Has Oyo Rooms lost its Plot?
One of the most recognisable names from India’s startup successes, has had its fair share of days in the sun.
The disruptive nature of the core business: tech-based aggregation of budget hotel rooms across India, had put Oyo in the map soon after its inception in 2013.
With his idea kicking up quite a storm in both the tech and hotel markets, college dropout Riteish Agarwal had found himself being hailed as a wunderkind, showered with praises and supplied with astronomical investments to propel his ambitious plans for growth.
Even though Oyo’s rise to precarious heights was celebrated in its early days, with Agarwal and his team lapping up all the accolades and investments they could manage by riding on the back of this fast and furious growth engine, the recent times have given rise to concerns that Oyo maybe heading for somewhat of a train-wreck instead.
While the Oyo management continues to sugarcoat reality and move ahead on their seemingly upward trajectory, industry insiders have begun to question the wisdom of its business model. Add that to the plethora of legal troubles the celebrated unicorn has been facing of late, the shockingly high burn rate and worryingly small revenues; and you have a disaster in the works if somebody doesn’t pick up the pieces soon.
Moreover, heavy funding from Mayosashi Son’s SoftBank group and a similar strategy of reckless growth, have also prompted many to draw parallels between Oyo and WeWork. The We Company business WeWork was, like Oyo, a celebrated unicorn that was raising obscene amounts of investors’ money at unprecedented valuations only to find its IPO plans go bust. Even as the public market slammed WeWork for its authoritarian and questionable governance practices, the company saw its aggressive $47 billion valuation collapse to a mere $7.8 billion in a bailout negotiated by Mayosashi Son. Several observers have also commented on the similarities observed between the two founders themselves.
Both Agarwal and WeWork’s Neumann have faced criticism for trying to control too much of the business, giving rise to questions around adept delegation and consummate management.
Are these prophets of doom really correct in their assessment? and
Is everything really as rosy as Agarwal & Co. would like to have us believe?
Let’s have a look at some of the key issues plaguing Oyo’s business right now, and what the company is planning to do about it?
OYO’s Murky Payout Practices
Ever since Oyo switched its business model from merely aggregating budget hotel rooms to operating in a franchise format in 2015, complaints from hoteliers have mounted against the startup’s payment practices.
More and more hotel owners have come forward to accuse Oyo of failing to pay them their minimum guaranteed fee.
Others have alleged that Oyo’s high inventory levels have pushed down their occupancy rates, and the company has used that as an excuse for deducting substantial sums from their contractually binding payouts.
Hoteliers have also complained that they were blindsided by arbitrary changes in fees, heavy discounts and hidden charges that only show up on the bill at the end of a financial period.
In addition, they say, Oyo charges them massive amounts for bookings made from outside the platform, and deducts disproportionate amounts if customers complain about the services.
According to Amitabh Mohapatra, a hotelier and the president of Gurugram’s Guesthouse Welfare Association
“About 100 budget hotels from around the country have complained that Oyo is yet to pay them a total of almost INR 5 crores. Moreover, platform charges, audit charges and other arbitrary fees have resulted in their margins shrinking, often below profitable levels.”
For its part, Oyo has denied these charges, claiming that they are not falling behind on promised payouts, and the deductions and charges are aimed at maintaining high standards of accountability when it comes to their partner hotels.
While it is true that the company has contributed a lot to the Indian hotel scene, by training staff, improving amenities and providing visibility to small budget hotels, the ill effects of their practices on their partners’ bottom line can someday prove to be their downfall as angry hoteliers come calling
Frauds, Complaints & Legal Troubles
As disgruntled hotel owners decided to sue for their dues, Oyo founder Riteish Agarwal and six of his top managers found themselves at the receiving end of a cheating allegation.
The police came calling on the Oyo top brass for allegedly failing to pay about 35 lakh rupees (5 months’ worth of rent) to a hotelier in Bengaluru.
Even though the company has stated that its a defamatory complaint that will be met with strong legal action on their part, the reports of cheating and duping their partner hotels have only added to the bad press Oyo has been receiving of late.
Earlier this year, Oyo had also grappled with legal troubles as Agarwal was booked in another case of cheating and criminal breach of trust, based on the complaint filed by the owner of another property in Bengaluru. This hotelier alleged that Agarwal & Co. owed him about 1 crore rupees. Even as the Oyo PR team and legal staff kept singing paeans to their supposed commitment to integrity and transparency, the rising wrath of their partner hotels, especially those in the southern city of Bangalore, became woefully apparent.
As if all the flak it was getting from its hotel partners wasn’t enough, Oyo hit a fresh roadblock this year when a barrage of customer complaints found their culmination in a widely covered website.
This website, called oyo-ruined-my-anniversary.com was created by a dissatisfied customer from Chennai to narrate his harrowing experience of booking a room with OYO.
As the bad press mounted, more and more customers took to social media platforms, especially Twitter, to rant against the questionable practices of Oyo. Hashtags like #oyosucks became rather widespread, with customers calling out the unicorn for failing to provide the services it offered.
Many customers complained about being turned away by hotels despite confirmed (and often paid) bookings made from the app. Most of such hotels claimed to have cut ties with Oyo, even though the hotels continued to be listed on the official app. Many others also complained of sub-standard amenities, an inevitable problem of standardisation when a company grows too fast and owns way more inventory than it can possibly manage.
Matters especially came to a head when a 15 year old national-level shooter was electrocuted to death in a hotel room, or when a rape complaint surfaced against one hotel staff member.
With all these concerns doing the rounds online, on sites like Twitter and Quora, more and more customers are now shying away from trusting the Oyo brand. As a company built on the internet, Oyo may just find its grave being dug on the internet itself, if it’s not more careful about servicing customer complaints.
Backlash in the US & China
After Agarwal decided to aggressively expand beyond the borders of India, probably in a hallmark move for a SoftBank protégé, it set up shop in the USA, PRC, among other countries. Hoping to replicate their Indian business model, Oyo Hotels and Homes tied up with American hoteliers and once again tried to drive down prices.
Like in India, they faced severe backlash and protests from the American hotel owners as well.
Most of the grievances sounded rather similar to those aired by Indian hoteliers, and involved an official complaint to Skift, claiming that Oyo’s property management system had too many glitches, causing overbookings and subpar customer service.
Several American hotel owners also claimed that the high discounts often turned their hotels into havens for drug dealers and prostitutes, harming the overall reputation of their business and therefore their bottom line as well.
Not surprisingly, Oyo has run into similar troubles in China, yet another frontier for its ambitious expansion plans. Armed with a flushed war chest supplied by the likes of Asian investing majors like SoftBank, Didi and Grab, Oyo had made a grand foray into the Chinese market. Having initially won over many hoteliers with promises of better occupancy and a minimum guaranteed fee (regardless of bookings), it had on-boarded several budget hotels in the country. Soon, however, the Chinese partners of the company also began to complain of unpaid dues and losses incurred because of their tie-up with Oyo. Many hoteliers alleged that Oyo simply wanted to up its numbers without caring how the competition would hurt its existing partners. Besides, Oyo’s policy of branding of hotels under its name caused discrepancies with the properties’ registered names, leading them to be delisted from other hotel booking sites, which are often more lucrative than Oyo alone.
According to the Financial Times, 172 Chinese hoteliers have recently come together to write a letter alleging Oyo of “unclear bills and arbitrary deductions” and threatening legal action in the absence of prompt resolution.
Many partners are reportedly also planning to cut contractual ties with the company as well. Clearly, Oyo is facing formidable opposition on both Eastern and Western fronts.
Massive Losses & Scrutiny by CCI
For all the troubles that Oyo has taken for its almost hedonistic lust for growth, one would expect that they were at least making enough profits, if not for anything else, then at least for all the legal bills coming their way!
While the company claimed to have seen a threefold jump in revenue in the financial year 2017–18, its net loss rose from 355 crores to 360 crores. In 2018–19, the company posted a similar value for its net loss, with its revenue reportedly rising nearly fivefold.
Even as its purported revenue increased, it cannot be denied that it is still, over six years after its inception, a loss-making business. While Mayosashi Son’s backing may have given them the cash to burn, such a massive chunk of money being lost every year does not point to a very sustainable business.
To add to the already mounting workload of Oyo’s legal team, it also found itself under scrutiny by the Competition Commission of India (CCI) this year.
Accepting a complaint from the Federation of Hotel and Restaurant Associations of India (FHRAI), the CCI began a probe into supposedly confidential commercial agreements concluded between Oyo and Go-MMT (the merged entity including GoIbibo and MakeMyTrip) to give preferential treatment to Oyo properties and ensuring a predatory and dominant control over the market. Even though the CCI went on to rule that Oyo and Go-MMT operated in different markets and could not be said to have asserted market dominance, the controversy worsened the year for Oyo, already bogged down by far too many issues.
Concerns Surrounding its Asset Heavy Model
As Oyo has diversified far beyond its core business idea to include vacation homes, resorts and more, many have wondered if they are treading the same dangerous waters that had tripped up WeWork’s business prospects. Its focus on getting more and more inventory has made it harder for the company to ensure standardised amenities and services, while also flooding the market with properties than it needs. Its decision to stretch itself too thin by making heavy capital investments in multiple countries, has found few supporters in the business scene.
Clearly, Agarwal’s ambitious enterprise has been hit by Murphy’s Law,and unless he and his team go all out to arrest the decline in goodwill and financial haemorrhage, it will soon find itself at the crossroads of disaster.
Thankfully, however, the young founder of this mammoth undertaking, has apparently sat up and taken notice of his plans going awry.
Having finally addressed the press about the allegations against OYO (albeit with some more denial), he and his team have moved to step away from the all-encompassing influence of the SoftBank Group.
In November it announced that it was appointing Betsy Atkins, CEO and founder of Baja Corp., as an independent director on its board.
This is perhaps a sign that the unicorn is trying to revamp its governance and seeking alternative guidance besides the aggressive growth-mongering influence of Mayosashi Son.
Only time will tell if the once-celebrated and talked-about startup will manage to arrest the decline and revive their prospects, hopefully building a more solid, sustainable business in its wake.