The startup that aims to be the largest hotel chain by 2023
Asia is undeniably a hotspot for Travel & Mobility Tech — whether you’re talking about technology, money, talent, or market and business model innovation. In the case of the Indian hotel startup OYO, everything seems to be in place for the company to disrupt the entire hospitality industry.
In contrast to the industry incumbents, OYO is a tech company in the business of hotel franchising. Within a couple of years, OYO has reached an unmatched level of direct bookings and reinvented hotel operations by leveraging its proprietary tech stack. The company is a pioneer in delivering standardized experiences, defined according to more than 30 criteria, including: free Wi-Fi, complimentary breakfast, flat-screen TVs, branded toiletries, quality linens, etc. As a result, the Asian budget traveler enjoys greater peace of mind, convenience and comfort.
While hotel group incumbents do not yet consider OYO a threat, the startup is pursuing a bold vision
“By 2023, we will be the world’s largest hotel chain. We want to convert broken, unbranded assets around the globe into better-quality living spaces,“ says founder and CEO Ritesh Agarwal.
The Indian hospitality startup exploits the concept of under-utilized inventory and has successfully created a market for franchise budget hotels. According to “Nikkei Asian Review”, the actual numbers in late 2018 were “230 cities and more than 8,500 hotels in India, 171 cities and 87,000 rooms in China, a 25 percent cut of every booking. With more than 150,000 heads resting on its pillows per night (…) and rooms running between $25 and $85, OYO could be bringing in as much as $1 million a day in revenue.”
While the world’s major hotel chains typically do not operate properties with fewer than 100 rooms, more than 90% of hotels fall under that category. Underdeveloped travel markets like India are highly fragmented with lots of small unbranded hotels, widely varying quality standards, and intransparent pricing. This infrastructure makes it nearly impossible for OTAs (such as Booking.com, Expedia etc.) to produce a broad inventory. This is especially true of the budget segment, which is crucial to serving the growing demand of the new wave of Asian travelers but considered unattractive for industry incumbents. Boston Consulting Group projects the Indian hotel sector to grow to $13bn by 2020 with budget and midscale hotels making up 52% of the market. OYO Rooms, moreover, is just one brand in the company’s growing portfolio.
The company’s sales pitch to hotel owners is simple: By joining the OYO chain, the room quality and service quality will improve, while prices will go down due to better efficiency. At the same time, the occupancy rate can be expected to increase from 25% to 70% within the first month. With room rates generally ranging from $25 to $85, OYO receives a franchise fee and a 25% share of revenue. Closing a deal with OYO only takes 10 days compared to an industry standard for hotel franchises of 10 to 11 months.
After the hotel’s rooms have been renovated (OYO employs over 700 civil and construction engineers), the owner can conveniently operate the hotel using a dedicated mobile app, which handles everything from inventory management to housekeeping. OYO’s offering is a quantum leap from analog hotel operations, as inefficiencies are improved through automation and a data-driven approach ensures business viability.
Currently, OYO is still not profitable and its breakneck growth is being fueled solely by venture capital. Founded seven years ago, the startup raised $1.58bn within only 5 years, making it just the second unicorn in India’s Travel & Mobility Tech sector — next to Olacabs, the MyTaxi of India.
Investors in the startup include not only venture capital powerhouses SoftBank Group, Sequoia Capital, or Lightspeed Ventures, but also Travel and Mobility Tech giants Didi Chuxing and Grab, both also backed by SoftBank Group. This reflects part of the latter’s strategic master plan: at a level so far unseen in venture capital, SoftBank-backed ventures invest in each other to drive synergies and promote mutual growth.
The infusion of capital will continue the ongoing expansion outside of India and China into West Asia (in collaboration with Grab), Saudi Arabia, and other markets, including Europe, starting with the UK. OYO opened its first US office in Dallas in February 2019.
Who is behind the company
The United States has special meaning for the now 25-year-old founder Ritesh Agarwal. Growing up in a business-family in India, he opened his first hotel business when he was just 19. While establishing his original business model, Agarwal spent a year in Silicon Valley on the prestigious Peter Thiel fellowship. After he returned to India in 2014 , OYO’s growth began to explode.
OYO is headquartered in Gurgaon, India. The startup employs around 10,000 people globally, including more than 700 software engineers, making it more of a tech company than a traditional hotel business.
The company grows with breakneck speed to pursue its vision. However, it remains to be seen whether it can use the same playbook devised for developing countries in markets like the US or Europe. Premature scaling and an underestimation of local differences can not only be costly (e.g. Airbnb), but even insurmountable (e.g. Uber). At first glance, the market structure in Europe and the US appears auspicious for allowing OYO to gain a foothold. Europe’s hotel market is comprised of 70% unbranded hotels, in the US hotel market it is 30%. On the other hand, it will be a challenge to raise travelers’ awareness and to lure them away from incumbent booking channels like Booking.com — a totally new field of competition for OYO.
What’s more, even though OYO pioneered this business model, it has already been imitated by several players in Asia, which are also fueled with venture capital. Notable startups include RedDoorz, Nida, Treebo, and ZEN Rooms, which Rocket Internet is betting on. The sustainability of this business model also remains an open question. It may fail as many other ventures have. Or it may become a textbook example for the disruption of an entire industry.
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