OYO – IS IT THE END OR NEW BEGINNING?

OYO ambitious plan to become global hotel superpower has taken a hit, a never seen crisis is faced by them which threatens to wipe out a large part of its business for the foreseeable future and impact its $10-billion valuation Corona Virus Outbreak has hit the travel and hospitality industry globally and it will take a long time for the industry to recover.

Earlier Masayoshi Son announced Ritesh Agarwal one of the star entrepreneurs backed by his SoftBank Group Corp and said the OYO group is going to overtake the biggest hotel chains in the world in the coming years.

As the SoftBank is still incurring huge loss on its investment due to the failed IPO (Initial Public Offering) of shared-office company WeWork. SoftBank booked for profits on OYO's rising valuation abut as of now they are forced to take losses on their investment. OYO valuation last year was at $10 billion. The situation is highly messy where Ritesh Agarwal  borrowed $2 billion to buy shares in his own company as the valuation rose, and Son personally guaranteed the loans from financial institutions, including Mizuho Financial Group Inc whereas if the valuation of OYO drops then the two of them will incur personal losses and banks may ask for more collateral. It has more than $1 billion of cash reserves which will keep the business running for next 36 months.

On 8 ^th of April, OYO’s founder Ritesh Agarwal said due to corona virus there is a drop of 50-60 percent in revenues and occupancy levels which has resulted in severe stress on the company’s balance sheet. OYO plan is to terminate the agreement with hotels that cannot generate a minimum revenue of $100,000 in a year, reducing the number of hotels within its umbrella and decreasing the size of employees which will bring down its monthly expenses down to around $25 million from the current levels of around $40 million. OYO followed aggressive expansion strategy last year to increase its footprint into Europe, Southeast Asia and the US apart from India and China which led to huge losses up to $335 million last year and they are now focusing on markets like India, Southeast Asia, Europe, China and the United State.

 OYO runs over 43,000 hotels with more than a million rooms apart from this they have 130,000 homes around the world under the umbrella of OYO Home, Belvilla, Danland, DanCenter, and Germany based Traum-Ferienwohnungen brands. It will keep sustaining its presence to Japan, Brazil, Mexico and the Middle East but at opportunity cost of leaving some parts of India where, it has shrunk from 550 cities to 400 cities currently.  OYO is now availing the services of renowned specialists like Alvarez & Marsal and Accenture Plc to suggest turnaround strategies the restructuring of its human resources is taken care by Aon Hewitt last year.

As stated earlier that the company was increasing its presence across geographies, many roles within the organisation were rapidly replaced by technology one of the side effects of scaling up too quickly, hence as a part of its restructuring exercise, the company has  cut about 15%-20% of its overall consolidated workforce in India (about 12,000 people); in China 30% of the 10,000 employees were downsized also reduced the non-discretionary staff of 6,000 by 50% in China and the current strength is of around 25,000 worldwide. India announced its lockdown from March 24 where interstate borders were closed and travel via flights, trains, and buses came to standstill, hence hotels across the country as well as globe is suffering.  

Earlier OYO founder announced that he is foregoing his own salary for a year, whereas the leadership team is taking pay cuts in the range of 25% - 50% while few employees were granted voluntary leave with limited benefits. In the financial year 2019 the company reported losses at the expense of expansion globally particularly China increased to 35 per cent of revenue in financial year 2019  to $335 million which is explained by the fact that in any new country, the revenue starts rising in from the second year onwards, making up for the costs incurred in the first year of operations. The global financial year 2018 loss was $52 million while India loss was $50 million in financial year 2018 and $83 million in financial year 2019. Its revenue for financial year 2019 increased to $951 million from $211 million in financial year 2018.

OYO was in trouble even before the covid-19 hit the China due to the fraudulent behaviour by few of its China employees and hotel partners apart from it many of hotel suppliers left the platform as the company was not fulfilling its promises. Budget travellers are increasingly opting for better chains such as Quanji  and Atour Hotel Group in China as they are offering more value-added services, but  in the short to medium term, China will be OYO’s best-looking market. Major recovery is seen from covid-19 in China and domestic tourism will see a revival with the upcoming summer months.

In the beginning OYO purchased rooms from hotels at fixed prices a profitable proposition for the hoteliers as they did not have to worry about occupancy but later OYO changed the model to a dynamic one wherein the control of the room rates and inventory rested with hotel owners and later on shifted to minimum guarantee price scheme wherein it took the entire inventory and the responsibility to fill the rooms due to this hotel were not allowed to feature their rooms on other booking platforms  said by Amitabh Mohapatra, He is the current president of  Guest House Welfare Association in Gurugram. Once oversupply of rooms was there, they were not able to achieve the target and did not gave the assured minimum amount and delayed payments they also started penalising hotel owners with hidden costs, excuses were given of poor service, convenience fees and data subscription fees, guest complaints.

Some of the other complaints faced by OYO are

1. OYO has been manipulating prices and artificially controlling demand with fake bookings.

2. They have been indulging in discounting of hotel room rates without the permission of owners

3. OYO has been charging below cost price and agreed rates where hotel owner is feeling cheated cases of illegal charging of hotel service fee from customer which were not passed on to the hotels

4.  Manipulation of the micro-market rates which aid in bringing more traffic on their platform forces hoteliers to reduce room rates

5. The rating system is erratic and one-sided

6. They are not prompt enough to move the money from their end to the partner end

OYO size has increased tremendously from the past and to grow and sustain int the market they require huge funds which will be met by SoftBank but they themselves are going through their own troubles.  The key investors of OYO are SoftBank, Lightspeed Venture Partners, Sequoia Capital, and Airbnb, while its smaller shareholders are Didi Chuxing, Grab, and Sunil Kant Munjal, chairman, Hero Enterprise. OYO’s asset-light model where it doesn’t own its properties and lean operations expenses where unlike hotels it doesn’t invest in front office, housekeeping, and F&B staff will help it survive this crisis.

List of OYO brands in India

1. OYO Rooms

2. Townhouse

3. Capital O

4. Collection O

5. Corporate and Executive hotel brand Silver Key

6. Palette Resorts

 Innov8 Gurugram-based co-working space provider was acquired for an estimated ₹180 crore to ₹200 crore last year. It also operates OYO Life, a long-term, co-living, fully managed, rental housing which target millennials and freshers joining new company. When compared with established hotel chains like Marriott International, Indian Hotels and others which have bigger balance sheets and generate profits OYO is more vulnerable. It has build itself as an internet start-up that leverages market power through network effect more the independent hotels are brought into platform it attracts more customers which means more business and in this way competition becomes irrelevant for rivals, then it raises larger capital which increases valuations and then the profits starts to generate by increasing prices and commissions.

 OYO has establishing itself as one of the biggest hotel chain in India it became the second-largest hotel chain in that country within 18 months after launching in late 2017, it has expanded to 79 other countries while buying hotel brands in  US and Netherlands,  entered China by breaking the  taboo about foreign companies entering there, OYO has raised $3 billion over the span of past four years and is spending on attracting and retaining hotels and customers, making technology investments and building a large workforce. It faces a prolonged battle to save its business from collapse. The company from the past months has moved fast to cut expenses and conserve cash. OYO is invoking force majeure clause with its hoteliers in India and refused to make fixed monthly payments now the payments to hotel supplier is made on the basis of customer bookings.

OYO is offering some of its properties as quarantine centres or for hosting medical workers and aircrew by reaching out to governments in India and other countries to. All the travel and hospitality firms along with OYO are hoping to get relief from the government. The future of OYO and similar companies in that space are waiting for announcement of favourable policies by the government.

OPPORTUNITY AVAILABLE

1. As businesses are heavily cutting costs a big opportunity for OYO post-Covid-19 world will be the availability of budget option

2. After months of lockdown millions of people will be out of their homes to enjoy themselves also the wedding industry, youngster parties and corporate function will look for venue bookings

OYO CHALLENGES

1. Formulating plans to survive the unprecedented situation

2. Ensure to retain its credibility with key stakeholders

3. Focus to increase the revenue and sustain its valuation

4. Maintaining the service standards consistently and focus on sustainable growth

5. To increase the demand which is falling due to travel restrictions across the globe and to prevent the further spread of Covid-19

6. Transparency with the hotel partners and fulfilling the promises made

GOOD MEASURES

1. They have launched CO - OYO app which will help hotel owners in such a way that they will be able to keep a tab on the bookings and entries made at the hotel reception

2. Initiative such as OYO Connect/OYO Direct/OYO Sambandh/OYO Globally, which will improve the relationship with existing customers as well as asset owners

3. The company had made cancellations easy for its customers alternatively, OYO was giving travellers credits that could be used to rebook later

4. Working on technologies and automation which will give them the edge over competitors

5. They are improving their brand image and cementing the relationships with US authorities and the healthcare community by offering its rooms for free to American medical and healthcare professionals fighting coronavirus

6. Training is being given to its business development officers in accounting and financial matters, apart from usual sales training.

7. Behavioural training is being offered for staff across departments Improving the code of conduct and soft-skills

 

Thus at the end of the article I will conclude that, Currently OYO has to contend with fallout of rapid expansion, conflict with partners, restructuring and a pandemic which is giving the company most difficult time, but as we know there is Silver lining to Dark clouds so we hope that OYO will come back bigger and stronger.