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OYO’s $807m cash injection is only a temporary fix to bigger problems

Under the aegis of Softbank’s Vision Fund, the Indian budget hotel chain has quickly expanded into China and Europe. But the startup cannot outrun poor business practices that have left customers dissatisfied and investors skittish.

Softbank India and RA Hospitality Holdings, owned by OYO founder Ritesh Agarwal, purchased $807 million worth of shares in OYO parent company Oravel Stays on March 17. The Vision Fund, helmed by Masayoshi Son, bought up nearly ten thousand shares while RA Holdings came into possession of another 5,699 according to filings seen by Entracker.  

“This is a key development for OYO Hotels & Homes and additional funds will help the business achieve its strategic objectives for 2020,” an OYO spokesperson said. 

The transaction is part of a funding round in the works since last year. OYO announced plans to raise $1.5 billion as part of series F funding in October 2019. 

With the latest share purchase, Softbank India now owns approximately 50.6% of OYO. But as Masayoshi Son renews his commitment to Agarwal’s company, other early investors have been eyeing the exit.  

Venture capital groups Sequoia Capital and Lightspeed Ventures collectively sold $1.5 billion in shares back to OYO’s founder in September 2019.

Some of the $807 million will likely be used to prop up OYO’s overextended China branch, which has been shedding employees since December and reporting significant losses. “Softbank is making the best out of the hand it’s been dealt,” Jayanth Kolla, founder of Indian consultancy Convergence Catalyst, told FinanceAsia

Founded by Agarwal in 2013, the New Delhi-based company provides a platform for small hotels, hostels and B&Bs to list rooms under the OYO brand umbrella, which is supposed to guarantee a higher standard of service and cleanliness. As a digital middleman, OYO takes a cut of every transaction between guests and hotel owners. 

Softbank’s latest purchase of $500 million worth of Oravel Stays shares echoes early efforts by Son to keep shared workspace startup WeWork afloat. The Japanese conglomerate has already pumped more than $1.5 billion into OYO, according to Skift Research. 

“Will OYO become another albatross around the neck of Softbank? If they don’t address their operational policies and negative public sentiment, it could,” Kolla said. 

As the costs of OYO’s international forays mount, so too do complaints of unsanitary living conditions and poor customer service in the company’s country of origin. The company has been accused of charging up to 40% of the transaction in fees, while Twitter is littered with claims of unresolved refunds owed to customers. 

This is the price of breakneck expansion for the startup, which claims to be the “world’s fastest growing hotel chain” with more than 43,00 hotels and 50,00 vacation homes on offer. 

“The only things going for OYO are the scale and the brand,” Kolla noted. Both appear to be crumbling, and nowhere is this more apparent than China. 

A losing battle abroad

China is a far bigger market than India; a highly lucrative fact for a company that depends on scale and expansion to maintain its large, and some would say unmerited, $10 billion valuation. 

The going has not been easy. After venturing into the Chinese market last year, the company recorded losses of $335 million in the 2019 fiscal year, a six-fold increase from roughly $52 million the year before, according to an annual report released last month. 

Now barely a year after starting, OYO’s footprint in China is quickly receding. Agarwal called 2019 a “year of learning” in a New Year’s note to staff, a show of contrition that came too late for the 72% of OYO China employees who have reportedly been laid off in the past several months. More than 9,000 people have left the startup’s Chinese branch, among them five senior executives including the COO. 

It’s a far cry from the confidence expressed by OYO China managers less than a year ago. “There are about 40 million to 50 million hotel rooms in China. That means we have only 1% of the China market,” FinanceAsia reported Li Wei, founding partner of OYO China, saying in June last year. 

China’s accommodation sector is tough to crack and brimming with already established competitors including budget hotel chains 7days Inn and Huazhu Group.  

Things will only be getting worse for OYO’s Chinese operations in the short term. Already worn thin by unsustainable subsidies to lure hoteliers to the brand, the COVID-19 global pandemic will severely dampen tourism for the foreseeable future. 

The company that last year said it hoped to become the world’s largest hotel chain by 2023. But for the health of operations in other regions, amputating its China arm may be the only way forward. 

¬ Haymarket Media Limited. All rights reserved.
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