India's hotel unicorn

OYO: Indian startup looking to find success in China

The six-year old Indian startup aims to become the world’s largest hotel chain by partnering with small hotel operators. It is making a big bet in China.

Chinese and Indian companies have always found it hard to break into each other’s markets. Besides the long-standing political and economic rivalry between the two Asian superpowers, language barriers and cultural differences are also blamed for the minimal corporate interaction.

Smartphone maker Xiaomi is arguably the only Chinese firm that is able to find success in India, having become the country’s largest smartphone seller with its affordable products.

Meanwhile, there has been hardly any Indian company that is able to become a leading player in the Chinese market.

But that may be about to change.

OYO Rooms, commonly known as OYO, said late last month that it has become the second-largest hotel group in China by number of rooms. With over 450,000 rooms in more than 10,000 hotels, OYO’s China business is nearly three times that of its home market in India, where it has about 173,000 hotel rooms.

Such an achievement is even more bewildering given OYO only started its China business 18 months ago.

China is now the largest national market in OYO’s global portfolio, which includes Japan, Indonesia, Malaysia, UK and Saudi Arabia, among others.

Best recognised by its distinctive red and while logo, the six-year old Indian startup is now valued at about $5 billion, making it the country’s third-largest unicorn behind Flipkart and Paytm.

Since its inception, OYO has raised $1.7 billion from a star-studded list of financial backers including SoftBank, Didi Chuxing, Grab and Airbnb.

FORMULA OF SUCCESS

Similar to Airbnb, OYO is disrupting a global industry and poised to change the way budget hotel owners manage and sell their hotel rooms.

OYO is able to expand exponentially in China due to its unique strategy of partnering with small, unbranded hotels in second-to-third-tier cities.

Owners of these small hotels face a common list of challenges. Due to their lack of working capital, they often find it harder to improve the quality of their rooms or service or use technology for management and marketing purposes, or expand their reach by partnering with travel agencies and third-party service providers.

As a result, they are unable to raise room charges and increase their revenue to improve their service, thus creating a vicious cycle.

By joining the OYO franchise, hotel owners will be able to access its huge network of physical and online booking sites and benefit from the economies of scale that big hotel operators enjoy.

For instance, they will be able to buy supplies at a lower cost by leveraging on OYO’s large vendor network. They can also use OYO’s technology for online marketing, sales and payments, as well as providing staff training with OYO’s resources.

While it is similar to a standard franchise model, OYO does not charge any franchise fee and instead offers financial support for hotel owners to upgrade their hotels to meet its standards.

OYO requires its franchise hotels to have basic services like clean sheets, a reliable hot water supply and WiFi connectivity. In China, each franchise hotel gets about Rmb20,000 ($2,900) in subsidies.

OYO gets about 3% to 8% of the revenue earned by its franchise hotels, which is much lower than the average share of other Chinese hotel chains at about 20% to 25%. 

CHINA VENTURE

Similar to cash-burning Chinese startups like Ofo and Luckin Coffee, OYO is spending massively to attract budget hotels to join its franchise. It is not yet profitable but its founder believes the firm could find success by helping small hotels to improve their occupancy levels and increase their income.

"India has 4.3 million unbranded rooms and China has 35 million, but there is only a 25% occupancy rate. We want to change that," said Ritesh Agarwal, who founded OYO at the age of 19 and is one of Indian’s youngest leading entrepreneurs.

OYO founder Ritesh Agarwal is one of India's youngest entrepreneurs

OYO has shown signs of initial success with its foray into China. The firm said over 97% of its franchise hotels renewed their contracts, a sign that its business model is widely accepted by small hotel owners.

In late May, OYO said it entered into separate strategic partnerships with Ctrip and Meituan-Dianping. These could yet provide a massive revenue boost to OYO’s franchise hotels by enabling clients of the two leading online travel agencies to book OYO hotels online.

OYO is also in partnership with Ant Financial, operator of China’s biggest online payment platform, to develop smart payment and credit services.

THE CHALLENGES

Still, for all the positives, OYO appears now to be encountering a few adverse side-effects from its rapid expansion.

According to Chinese media reports, there has recently been an increasing number of complaints over the quality of rooms and service at OYO hotels. After all, it becomes a tough task for OYO to ensure the quality across its franchise hotels when it is adding one hotel to its portfolio every three hours.

Some hotel owners have also expressed some grievance over the fact that the bulk of the subsidies are spent on items that represent the OYO franchise, such as new hotel signs and supplies that bear the OYO logo. As a result, many of them do not enjoy the real benefits that OYO has promised, like room refurbishments and software upgrades.

OYO has more than 450,000 hotel rooms in China

There is also the question of how much additional capital is needed to support the expansion. OYO has said it aims to become the world’s largest hotel chain by adding 2.5 million rooms globally by 2023.

And in China’s highly-competitive budget hotel market, there is little doubt that OYO will increasingly face competition from traditional operators like Huazhu Group, Home Inn and 7Days Inn.

"Currently there are about 40 million to 50 million hotel rooms in China. That means we have only 1% of the China market," said Li Wei, founding partner of OYO China. "There is still a long way to go. We believe our vision can disrupt China’s hotel industry and lead to a brighter future for hotel operators.”

¬ Haymarket Media Limited. All rights reserved.