of OYO’s lofty visions in the hospitality space and subsequent acquisitions of Innov8 — the co-working space, Weddingz — the wedding marketplace to grow its ancillary businesses, the positioning of OYO till date remains as a place for young couples to get some privacy. Nobody is complaining because corporates on short visits and couples on shorter are arguably the main contributors of revenue to OYO in terms of footfall and volume.
The problem comes in when the same positioning exists across categories and offerings of stay. Regardless of whether a couple enters an OYO Room, Townhouse or a Spot On, the overall brand image of OYO in the eyes of the general public has consistently remained corrupted.
This problem gets compounded further with OYO trying to offer everything to everybody in every market.
Although OYO claims to be a budget hotel chain, its product categories are somewhat all over the place. In Wikipedia’s results of ‘Branded Hotel Chains’, OYO is the only chain that is present across Budget, Midscale and Premium categories under a single brand name. This is contrary to the common practice of selecting a target audience in terms of purchasing power, demography and taste, and creating a sustainable business out of it. This should however come as no surprise as it’s fairly common to see large Softbank funded companies try becoming super companies to achieve scale, revenue and users.
In the same list, although the Indian Hotels Company Limited (IHCL) is also present across Budget, Midscale and Premium categories, its presence is via a completely different brand name and set of operations. The Midscale and Premium offering is under the brand name of Taj and the Budget offering is under Ginger. The Red Lions Hotel Corporation from the US follows a similar strategy. OYO, however, has a common platform and operational playbook. The difference in amenities and infrastructure is definitely there but the lack of concrete barriers between product categories is evident by the quality of service and support.
To elaborate on the same, the probability of a geyser not working in a Rs.600 OYO Room and Rs.2,500 OYO Townhouse is pretty much the same. The complaints that are surfacing around OYO are not to do with a particular category or range of rooms. The problem is not localized. It’s a virus spread across categories because no category has its own firewall. From being electrocuted to being denied entry into the hotel, to poor response from the customer support team, the inconvenience that the customer faces can be in any category and in any city. The growth in number of categories has not been supported by a robust system in place that would localize the issues to a particular offering. This has in turn made very basic problems into a questionable systematic failure.
If you were to pan OYO’s products on a price-performance index, you could argue that the graph would be relatively steep as the customer of any category can face the same problems and level of inconvenience. The discount categories being the hotel rooms get at Rs.600, and the premium category would now be the Las Vegas Hooters Hotel.
Possible Price-Performance graph of OYO Rooms
Myopic product categorization seems to be an infection OYO isn’t paying much attention to and is also allowing to spread in its foreign markets. When OYO bought the Las Vegas Hooters Hotel in August 2019 to mark its entry in the US market, it was reasonably assumed that OYO would keep the buying behavior, culture and regulations of America in mind and target high end popular, safe or premium accommodations only. That didn’t happen. Having bought a casino in Vegas, OYO for its own reasons opened budget hotels and accommodations that became the go-to venues for consuming drugs, prostitution and criminal activities. This subsequently renders the brand value gained by owning a hotel in Vegas to borderline zero.
The idea to rebrand a couple of OYO offerings with an alternate brand name is something most of us would have thought of. Keeping the disclaimer in mind, it would be naive to assume that OYO itself wouldn’t have thought of it at all. So why didn’t they? The answer can arguably be the culture driving the company. When you rebrand your verticals with an alternate name, you dilute the competitiveness. For instance, anybody looking at Ginger can arguably deem it to be an entity or market offering one can compete with, despite it being owned by IHCL. However, the same is not possible when every hotel has the OYO signboard on it. The culture to keep competition out can very much be a reason for not siding for alternate brand names.
Similar customer complaints across a maniacal number of offerings that altogether carry the same brand image is the culmination of several poor decisions that to many is beyond reason. To move beyond this, OYO will seriously have to reconsider its positioning and strengthen it with the spirit of a ‘canon’. I do not suggest that the positioning has not worked for them. On the contrary, I believe that the strategy has worked a bit too well for them. Couples looking to have sex no longer need to know that they can go to a nearby OYO. It’s a fact and a facility that enough are aware of. It’s time to move on.
2.3 Workforce Quality
You know your company has issues when you’re the 3rd largest hotel chain in the world that is being run by 20,000 employees but about 80% of them have spent less 1 year in the firm.
A company is merely a collection of people who are coming together to create value. Most aspects of a company are driven by decisions and are a choice. There is limited scope of God or fate taking the wheel because there are a lot of controllable factors that can change the course of a business.
Regardless of the strategies OYO comes up with, it is going to take an enormous amount of time to materialize them to their fullest effectiveness. This is because the people who are to carry out the ground level implementation are in fact clueless. It’s a business that is operating through playbooks and templates. This is exactly why if you were to call up the customer support and rant about the mattress not being clean or about feeling unsafe in the facility, you would get a standard response of them being sorry about the inconvenience caused, the false assurance of action being taken and then ultimately no action being taken altogether.
The people in the company don’t know what they don’t know because their playbook doesn’t suggest otherwise.
On this note, let me narrate an incident that happened with Jack Welch. General Electric had just introduced the Work-Outs program. It’s a program that was introduced across its manufacturing facilities to boost productivity by encouraging ideas from the workers. Thousands of such sessions began taking place across facilities until it ultimately become the way of life at the company. From refrigerator plants to jet engine facilities, workers were pro-active in suggesting ways of cutting costs, saving time, boosting morale and what not. On one particular occasion, a middle-aged worker came forward and spoke for thousands of others when he told Jack Welch, “For twenty-five years, you paid for my hands when you could have had my brain as well — for nothing.”
There are enough public records of current and former employees of OYO expressing their disbelief about what OYO is like from the inside. It is imperative to know that a company is only as good as the people who are running it on an everyday basis. A highly competitive work environment with neither a positive culture nor a clue, is bound to create friction in the overall process of conducting great business.
OYO’s rapid expansion is concerning. It’s not about aiming to become the world’s largest branded hotel chain but that this rapid expansion has brought with it two other titles — largest hotel chain in India and 2nd largest in China. Making a nation-wide presence in two of the most culturally sensitive markets that are also characterized by their strong competitive economies, complicated regulatory systems, unique consumer behavior and contradictions, is not simple to say the least. Dominating these markets within hardly any time and defying the rules of any conventional growth story in these 2 Asian economies is no joke. With current aims of adding about close to 100,000 rooms every 30 days, OYO is putting a lot on the line to achieve a vanity metric.
7/7. CONCLUSION
The combination of a very strong top-level culture, a self-justified need to stretch beyond means and the lack of a supporting system has created the problems for OYO that we speak of today. The company is currently amidst a firing spree, is shutting down hotels and is also planning investment cuts across its ancillary businesses for operational efficiency and profitability.
Building no business is easy but recent businesses are mistaking excessive capital and deep discounting to be a strategy which is a thriller waiting to unfold into a tragedy. The existence of bottomless capital makes one believe that they are climbing the ladder and scaling new heights. It’s a different story however that their ladder might be leaning against the wrong wall.
OYO has done plenty to encourage budding entrepreneurs and its journey from a business story to a possible business lesson has captivated the interest of every stakeholder in the system. There is a lot to learn from, give credit to and take after the ethos of OYO and the experiences of Ritesh Agarwal. However, while everybody sees OYO to be a lesson on poor strategy and execution, to me it is a lesson on top level executive culture. It’s a result of three strong personalities catalyzing the learnings and ideologies of one another into what most believe to be a beautiful mess. With this regard, OYO either knows exactly what it is doing and is just coming from a different conscious, or it is in fact a story of another young entrepreneur having lost his mind.
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