A Deep Dive into OYO 2019: The World’s Fastest Growing Hotel Chain

by Seth Borko + Skift Team - Oct 2019

Skift Research Take

Oyo promises a new type of hotel company. It’s an asset-light brand that seeks to connect the global long tail of mom-and-pop hotels through its tech and distribution platform. But can it live up to the hype? Skift Research dives deep into Oyo’s business strategy and financial performance.

Report Overview

We might suggest that Oyo Hotels and Homes is a contender for the most exciting company in hospitality today. If reaching a million rooms and a ten-billion-dollar valuation in just six years doesn’t make you sit up and take notice, then what will?

Oyo is a topic of conversation and controversy in hospitality, tech, and media circles. And much confusion over Oyo and its current business model exists.

In response, we wanted to publish the definitive look into how Oyo operates. To take apart its business model and to figure out what makes the company tick and how it makes (or doesn’t make) money.

Part of the challenge is that Oyo doesn’t look cleanly like any one thing. So how you view it depends on where you sit. Those with a background in distribution might see some similarities to online travel agencies. Those in the tech world will see that it offers a software platform, and of course note that it is backed by the prominent SoftBank Vision Fund. And in the hotel world, Oyo franchises or manages thousands of properties.

So, what is Oyo today: a tech company, an online booking site, or a hotel company? A slight mix of all to be sure, and as such we investigate all three aspects of Oyo’s corporate makeup in this report.

We supplement that qualitative look with a quantitative look into Oyo’s financial performance, geographic expansion, as well as how Oyo stacks up to its global peers in hospitality. We believe that this report presents the most accurate, consistent, and complete look into Oyo’s income statements and key performance indicators available today.

To do this, Skift Research sourced and reviewed hundreds of documents from Oyo dating back to 2012, including its internal audited financial statements, articles of incorporation, fundraising documents, marketing and operational agreements, and franchise disclosure documents. We also collected property- and room-level data for all of the publicly viewable listings on Oyorooms.com, giving us a dataset of 21,000 properties and 380,000 rooms in 20 countries. We’ve combined these resources with Oyo’s public releases and press statement as well as with additional desk research.

The result is that we have pieced together what we believe to be the most thorough look yet into how Oyo runs its business.

What You'll Learn From This Report

  • An in-depth analysis of Oyo’s hospitality, distribution, and tech strategies
  • Oyo financials and KPIs including room nights, gross bookings, revenue, and profits, FY2016-FY2020E
  • Oyo’s geographic mix and how its footprint compares with other chains
  • Oyo’s capitalization table, money raised, and valuation
  • Obstacles that threaten to derail Oyo’s growth

The Origin and Evolution of Oyo

Oyo Homes and Hotels is one of the fastest growing hospitality companies in the world, offering more than a million rooms, according to the latest releases by the company. Oyo says it is the largest hotel chain in both India and Southeast Asia and the second largest in China. It has achieved these milestones in only about six years, an impressively short span of time.

First officially incorporated as Oravel Stays (Oyo’s legal name is still officially Oravel Stays Private Limited) in February 2012, the story of Oyo begins in earnest in May 2013. That’s when then 19-year-old founder Ritesh Agarwal won the Thiel Fellowship, which encourages would-be startup founders to skip college and pursue entrepreneurship.

Agarwal had identified a major hospitality pain point in India. A growing wave of Indians, primarily millennials, were eager to travel and explore their own country and needed to stay within their budgets. But the challenge for these travelers was how to pick where to stay from among hundreds of unbranded mom-and-pop budget hotels in any given city. Standards of hygiene and service among these properties can vary dramatically, ranging to downright stomach-turning in the most dramatic cases. And few, even of the highest standards, could offer anything in the way of a modern online booking experience. Agarwal’s plan was simple: guarantee basic amenities — air conditioning, clean linens, a sanitary washroom, and free Wi-Fi — at a low price, and make those rooms available to easily book online. The concept caught on with India’s rising middle class.

Oyo has remained focused on this core offering ever since, but its business model has shifted significantly over time. The initial Oravel was essentially an online hotel room aggregator and distributor with a branded twist. It would purchase wholesale blocks of rooms at a given hotel (say, 10 rooms at a 30 room property) which met certain room standards and redistribute those rooms on its own platform.

But Oyo struggled with this model. Without control over the entire hotel operation, it was a challenge to maintain property standards. Hotel owners had no reason to help market Oyo’s rooms given that those rooms were already spoken for by Oyo’s pre-purchase, as far as they were concerned it was Oyo’s sole job to sell them. Worse in fact, owners were incentivized the opposite way, to compete against Oyo for inventory within the same property. Knowing that those 10 Oyo rooms were guaranteed as sold, in practice, gave property owners a subsidy with which to promote their remaining 20 unsold rooms. Reportedly, some hotel owners would even go so far as to rate match and re-book Oyo customers into non-Oyo rooms when they came to check into the property, effectively double dipping at Oyo’s expense.

These difficulties, coupled with aggressive minimum guarantees, meant that Oyo netted a negative take rate — it on average lost money on every room it sold. So, starting in late 2016 it began shifting to what it called “2.0 properties,” where Oyo controlled 100% of the property’s inventory. Going forward, it would have exclusivity over every room in a given property, strictly enforce its brand standards through regular audits, and dictate the distribution and marketing terms of its rooms. Oyo was converting itself to an asset-light franchising company. It’s a model that hoteliers operating under franchise agreements with Marriott, Accor, and others across the world will quickly recognize.

By July 2017, Oyo had 30,000 rooms at 2.0 properties and claimed 2.0 made up 80% of revenue in September 2017. By the end of 2018, Oyo had completed its move to be a 100% leased and franchised hotel chain.

Current Business Model

We find confusion over Oyo and its current business model persists today. That’s partially because of Oyo’s online travel agency-like early business model. It’s also a result of raising billions of venture capital, making the company a topic of conversation in the tech community. So, what is Oyo today: a tech company, an online booking site, or a hotel company?

Well, a slight mix of all three to be sure, though not in equal parts. Oyo is first and foremost a hotel company. A hotel company, mind you, that sports a homegrown property management system. And a hotel company with a strong first-party distribution channel, worthy of envy from many a brand. But a hotel company at its core, nonetheless.

The idea is that Oyo helps renovate a property to new standards (hospitality) and then plugs the property into its marketing and distribution channels (distribution). This is compounded with value prices, governed by revenue management tools (technology).

We investigate all three aspects of Oyo’s corporate makeup below.


Oyo the Hospitality Company

The core promise Oyo makes to consumers as a hotel brand is quality and affordable rooms. Its first product and the one it is best known for is Oyo Rooms, sometimes called Oyo Hotels, its budget hotel offering. But as the company has grown, it has expanded to pursue a multi-branded strategy.

All of Oyo’s Brands, Explained

This multi-brand strategy lets Oyo expand its addressable market beyond budget, into, for example midscale offerings. It also puts Oyo in a position to deepen its relationship with existing clients across different modes of travel such as when they travel for business rather than for leisure.

Oyo has also expanded its portfolio to include apartments and vacation homes, following a company mandate to grow beyond offering traditional accommodations.

Below we explain all of Oyo’s brands with their respective global footprints, the company’s official positioning, and our own Skift take. We also delve into how Oyo signs up new hoteliers and what those property owners pay to be a part of Oyo’s brand. We should note, given how fast Oyo can evolve, all of this is our understanding of the brand as of October 2019.

Traditional Hospitality

OYO Hotels (Formerly OYO Rooms)

Global Footprint: The core brand, available markets all of Oyo’s global markets. We estimate 15,000+ properties.
Oyo Take: “Oyo Hotels (earlier known as Oyo Rooms) offer super affordable stays at the best locations while assuring quality and the amenities that matter.”
Skift Take: These are your basic Oyo hotel rooms, the ones that started it all. Budget accommodations but that promise to offer much better Wi-Fi and aesthetically pleasing design. While they may vary from country to country, a number of the existing U.S. hotels in Oyo’s portfolio, as an example, were formerly branded by Motel 6 and Howard Johnson.
OYO Townhouse

Global Footprint: 150+ locations in India, UK, and the U.S.
Oyo Take: “The neighborhood hotel, in the midscale segment targeted at millennial travelers aspiring to premium economy accommodations.”
Skift Take: Townhouse is Oyo’s take on a lifestyle hotel, which has become very popular with both legacy hotel operators and industry newcomers as a way to attract younger travelers. The brand was handpicked, along with Oyo Hotels, as the focal point of its $300 million U.S. expansion this summer.
Capital O

Global Footprint: India, Southeast Asia, the Middle East, and Latin America. We estimate 800+ properties.
Oyo Take: “The perfect offering for the new-age travelers with the functionalities that they look for when it comes to business & leisure stays. These premium hotels are located in prime locations and specially curated to deliver Oyo’s quality-assured experience at an affordable price.”
Skift Take: Launched in June 2018, Capital O is a premium offering for business travelers, launched as part of Oyo’s push to capture more corporate accounts. This is by our count Oyo’s second largest brand as the company has made capturing business travel a priority. It is also, after Oyo Hotels (Oyo Rooms), the brand with the second most international locations, speaking to the global business travel landscape.
SilverKey

Global Footprint: India. We estimate 150+ properties at current, expanding as part of plan to add 400 this year.
Oyo Take: “Launched in April 2018, SilverKey caters to the needs of the corporate traveler undertaking business trips for a short or long duration. With SilverKey, we are providing executive furnished accommodation to corporates for their personnel stay. Located in the heart of business hubs and equipped with spacious rooms, upscale interiors, meals, gym, and dining area to cater to all the requirements of business travelers.”
Skift Take: Oyo’s executive stay product, SilverKey is for the modern corporate traveler that dreads going from one hotel to another. Instead, the goal is to make business travelers feel like they are at home and tap into emotions they may feel when staying at a vacation home or Airbnb. In April of this year, Oyo announced expansion plans for this brand to be in 19 cities by the end of 2019, up from the current 10, and to add 400 properties and 8000+ rooms.
Palette Resorts

Global Footprint: India. We estimate 150+ properties
Oyo Take: “Palette Resorts offers the perfectly curated staycation for those in search of an intuitive experience at competitive prices, an upper-end leisure resorts category.”
Skift Take: Another of Oyo’s newer brands, launched in August 2018, Palette Resorts, is the company’s first foray into the upscale hotel category. The decision to make this leap made sense for a brand that appears to be casting a wide net in India to see what sticks before expanding globally. But the idea to go the resort route was peculiar.
Collection O

Global Footprint: India. We estimate 250+ properties.
Oyo Take: “The newest category under Oyo’s hotel portfolio that caters to the requirements of discerning business travelers. The category offers bigger and spacious rooms with premium furnishing and linen, on-request laundry, unlimited breakfast, 24X7 in-room dining, high-speed WiFi, workstations in every room and Oyo-trained customer service. This brand is currently only available in India.”
Skift Take: Launched in March 2019, this mid-scale brand caters to corporate travelers. Oyo says it is seeing strong traction with business accounts, racking up stays from 300+ corporate brands. That said, we struggle to see much of a distinction in positioning between Collection O and Capital O. Oyo is experimenting with the idea of launching this brand wider, with experiments in Mexico and Indonesia.
Others
Travelers looking to book a stay with Oyo may notice brands, such as Flagship, Premium, and Spot On, that Oyo does not recognize as core brands. They are effectively slight variations on the Oyo Hotels core product either tweaked slightly more upscale (Flagship, Premium) or more budget (Spot On).

Alternative Accommodations

Oyo has been aggressively expanding into alternative accommodations. it started in late-2017 with the launch of its own short-term rental offering in India. But took its biggest step in that direction with its May 2019 purchase of @Leisure Group for $415 million. Tobias Wann, the former CEO of @Leisure group and now, the current CEO of Oyo Vacation Homes, says his business was a good match for Oyo across several fronts.

First, in principle, Wann says both Oyo and @Leisure share an intense focus on controlling an exclusive supply of accommodation inventory. He tells us that, “the one who owns the supply exclusively will be the one who will have a chance to significantly increase the impact in the vacation home industry.”

But supply acquisition in the short-term rental market is painstaking work and Wann, with Oyo’s backing, with has ambitious expansion plans. To grow the business, Oyo has committed to hiring 1,000 new employees in Europe by 2020. Many will go towards signing on new properties because Wann says that at the end of the day he needs “feet on the street” to expand in this fragmented and localized industry.

Secondly, Wann says that there are significant revenue synergies to be gained from this merger, pointing to the boost he sees coming from applying Oyo’s revenue management abilities to vacation rentals. He wants to be one of the first vacation home manager to apply this technology at scale. Wann tells us that Oyo vacation homes is taking, “the tactics, tools, behaviors that Oyo very successfully applies on the hotel side… and applying them on the home side now as well.”

Furthering this initiative was the thinking behind Oyo’s follow-up purchase of short-term rental revenue management software provider Danamica just last month. Wann says that even after a few months, revenue management gains are already showing up in his business and that, “the results are revenue growth that is North of everything that we’ve actually ever seen in this company [before].”

The goal at the end of the day, says Wann, is “to become the largest vacation rental company in the world.”
OYO Vacation Homes
Global Footprint: 46,000 fully managed homes and villas available in Europe (except the UK).
Oyo Take: “With the acquisition of Amsterdam based @Leisure Group, OYO will offer customers around the world access to beautiful fully managed holiday homes, spanning from Spain to Norway making OYO a world-leading holiday homes manager”
Skift Take: Oyo Vacation Homes is less a brand, and more of an internal company division that itself houses multiple sub-brands. This organization was formed to house the former @Leisure Group after its May 2019 acquisition. It manages more than 46,000 homes and villas under localized operations including Bellvilla, Dancenter, and others. Additionally, Oyo Vacation Homes operates a listing platform for short-term rentals under the Traum-Ferienwohnungen brand. Traum-Ferienwohnungen has 80,000-plus ad listings for vacation homes across Europe which Oyo does not manage.
OYO Home
Global Footprint: India, Malaysia, and the United Arab Emirates. We estimate 2,600+ homes and villas.
Oyo Take: “India’s maiden Home Management System that offers beautiful private homes in great locations are fully managed by Oyo and make a perfect choice for staycations.”
Skift Take: Not to be confused with Oyo Vacation Homes, this was Oyo’s initial, organic foray into the short-term rental business. Launched in September 2017 and still operated separately, these homes tend to skew more urban and more towards apartments than the @Leisure group inventory. Geography is the other primary differentiation with Oyo Homes in Asia rather than Europe.

Apartments and Lifestyle

OYO LIFE
Global Footprint: India and Japan
Oyo Take: “Targeted at millennials and young professionals in search of fully managed homes on long-term rentals, at affordable prices. Under this category, Oyo offers an end-to-end managed, comfortable, high-quality living experience that eliminates the hassles of finding, accessing and managing everyday housing.”
Skift Take: This is effectively a move into renting out fully-managed apartments. In a best case, this is a shift into an exciting new category that several other startups, both in the U.S. and elsewhere, are trying to crack. We see the potential, but it also is oddly reminiscent of fellow SoftBank-backed startup, WeWork’s move into WeLive, which hasn’t lived up to its potential, and may prove to be a distraction from the core offering.

Brand Standards: The Oyo Captain and 3C Audits

In May 2017, as part of its push to raise brand standards and the customer experience, Oyo created a new role that it calls the Oyo Captain. Despite its branded name, the job description places it somewhere more along the lines of a regional manager. A typical Captain is responsible for covering up to 200 or more rooms across several properties meaning that there are several assigned to most cities. The Captain is directly employed by Oyo and has two primary roles, one customer facing and one hotel owner facing.

For the customer role, these regional staff work much like concierges. Customers are able to communicate via text or phone with Captains through the Oyo app. They provide recommendations about where to visit and what to eat. In the case of complaints, the Captain is responsible for liaising with the property manager.

Arguably, more important is the Captain’s role in enforcing Oyo’s brand standards. In this role, they work much like an outsourced hotel general manager, and are responsible for reviewing the condition of hotel rooms and training staff.

Oyo regularly performs audits, in fact weekly or biweekly in many cases, of all its properties to ensure they meet its brand standards which are laid out in a policy that it calls “3C.” Each ‘C’ represents a category in a rubric along which each hotel is scored. The ‘Cs’ stand for: constant availability of rooms, guests are not to be denied check-ins or shifted to other properties; compatible rooms, rooms must comply with Oyo standards for cleanliness and hygiene; and customer reviews, negative and positive reviews are tracked and factored into the property’s performance.

Each screw up along these lines is assigned a point value based on the severity of the problem, which are summed at the end of the month, slightly offset by any 5-star customer feedback, to generate a final 3C score.

 

Exhibit 1: Oyo’s 3C audit: constant availability, compatible rooms, customer reviews

 

Think golf — the goal is for as low a 3C point total as possible. A score of three is par for the course, and anything at or below that level is a green light. As the point total builds, indicating persistent and/or compounding problems, the property will find itself deprioritized on Oyo’s site. This is not a direct cash penalty, but as properties will be less prominently displayed and marketed, there are indirect financial implications.

Keep messing up, with scores of 16 or above, and your hotel will no longer be sold on Oyo’s website. These hotels are sometimes fully delisted from Oyo but are often simply marked as sold out (careful though, as some properties also legitimately sell out). And since all properties now sign exclusive marketing deals with Oyo, the implication is an effective shut down of the entire business. This time-out period last for at least a month and properties are only to be reopened upon passing a new audit and remediating prior issues.

Hotel Supply Acquisition

Oyo takes an interesting twist on the classic hotel strategy to plant new flags. Oyo does not do any substantial new real estate development. Rather, it looks to onboard existing hotel owners, primarily in the budget and one- to two-star hotel space and convert them to Oyo properties.

Oyo’s pitch to win over new hoteliers can be quite convincing. One of its primary recruitment tools is to offer improvement capital, free cash that Oyo hands out to hotel owners to spend on bringing their properties up to Oyo standards.

The amount of improvement capital is negotiated one-off for each project and comes along with a property improvement plan, which details the steps required to meet Oyo standards. Oyo, in its U.S. franchise disclosure documents writes that, “we will calculate the amount of the improvement capital to be as close as possible to the estimated cost of implementing the PIP [property improvement plan]” But any overruns are the owner’s responsibility, and in other countries, Oyo may not be as generous. Oyo estimates that the average cost of conversion improvements in the U.S. will run up to $30,000. This then, is implicitly the improvement capital we expect it hands out in the U.S.

The other key incentive to convince hotel owners to sign up with Oyo is to offer minimum revenue guarantees. These are discussed further below.

Franchise vs. Management

Hotels owners can sign on with Oyo in two formats, and thus, Oyo revenues fall into two different segments: franchised properties and managed properties. Oyo primarily operates on a franchise model, what it refers to as self-operated businesses. But in calendar year 2016, it began offering hotel owners the ability to contract with Oyo to provide staff to manage properties. As of the end of the company’s 2018 fiscal year (March 2018), franchising, excluding China, made up 65% of corporate revenue (before corporate eliminations). That is down from 70% in fiscal 2017 (March 2017) as management revenue grew at a slightly faster pace than franchise sales.

 

Exhibit 2: Breaking down Oyo by franchised vs. managed revenue streams, sales mix

 

It should be noted that on an EBITDA basis, franchise operations are responsible for 94% of the company’s losses. That disproportionate contribution to profit losses relative to revenue is because the margins are currently far worse for the franchises than for managed properties, though neither segment is profitable. Both seem to be headed in the right direction, however.

 

Exhibit 3: Breaking down Oyo by franchised vs. managed revenue streams, EBITDA margins

 

Franchise Hotel Economics

Regardless of whether a hotel owner signs a franchise or management agreement, Oyo tends to walk away with, all in, between 20–30% of hotel revenue, split between a service fee and a platform fee. Let’s review the economics of their core franchise business in depth.

Service and Platform Fee

According to documents Skift has reviewed, we believe that a typical Oyo franchise contract in India sets a service fee, effectively a commission or take-rate, of 20–25% on overall property revenue above a pre-negotiated floor.

On top of that, it also charges a platform fee for access to its tech platform, including property and revenue management software, as well as for certain toiletries and other consumables. The platform fee was first introduced in December 2017 and appears to have been set at 2.5%; in September of 2019 it was raised to 5.5% or 6% depending on the contract signed.

In the U.S., rather than a 24% service fee for the flag and a 6% platform fee for the tech, the economics are split down the middle. The overall charge is still about 30% but in the U.S., Oyo’s franchise disclosure documents state that it charges a 15% royalty fee for the flag and a 15% “technology infrastructure and revenue management fee” for access to the platform.

The Minimum Revenue Guarantee

A major quirk in this payment structure is that Oyo will from time to time make guarantees to pay a property owner a minimum amount of revenue every month. This is negotiated on an individual basis, based on the property’s pre-existing operating economics. Oyo only earns its fee on revenue that comes in above this minimum target. The goal is to incentivize owners to sign up with the Oyo brand by reducing their downside risk. A new owner’s revenue cannot fall below what it already was earning (unless Oyo defaults) and they are only paying Oyo for incremental bookings that the brand can bring in by virtue of higher revenue per available room, or RevPAR (which will almost certainly be a function of higher occupancy, since Oyo loves to slash rates).

This is a great tactic to rapidly onboard new hotel properties, especially in a highly fragmented and competitive market like India. It’s a large part of the secret to Oyo’s rapid expansion from seemingly out of nowhere (the other ingredient is payments for hotel renovations mentioned above). But it shifts a huge financial liability onto Oyo’s shoulders and quickly becomes expensive, especially if the company is unable to live up to its promised top-line improvements. This has been a problem for Oyo, particularly before it had full operational and marketing control over all its inventory, and the company paid out $20 million on these minimum guarantees in fiscal 2016 while generating just $61 million in bookings. Because of those pesky floors, Oyo lost 29 cents on every dollar it sold before factoring in operation costs like employee salaries.

Oyo learned from this lesson and has scaled back its guarantees dramatically. We believe that far fewer properties are still being offered generous guarantees (all of the contracts we reviewed had a floor of $0) and the company now insists on exclusive inventory and strictly enforces its brand standards so that it is not paying out floors on sub-par inventory which sits outside of its control to fix.

We have since seen Oyo’s minimum guarantee payments level out at far more moderate levels, $6 million was paid out in fiscal 2018 (March 2018) on bookings of $274 million.

That said, we expect Oyo will have to boost guarantees once again to continue to drive growth. For instance, we understand that some hotel owners in the U.S. are being offered minimum guarantees as part of Oyo’s expansion strategy into that new market. Another major asterisk to this story is China. We have no visibility into the financial or operational performance of Oyo’s China subsidiary, but local media reports suggest that minimum revenue guarantees are a major part of its expansion strategy in that market as well.

What this tells us is that minimum guarantees are a major arrow in Oyo’s quiver that it employs when expanding into new markets. And as Oyo aggressively adds new geographies, we should see this line item expand. On the other hand, Oyo seems to be making more sensible guarantees these days and scaling back the floors it promises to new owners in territories where it is already well established.

As a result, we expect that overall, at least outside of China, net take rates will remain in positive territory going forward.

 

Exhibit 4: Oyo has dramatically cut back on minimum payments to stabilize its net take rate, at least in India and the rest of the world excluding China

 

Reimbursable Costs and other Fees

Oyo feels that complimentary breakfast meals are a much-desired perk that drive significant business amongst its Indian customer base. As such it pushes hard for its partner hotel owners to provide breakfast and will supply food and beverages to its franchisees. These, along with some operational supplies (e.g. linens, toiletries) are sold mostly at cost. In a similar manner to the accounting at Marriott and other franchise companies, Oyo recognizes sales of food and beverage as revenue but then will also expense a nearly identical charge. Thus, though food and beverage sales boost the top line, they have a de minimis impact on profits.

Oyo also charges cancellation fees and other penalty fees for both consumers and hotel owners. The company collected nearly $26 million in such fees, excluding China, through the calendar year ended December 31, 2018. While cancellation charges are not a majority of revenue, they are not insignificant to the company either and, as almost pure profit, can boost the bottom line.


Oyo the Distribution Company

Oyo is a hotel franchising and management company, that as we mentioned above, inclusive of all everything, charges hotel owners fees in the 20—30% range. Those fees are higher than what a typical franchise charges for a flag. Consider Marriott, which charges closer to 12% to affiliate, before tech charges such as for property and revenue management software. In fact, those Oyo charges feel a lot more like what an online travel agency would charge as commission. How does Oyo manage to charge OTA-like fees all-in once you combine royalties and its tech platform?

First-Party Distribution

Part of the answer lies in its strong first-party distribution strategy. We estimate that, outside of China, 94% of Oyo’s bookings came from first-party channels in fiscal 2018 (12-Months ended March 2018), the last year for which we have available data to review. That’s a stunning figure. Industry leading, too. For context, we estimate that in the U.S., Marriott may generate as much as 20% of its online leisure bookings from either Booking Holdings or Expedia Group. This means that for many independent hoteliers, Oyo effectively replaces online booking sites altogether. That means Oyo can act as both a flag and an OTA, and thereby lay claim to portions of a hotelier’s budget that were previously earmarked for travel agent commissions.

One tactic to drive direct bookings has been to focus on repeat customers. Oyo counts upwards of 790,000 advocates — its name for VIP customers that have stayed 5+ times in an Oyo in the last six months — and says that more than 65% of its revenue in 2018 came from repeat customers (repeating in any number, not necessarily 5+).

VIP Customers are attracted to Oyo’s low prices, which are dynamically managed by Oyo’s in-house revenue management technology to provide as low a price as possible that maximizes inventory. It also offers a wide selection of properties in many locations and, increasingly, across chain scales. That’s the carrot. The stick is that repeat customers are tracked in Oyo’s tech systems and hoteliers are penalized more than they would otherwise be under the ‘3C’ system for errors escalated by VIPs. The hope is this incentivizes local staff to pay extra attention to repeat guests.

Further, Oyo offers a loyalty program to promote repeat, direct bookings. The Wizard program is a paid subscription membership in three tiers (Indian consumers seem to be more open to paid loyalty as MakeMyTrip offers a similar program, MMT DoubleBlack). In exchange for upfront fees, members receive discounts, cashback, and/or upgrades on their Oyo stays. The company claims 1.5 million members as of June 2019, and says they are responsible for 25% of bookings. The fees are pretty sparse so far, and we don’t expect them to fuel an Amazon Prime-like flywheel anytime soon. The company earned just under $700,000 of Wizard income in calendar year 2018 (Ended December 2018).

Let’s be real though, every brand claims to offer exceptional customer service and great value. There must be more to it than that, right? We believe that a large piece of the Oyo’s recipe for customer acquisition comes from being savvy to the way their core customers, millennials, book their trips online.

First is mobile. We discuss this in greater detail in our tech section to follow, but Oyo prioritizes investment in mobile experience. Its consumer app has become an important source of first-party distribution with which Oyo claims it drives up to 40%+ of gross bookings. But it’s more than just a good mobile app.

Secondly, on the desktop side of things, we partnered with SimilarWeb to analyze the web traffic of Oyo and found it is industry leading in its search optimization. That is a marketing strategy by which Oyo optimizes its web presence so that it appears high in organic search results, as opposed to paid search positions.

Search Engine Optimization and Marketing Strategies

Globally, Oyorooms.com received 46.5% of its web traffic in September 2019 from organic search results. That is better than leading global hotels, like Marriott.com; ostensibly web-savvy online travel agents, like Booking.com; or similarly priced budget motels in the U.S., like Bestwestern.com.

It has the best organic search traffic out of any hospitality brand we surveyed with SimilarWeb.

Oyo didn’t have the best direct web traffic (e.g., customers navigating straight to Oyorooms.com) out of those same brands. In fact, it had the second worst, sourcing just 32.3% of its traffic directly. But it didn’t need it. Oyo’s search engine optimization (SEO) advantage is so great that it still came out on top as driving the highest share of unpaid traffic (i.e., organic search plus direct traffic) out of the eight brands SimilarWeb analyzed.

 

Exhibit 5: Oyo appears to derive a large web traffic advantage from its SEO efforts

 

Search engine optimization, unlike paid search advertising (PSA) , does not necessarily have a direct cost attached to it. But it certainly comes with overhead in the form of salaries for experienced staff. The same is true of mobile app development.

But Oyo is also willing to simply pay for direct customers. Don’t forget, that first-party bookings are not the same thing as free bookings. There is no travel agent commission to be paid, but customer acquisition still costs money in the form of marketing and retention costs, as well as customer support.

For instance, in fiscal 2018 (March 2018), Oyo spent $15 million on advertising and sales promotions and a further $6 million in customer support. Off an operational revenue base of $64 million, this means Oyo spent 32% of its sales that year on customer acquisition and retention. We expect that figure to grow in dollar terms, though it should fall slightly as a share of overall revenue in years to come.

 

Exhibit 6: First-party is not the same as free; marketing and support expenses at Oyo

 

Third-Party Distribution

The SimilarWeb data shows that Oyorooms.com derives a relatively small proportion of its traffic from paid search. Search advertising is a common customer acquisition tool in the U.S. and Europe, but homegrown Indian online travel agency MakeMyTrip prefers to invest its marketing dollars in discounts, coupons, and other promotions. From an accounting perspective, these costs are often booked in the same bucket as performance advertising and we have little way to directly separate them out in the case of Oyo. But based on the evidence, we suspect that Oyo follows in the footsteps of its Indian peer and spends most of its direct marketing budget on promotions. (We discuss MakeMyTrip’s preference for promotions over search engine marketing more in our deep dive on the company).

As Oyo expands geographically, its customer acquisition strategies will have to shift to suit local tastes. SimilarWeb broke out Oyo’s share of direct desktop web traffic by country of origin.

 

Exhibit 7: Oyo’s direct traffic share erodes, for the most part, as it expands further from home

 

Unsurprisingly, Oyo posts some of the strongest direct web traffic performance in its home market of India. There, direct visits to Oyorooms.com represented 33% of desktop web traffic in September 2019. Some countries do better. For instance, Malaysia saw an impressive 52% direct traffic share.

But for the most part, the farther Oyo expands from home, the harder it is for the company to attract direct traffic. In Indonesia direct traffic was a 26% share, in the U.S. 24%. The UK posted just 23% direct share.

As a result, we expect that Oyo will need to lean more heavily on online travel agencies and other forms of third-party distribution as it expands globally.

We have already seen third-party distribution capabilities begin to shape up at Oyo as it recently inked a slew of distribution agreements with Hotelbeds (April 2019), Ctrip (May 2019), and Meituan (June 2019) to name a few. It just launched a new online portal called SuperAgent to make it easier for offline travel agents to access to its inventory (agents earn a 10% commission). Oyo has also taken venture investments from potential future distribution partners such as Airbnb, Grab, and Didi Chuxing.

Therefore, we forecast that we are passing a high-water mark in Oyo’s first party booking share. We model for first party bookings as a share of the total to decline gently, to a still respectable 88%, by March 2020.

 

Exhibit 8: Skift Research estimated share of hotel bookings from first- or third-parties

 

We note this trend with slight trepidation. That’s because as long as Oyo can provide value like an OTA, it can claim the OTA’s share of fees as well as its own. The risk here is that if Oyo is forced to fall back on using third-party distribution then those extra fees stack on top of Oyo’s already pricy model and a good chunk of its value proposition falls apart.

Going from 94% direct distribution to 88% won’t be the undoing of Oyo, in our view. But it is a development that bears watching.


Oyo the Tech Company

Oyo says that technology is “deeply embedded in its DNA.” It views its tech platform as a key factor distinguishing it from other hotel brands and competitive advantage.

About half of Oyo’s 20–30% gross take rate ostensibly goes towards paying for access to its tech platform (in Indian contracts it is ~6%, in U.S. contracts it is 15%). Oyo says it runs an in-house tech stack of 20+ applications developed by 1,000 full-stack engineers. This is a wide-ranging ecosystem of apps that run the gamut from property management and revenue management to back-of-house operations and business management.

Oyo has also been experimenting with deploying a number of new, cutting-edge technologies. It is developing machine learning for dynamic pricing, supplemented by acquisitions in that space, and is deploying natural language processing to help with customer service requests. It is also piloting an internet of things experiment to see how customers and costs react to the installation of smart lights and smart locks (costs are cut through lower electricity bills and fewer staff via unassisted check-in).

All that said, no technology is without its bugs and Skift has heard a fair number of complaints about Oyo’s tech stack. We dive deeper into six of the core apps that form the heart of Oyo’s tech ecosystem below; further down we address owner concerns about the technology’s capabilities.

Oyo’s Core Apps, Explained

OYO OS
This is Oyo’s custom-built property management system. Available on both tablets and mobile phones, it is intended to be an all-in-one software used by front-desk staff, back-of-house staff, and management alike. The application is a core part of both Oyo’s value proposition to its hotel owners, offering them the ability to quickly modernize existing IT systems, as well as access to advanced revenue strategies. Oyo charges up to 15% of gross room revenue for this software.

The system handles standard property management fare such as processing incoming bookings and cancelations, check-in and check-out, room availability calendars, and guest profiles. The Oyo OS integrates as standard a wide range of functionalities that are more typically sold as premium upgrades, separate stand-alone software, or simply unavailable on other property management platforms. This includes revenue management software and promotional campaign management.

The app also serves as a central hub for back-end hotel management tasks such as housekeeping, food and beverage, procurement and inventory management, expense management, customer satisfaction reviews, and staff training.

Reflecting this goal of comprehensiveness, Oyo will often refer to its OS as a “hotel management system” rather than the more standard property management system.

 

Exhibit 9: The Oyo OS tablet home page, note the bottom navigation bar which highlights the wide range of tasks the app is responsible for conducting

CO-OYO
This is Oyo’s owner dashboard. This app provides a high-level view into the day-to-day operations of any given Oyo properties. The app allows an owner to track his/her personal Oyo profile and bank account details, daily property earnings, and details of his/her contract with Oyo.

In addition to these owner-specific functions, the app also provides an executive summary of important property-level performance indicators which are also available through Oyo OS including the current status of property bookings, hotel occupancy, room prices, and guest satisfaction.

 

Exhibit 10: The Co Oyo owners mobile app showing, clockwise from the top left: home page with summary data, owners earnings, property performance trends over time, and details of owners contract agreement with Oyo

OYO Keep
For use of managing and tracking housekeeping staff. The app allows managers to allocate tasks to cleaning staff. Each room has a set checklist of tasks to be performed and is allocated a specific time slot to be completed within. Housekeeping staff can then upload pictures of the clean room into the app to confirm that the room was cleaned to Oyo’s standards.

 

Exhibit 11: A room cleaning assignment tasked to housekeeping in the Oyo Keep app

OYO Optimus
The most visible part of Oyo’s business model is the makeover it performs on run-down budget properties to bring them up to Oyo’s quality standards. Given Oyo’s rapidly growing footprint, it requires a large transformation team dedicated to these renovations distributed across all of its markets.

Optimus is a project management app used by these transformation teams to understand and track the requirements of a hotel’s renovation. The app can be used by the team to get an overview of all in-progress renovations in a given market. At the property level, it can be used to generate cost estimates, assign tasks, track the pace of progress, and measure construction costs — importantly also splitting out costs by those born by the owner versus by Oyo. The app also generates an audit checklist that the transformation team must complete to certify the refreshed property is up to snuff.

 

Exhibit 12: The Oyo Optimus transformation mobile app showing, clockwise from the top left: ongoing projects in a region, the punch-list of audit items for a specific property, audit requirements for an individual room, expense tracking including the split of costs borne by Oyo

Krypton
Oyo does not just audit hotels upon their initial onboarding to the platform. Oyo employs teams of regional managers — in its corporate lingo ‘Oyo Captains’ — to most of its markets who are responsible for on-the-ground guest customer service requests and for managing local hotel relationships.

Part of the duties of these captains is to audit local properties and follow-up on poor guest experiences. The app works to identify the underlying patterns in customer behaviors and reviews to flag hot spots in need of a fix so Captains can intervene.

The app also provides overall market key indicators such as bookings, room rates, and occupancy, so that Captains can understand the performance of their markets.

 

Exhibit 13: The Oyo Krypton audit app showing local properties that need to be audited and a dashboard showing recent guest feedback

OYO (the Consumer App)
We’d be remiss if we didn’t mention the core consumer facing app itself. Used to book Oyo hotel rooms, per a company spokeswoman, the app has been downloaded over 25 million times across Android and iOS. We believe the consumer app drives over 40% of gross bookings at the company and is the only way to book an Oyo room in China.

Oyo has further launched a ‘Lite’ version of the app, with a storage size of less than 800 KB. This is crucial in many developing markets where consumers may not have a lot of extra memory on their phones. The app has a stripped down booking funnel as well, and is designed to work in low connectivity areas.

The company is also rolling out multilingual app offerings with Bahasa (commonly spoken in Indonesia and Malaysia), Vietnamese, Arabic, and Hindi currently available, in addition to English. Additional languages will be rolled out in the coming months in a phased manner.


Putting it All Together: Analyzing Oyo’s Growth and Financial Prospects

These three components of Oyo’s strategy should all reinforce each other — hospitality, distribution, and technology. In a perfect world, a hotel would be renovated to a modern Oyo standard, and plugged into the company’s powerful marketing and distribution pipeline. That distribution is supported by demand generating tech such as dynamic price management and the mobile app experience. Tech should also be supporting a smooth experience on the back end with managing reservations, finances, staff, and inventory.

The net result is that a spokesman for the company told Skift Research that Oyo properties see, on average, a boost in occupancy from 25% to 65% in less than three months. The company says it can generate consistent occupancies as high as 90%+ for top properties.

The world is not perfect though, and not every hotel owner or guest has such a positive experience. We address many of these concerns in upcoming sections. But regardless, one cannot deny that Oyo has so far succeeded in expanding its top line, if not its bottom line, by following this strategy. The numbers speak for themselves.

Room Nights

By putting together hospitality, distribution, and tech (along with ample venture capital), Oyo has seen exponential growth over the last few years. Oyo hosted about 91,000 room nights in its 2015 fiscal year (ended March 2015), based on our analysis of its filings, which grew to five million by fiscal 2017 (ended March 2017). Those all would have been in the Indian subcontinent.

Those are impressive growth numbers on their own, but its November 2017 expansion into China supercharged Oyo’s growth on another level. In the rest of the world, primarily India, Oyo doubled its room nights stayed to 10 million for fiscal 2018 (March 2018). In that same year, China did eight million room nights (NB: Oyo only operated in China for less than five months out of that year). We estimate that by fiscal 2019 (ended March 2019), Oyo China sold 31 million room nights in China, compared to 29 million in the rest of the world. We forecast that Oyo will sell 152 million room nights in fiscal 2020 (March 2020), of which 85 million may come from China.

 

Exhibit 14: The exponential growth of room nights sold by Oyo

 

Gross Bookings

A similar pattern has been playing out in Oyo’s realized value, the gross value of bookings generated across all its properties.

From a mere $2 million in fiscal 2015 (March 2015), Oyo’s gross bookings rose to $61 million and then $119 million in fiscal 2016 (March 2016) and 2017 (March 2017). Oyo’s afterburner kicked in with its expansion into China, unsurprising given the room nights data. In fiscal 2018 (March 2018) the company had reached $411 million in gross bookings.

We estimate that by the end of this last fiscal year in March 2019, Oyo generated $1.27 billion in gross bookings with 4 0% coming from China. We forecast that the company is on track to do $3.3 billion of gross bookings, with 45% from China in this coming year, fiscal 2020 (March 2020).

 

Exhibit 15: The rapid rise of realized value (gross bookings) sold by Oyo

 

Financial Model

Bookings and room nights have seen gangbusters growth, but at the end of the day what makes a sustainable business is how those reservations translate into revenues, and ultimately, profits.

We find that the best way to understand these dynamics within a business is to build a financial model representing the flow from bookings down to net income.

That effort was complicated because Oyo is a privately held company with no obligation to share its financial performance. However, Oyo is required to file documents with the Indian Ministry of Corporate Affairs which can be accessed by the public. And from time to time Oyo will attach audited financial statements to these filings.

Skift Research reviewed hundreds of government filings by Oyo dating back to 2012 in order to collect as many financial records as possible. We combined those documents with Oyo’s public statements and press reports to piece together what we believe to be the most accurate and consistent set of income statements possible running from FY2016–FY2018. Though these are still ultimately based on our analysis and best judgement, they are firmly rooted in historical filings and we label them as ‘actual’ results.

We then created a set of financial estimates, FY2019–FY2020, for which we did not have historical documents to review. The FY2019E income statement is based upon documents we reviewed for the calendar year ended December 31, 2018, three-quarters of which will line up with the 2019 fiscal year, ended March 31, 2019.

We also created a FY2020E income statement based on our own assumptions about how much growth we can expect from realized value, revenue, and expenses. Naturally, these numbers have the greatest amount of uncertainty. None of these numbers have been verified by the company. We welcome any and all feedback about our numbers and assumptions used.

There are caveats to these figures. The most important is that these figures exclude China. The Indian consolidated financial statements include Oyo’s Singaporean subsidiary, through which it operates its Southeast Asia, UK, and U.S. businesses amongst others. But the China subsidiary seems to be set up as an entirely separate entity and is unconsolidated in these reports. As such, China is effectively a black box to us. We know from public statements that China is contributing a large share of room nights and bookings, and we accordingly believe it also contributes quite a large operating loss. But ultimately the size of these figures is unknown to us. Please also note that as these figures are reported in U.S. dollars, but Oyo operates in many different currencies (primarily Indian rupees), that these figures are subject to exchange rate fluctuations, which can, in some years, be quite significant.

OK, on to the numbers.

We believe that Oyo recognized India plus rest of world ex-China revenue from operations of $18 million in fiscal 2017. We believe those sales grew 131% to $64 million in fiscal 2018 and 179% to $764 million in fiscal 2019. We expect that Oyo can maintain its impressive triple digit revenue growth rate to attain operating turnover of $348 million by fiscal year 2020.

We believe that Oyo rung up operating expenses of nearly $126 million in fiscal 2018 and that those costs rose 74% to $218 million in fiscal 2019. Looking forward, we forecast a further rise in expenses by 86% to $407 million.

Some of Oyo’s most expensive line items in fiscal 2018 were employee salaries, advertising and sales promotion, and customer support. We expect that all of these will only grow as the company continues to expand. We also expect that third-party commissions will rise in prominence, as per our earlier conversation around distribution.

Expenses have been growing at a rapid clip, though less so than revenue, leading to a slow closing of Oyo’s profitability gap.

We believe that Oyo generated an operating loss, as measured by earnings before interest, taxes, depreciation, and amortization (EBITDA), of $51 million in fiscal 2018, representing -69% of total revenue. We see that growing in absolute terms, though shrinking as a share of revenue, to a $59 million EBITDA loss in fiscal 2019, representing -37% of revenue. We model for losses to decline in both absolute terms and as a share of revenue in fiscal 2020. We end our forecast period expecting Oyo to post an EBITDA loss of $33 million, or -9% of revenue.

 

Exhibit 16: Skift Research’s estimated income statement for Oyo’s Indian and rest of world ex-China operations, in millions of U.S. dollars

 

 

Exhibit 17: Skift Research’s estimated income statement for Oyo’s Indian and rest of world ex-China operations, in common size terms as a share of total revenue

 

 

Exhibit 18: Skift Research’s estimated income statement for Oyo’s Indian and rest of world ex-China operations, year-on-year growth rates

 

Geographic Expansion

A key part of Oyo’s growth plan is to expand into new markets. Oyo now operates, by our count, in 21 different countries. And that number is growing.

We wanted to analyze how these plans were progressing, so we collected property- and room-level data for all of the publicly viewable listings on Oyorooms.com. This gave us a dataset of 21,000 properties and 380,000 rooms in 20 countries. As our technique relies upon public listings, it is possible that there were rooms we missed for any number of reasons and we cannot verify this with 100% accuracy. But our data ties very closely with geographic breakouts that Oyo has released, giving us confidence in our numbers.

However, we were not able to collect data on China. Oyo’s rooms in China are not available on its main website and can only be accessed through its Chinese mobile app. As such, we plugged in a China number based on Oyo’s most recently released room count and estimated a property count based on the typical property size in China.

We primarily rely on our own numbers in following sections for the granularity they provide and the sake of consistency.

 

Exhibit 19: Skift Research’s estimated geographic breakdown of Oyo properties; India has the greatest share

 

 

Exhibit 20: Skift Research’s estimated geographic breakdown of Oyo rooms; China has the greatest share

 

 

Exhibit 21: Skift Research’s estimated room count, property count, and property size be region. India has the smallest properties; the U.S. has the largest

 

Our analysis shows that the Indian subcontinent holds the greatest number of Oyo properties — nearly 18,000 properties, or 53% of the brand’s total. But Oyo’s Indian properties sport the fewest keys, on average. As a result, when we analyze the distribution of rooms, we find that the largest share of Oyo’s keys are in China.

India remains Oyo’s core market and is its main testbed for new product offerings. The company has grown by focusing on modern millennial customers, such as by promoting that its hotels allow unmarried couples to check into the same room (a major taboo in traditional Indian hospitality). The company began its multi-brand strategy in India and has been rolling out brands globally based on their performance there. Oyo has also begun to expand into the workspace marketplace in India with three co-working companies: Powerstation, Workflo, and Innov8.

Oyo operates in China as “OYO Jiudian” (Jiudian means “hotel” in Mandarin). In terms of room count, Oyo’s operations in China have surpassed India to become its largest market. Oyo has tried to localize its China operations, telling Skift Research that it, unlike many foreign companies in China, does not make it a requirement that their management staff be bilingual. Oyo argues that to require English would limit its talent pool and the company says only a tiny minority of its staff and partners in China speak English. As a result, Oyo is in 337+ Chinese cities and claims to be the second largest hotel group in the country.

Oyo’s third largest region is Southeast Asia, home to 5% of its global rooms. Oyo says it is in 160+ cities in Indonesia, the Philippines, Malaysia, Vietnam, and Thailand. Indonesia contributes the greatest share here, 30k+ rooms out of 50k+ total, by our count. Oyo tells us its goal is to have two million rooms in Southeast Asia by 2025.

All the rest of Oyo’s global expansion — much touted in the press — collectively account for fewer than 3% of keys. This means its success, or failure, is frankly less relevant to the company than those of us based in the U.S. might otherwise implicitly expect.

Oyo is expanding rapidly in the U.S. and has committed $300 million in investment spending towards that goal, presumably to be spent on improvement capital, minimum guarantees, and staff. Our analysis of Oyo web data shows 135 U.S. properties in 84 cities and 23 states.

Oyo has big ambitions for the U.S., literally. The average size of an Oyo is much greater in the U.S., at 58 keys per hotel, than anywhere else in the world. This reflects the already built dynamics of the U.S. hotel/motel market (Oyo only converts properties and does not do greenfield expansion). But it also reflects a purposeful strategy on Oyo’s part, exemplified by its recently announced purchase of the former Hooters Casino Hotel in Las Vegas. It will convert that property into its 657-room flagship U.S. hotel, the OYO Hotel & Casino.

In Europe, Oyo has primarily focused on the UK with 3,500+ rooms at 130+ properties across 25 cities. It is also building a presence in Spain, with 900+ rooms at 40+ properties. It is experimenting with other locations, such as Germany. And with Oyo’s acquisition of @Leisure Group, it now owns 125,000 vacation home rentals across the European continent (not counted in the above room analysis).

Oyo expanded into the United Arab Emirates in October 2018 and then to Saudi Arabia in February 2019. It has over 7,800+ rooms in the region at 225+ properties. The company says it has hosted over 225,000 guests in the UAE of which 54% were international visitors.

Oyo recently expanded into Latin America with the addition of 2,000+ rooms in both Brazil and Mexico. We estimate the company has over 125+ properties in the region.

Oyo is experimenting with even more new markets and looking to grow further within the regions that it already operates. An Oyo spokesperson said that it is, “looking at the largest 15–20 markets of the world which are characterized by fragmented inventory.” They said that when expanding into a new territory, Oyo’s goal is, “not just to capture a handsome market share but to be bigger than the top 3–4 chains combined. We have succeeded in executing this in India, China, and are on a similar path in Indonesia and other countries.”

Comparing Oyo to Other Global Hospitality Organizations

Now that we understand Oyo, how does it compare to other global hospitality organizations? We collected data on 10 other global hotel chains as well as three online travel agencies that we felt could be compared against Oyo to give a sense of perspective. All of the hotels and OTAs are publicly traded and so we accessed their latest room count, property count, and RevPAR as of Q2 2019, June 30, 2019 for most. Room revenue was estimated by annualizing Q2 RevPAR based on rooms available at the end of the quarter.

We collected the Oyo room and property data ourselves (methodology explained above) as of October 2019. The Oyo room revenue is derived from a blend of our FY2020 and FY2019 estimates to match the data of our room and property count. That means there is a discrepancy in the Oyo time frame analyzed compared to other brands of about three months, but we do not think it changes the overall signal contained in our dataset too much.

One takeaway that immediately jumps out is that Oyo is the second largest hotel company in the world by room count and the largest by property count. The company had previously, this summer, claimed to be the third largest in the world, but our data suggests it has since surpassed Hilton.

That said, our data clearly demonstrates the difference between hotel franchises and an online travel agency. Oyo still falls well short of the 22.7 million rooms that Booking.com can offer.

The differences in business model also quickly become apparent. Oyo runs hotels that are nothing like its global peers. The average Oyo property has 28 keys, the next closest is Choice Hotels whose typical property has 81 keys, more than three times as large. In this respect Oyo has more similarities to an OTA which tend to, on average, offer smaller properties online. Here we see the overlap of Oyo with OTAs: they both operate as platforms that intend to capture, and bring online, the long-tail of small hospitality businesses.

And that RevPAR! We estimate that Oyo generates just $8 per available room. Chinese hotel chain Huazhu comes the closest at a $30 RevPAR, unsurprising given the market overlap. The others are in a different ballpark altogether. We can already hear your complaint. Yes, it is unfair to compare RevPAR figures at brands that are primarily mid- to up-scale and based in the U.S. and Europe to a budget chain mainly based in India and China. True, but it dramatically demonstrates just how wide the gulf is between Oyo and traditional hospitality giants.

Combine room count with RevPAR and we get branded room revenue. In this figure we can balance out Oyo’s massive property reach with its tiny RevPAR model. Here, we see that Oyo’s scale is perhaps not as great as we initially thought. Here Oyo slides in nicely near the bottom of the brands we assembled, but respectably enough, not at the bottom.

That said, Oyo is nowhere near being the second largest hotel company in the world by room revenue, and won’t be any time soon. The average of these major global hotel brands generated $19 billion in room revenue. As a fun back-of-the-envelope thought exercise, to match that figure at its current prices Oyo would need 6.7 million rooms. Hey, maybe it will happen one day?

 

Exhibit 22: With Oyo emerging on the world stage, how does it stack up against other global hospitality companies?

 


Oyo’s Funding Rounds and Ownership

As we were drafting this report, Oyo made a splash by announcing plans to raise $1.5 billion in Series F financing at a whopping $10 billion valuation.

Concurrent with that financing, Founder and CEO Ritesh Agarwal announced plans to purchase $2 billion of Oyo stock, with most of the cash coming from bank loans secured by his preexisting, unencumbered share ownership. This move should nearly triple Agarwal’s current ownership stake in the company from 9% as of March 2019 to what we estimate will be a 26% stake once the deal closes.

Agarwal plans to purchase $700 million of new, primary Oyo shares as part of the $1.5 billion Series F with the remainder of the round provided for by existing investors SoftBank, Lightspeed Venture Partners, and Sequoia. The additional $1.3 billion that Agarwal plans to invest will be secondary shares repurchased from Sequoia and Lightspeed.

Thanks to a review of filings with the Indian government, Skift Research believes it has a good fix on the ownership stakes of Oyo investors as of the closing of its Series E in March of 2019. As of that date, SoftBank, through its Vision Fund, was the single largest investor of Oyo with a 47% stake. Venture investors as a class owned 85% of the company of which strategic corporate investments from the likes of Grab, Didi Chuxing, Airbnb, and Huazhu Hotels (formerly China Lodging Group) constituted an 8% stake. Management and employees owned the remainder.

Because Oyo’s latest financing round and Agarwal’s buyback have not been finalized yet, our numbers for ownership post-Series F are far more speculative, and based on current media reports. We believe that with these two transactions, Agarwal is the only party increasing his ownership stake in the Series F. In our view, it is most likely that SoftBank is participating primarily to prevent dilution; in effect, treading water. Early investors Sequoia and Lightspeed are taking some chips off the table (making them the only clear winners from this transaction) while all other shareholders are being slightly diluted.

 

Exhibit 23: Skift Research estimated ownership structure of Oyo, before and after Series F and buyback

 

If this round closes as anticipated, Oyo will have raised a cumulative $2.6+ billion dollars over the last six years. This speaks to Oyo’s— which is not yet cash flow profitable — growing need for cash. The August 2018 Series E set aside $600 million for Oyo’s then-brand-new expansion into China. The company’s geographic ambitions have only grown since then with an eye towards Europe, the U.S., Southeast Asia, and Latin America. These plans, you can be sure, will require significant capital.

 

Exhibit 24: Oyo’s demand for capital is growing over time

 

Let’s return to that eye-catching valuation. By our calculations, Oyo’s Series D in September 2017 valued the company at $600 million. Then every year since, like clockwork, its valuation has grown. In August 2018 its valuation tripled to $3.8 billion. And now in October 2019, it’s hit $10 billion.

 

Exhibit 25: Oyo’s $10 billion private valuation puts the company in rare air

 

Scrutiny of that number is justified. Softbank has been in every round since Oyo’s Series A and has led all of its later stages. That lets its Vision Fund dictate valuation on its own terms, especially in the later stage rounds. Agarwal’s buyback too, deserves a hard look, as he can effectively dictate his own valuation in these transactions, presuming he has the cash on hand for it (and $2 billion is a lot of cash). Both Softbank and Agarwal have clear motives to, and opportunities by which they can, push for as high a valuation as possible.

Skepticism about valuation notwithstanding, let’s take it at face value for just a moment. A $10 billion valuation makes Oyo, best we can judge, the second most richly valued VC-backed travel startup in the world, following Airbnb. It also makes it the second most valuable India-based startup after payment company Paytm. And one of only perhaps a dozen or so “deca-corns” (VC-backed startups with a valuation over $10 billion, i.e. 10x a ‘unicorn’) in the entire world.

That’s quite the impressive achievement. That valuation prices in massive expectations. But, that does not mean that the Oyo cannot live up to the challenge. After all, Oyo’s growth to date has exceeded all prior expectations.


Mounting Problems at Oyo: Speed Bumps or Existential Threats?

Oyo has not been without criticism. There is a rising volume of complaints against Oyo and while they do not yet seem to have had a major impact on the company’s growth story, we would be remiss if we did not address them.

We identified three concerns about Oyo that we want to tackle: 1) Growing dissatisfaction amongst owners and customers, 2) Whether its expansion into Western markets can scale as rapidly as in Asia, and 3) The complications implicit in Oyo’s large private valuation.

Growing pains at a company that has scaled as rapidly as Oyo are to be expected. The fundamental question that needs to be addressed is if these are just temporary speed bumps to be worked through, or if they represent a systemic challenge for the business, obstacles that represent existential threats.

Challenge: Owner Satisfaction

There is a growing body of journalism documenting complaints of hotel owners against Oyo. Complaints run the gamut, covering room rates that are too low, hidden fees, withholding of payments, lack of promised demand, and glitchy tech offerings.

For instance, Reuters spoke to 22 hoteliers in India and ran a story documenting a growing sense of discontent. Skift, speaking to Oyo owners in the U.S., found some of them were dissatisfied with Oyo’s technology and pricing strategy. Similar allegations have also arisen out of China.

These concerns were echoed most dramatically in a complaint by RKG Hospitalities made to the Competition Commission of India (CCI). The complaint primarily accused Oyo of illegal fees and financial penalties. Oyo called these claims baseless and they were in fact later dismissed by the court.

Based on our review of the documents, we would agree that it does not seem that Oyo violated any of the terms of its contracts. Rather, we would suggest the issue is one of poor communication and misaligned expectations.

For instance, the company vigorously denied allegations that Oyo charges financial penalties for poor customer experiences. And based on the contracts we have read; this is technically correct. But the complex scoring algorithm for its 3C audits was still confusing for us,even after multiple re-reads. And the penalty for poor audits, deprioritization or potentially even being shut off in the system, while not a direct financial fine, will certainly have indirect financial impacts on the business. We can easily sympathize with a small business owner who feels they are being financially penalized for failing an audit system they do not understand.

Oyo also maintains a “Hotel Revenue Assurance Policy” that is designed to prevent hoteliers from taking walk-in bookings outside of the Oyo system, and thereby avoiding Oyo commissions. Oyo says it conducts revenue audits and assesses penalty fines on owners that it believes are circumventing its service fees. This is a direct financial penalty, but justified, in our view to prevent owners from violating the terms of their contracts.

We also note that Oyo passes along commission costs charged by online and offline travel agents. This is standard practice, but Oyo’s royalty and tech fees are already quite expensive. This goes back to our earlier point about how Oyo’s value proposition is eroded the more it needs to rely on third parties. We suspect that many owners expected to pay no third-party travel agents commission and, though it is not a hidden fee, we sympathize with a frustrated owner stuck potentially paying a further 20% on top of Oyo’s base rates.

Oyo says these problems are one-offs and that the majority of its hotel owners are happy with the product. And the numbers do seem to support that claim. Afterall, it continues to rapidly expand and onboard hundreds of new properties and thousands of rooms. Further, Oyo says it has 99.5% owner retention rate in India and South Asia, though we are unable to verify those figures.

Admittedly, we are playing a bit of ‘both-sides-ism’ here. The bottom line for us is that we do not believe Oyo is acting fraudulently. But that is probably too narrow of a lens through which to view this problem. In a more practical sense, there are clearly real and building frustrations within Oyo’s hotel owner community.

Overall the picture we see is one of a young company scrambling to expand as quickly as possible. Policies change and new programs are rolled out rapidly, and owners are simply notified via an email that they are by default opted into. An aggressive business development team and flashy news stories overpromise as to what the on-the-ground experience of operating an Oyo will feel like. The company is reaching more towards third parties, leading to extra commission charges.

Recognizing the legitimacy of these complaints, in April of this year, Oyo rolled out a new program called the Oyo Partner Engagement Network (OPEN). It denies it was in response to complaints and instead says it was a proactive initiative. The goal of this is to improve Oyo’s relationship with its asset owners in India by making new promises including: transparent payment protocols (with 18% interest on delayed payments), financing assistance, multiple touch points to connect with corporate, and new tech innovation, among others. The program launched in India and will be expanded globally.

Owners are key constituents at any hospitality organization. Ultimately, poor owner satisfaction will slow Oyo’s ability to onboard new hotels and therefore, growth. The challenge is not insurmountable, but needs to be aggressively attacked.

Challenge: Customer Satisfaction

We believe that Oyo will need to continually fight to maintain its customer satisfaction ratings. There appears to be an undercurrent of guest difficulties building. As the company rapidly expands, we have heard complaints that not all properties are up to the same standards of cleanliness (ironically, this triggers a cycle of stricter audits, and leads to owner complaints such as those documented above).

We have also noted a growing problem with denied bookings at Oyo properties. Skift’s examination of online reviews, coupled with hotel owner conversations, and first-party channel checks, all indicate that denied check-ins appear to be a greater problem at Oyo than at other brands. The fact that denied check-ins have their own pillar under the 3C framework — constant availability — also says to us that this has been a persistent enough problem that the company needed to write formal documentation addressing it.

It’s not quite clear exactly what is causing this. We suspect it could be partially tech driven. A Queens, NY-based Oyo general manager told Skift that he has trouble locating reservations made through Expedia in the Oyo system and as a result, the property has been overbooked in the past. We have also observed issues with bookings made through HotelTonight. We suspect this problem is being compounded by Oyo’s aggressive revenue management system that cuts prices to maximize occupancy, but which, perhaps, can quickly tip to oversold if all of the inventory booked via OTAs is not properly captured on the platform. This represents another obstacle for Oyo if it continues to grow its reliance on third parties.

These challenges aside, we note that customers are voting with their feet and Oyo continues to see growth in room nights, a sure sign of guest value. It can also point to its large share of repeat visits and a net promoter score that rose from 40.4% in March 2017, to 48.2% in March 2018 and finally reached 50.2% in July 2018.

Challenge: Value Proposition in Western Markets

That being said, we also have some concerns about Oyo’s ability to continue to expand and offer compelling value to owners and customers in the U.S and much of Europe. The Indian and Chinese market may desperately have been lacking quality standards in the budget hotel market, but that is not necessarily the case in the U.S.

Since the 1950s, franchised motels have developed, enforced, and expanded budget-branded standards across America’s highways and byways. Perhaps none were more successful in that than Holiday Inn which grew from 2,107 rooms in 1956 to 314,127 by 1988, according to the book The Motel in America, by John A. Jakle, Keith A. Sculle, and Jefferson S. Rogers.

In many ways, Oyo strikes us as the Holiday Inn of Asia, rapidly growing on the back of latent consumer demand for quality, budget accommodations. But the challenge for Oyo is that Holiday Inn already exists in America, as do many other budget hotel brands.

As such, we are concerned that Oyo’s uptake in American, and other Western markets, will not happen as fast as it did in Asia. It will have to fight for a share of an already established market here, rather than pioneering a new market category as it did in other locations where they have landed thus far.

We are also concerned about Oyo’s franchise economics in the U.S. Oyo charges as much as 30% of gross room revenue all in, split between a 15% royalty fee for the flag and a 15% “technology infrastructure and revenue management fee.”

In contrast, budget brands in the U.S. charge royalty fees of between 4–6%. There are also other program, service, or marketing contribution fees that can add between 2–3%. But even including those, Oyo still tops our cost rankings.

 

Exhibit 26: Oyo is, at face value, more expensive to franchise than other U.S. budget hotels

 

Granted, there are more fees that franchise owners pay, including fees for loyalty programs, property management systems, revenue management systems and other miscellaneous charges. And all that is before including any third-party commissions. Therefore, we understand the appeal of Oyo’s flat-rate model as opposed to being nickel-and-dimed by a barrage of charges at a more conventional franchisor.

To demonstrate this, we shift from budget chains to looking at the major U.S. hotel companies. Research firm HVS, in its 2018 Hotel Franchise Fee Guide, attempts to estimate average costs of affiliation. It looks at many of these additional add-on fees, but excludes technology platform costs. It finds that the all-in affiliation at a Hyatt flag averages 11.6%, up to 13.3% at IHG. We are getting up there, yes, but still, all are below Oyo’s 15% royalty fee (which similarly excludes the tech platform aspect of costs).

 

Exhibit 27: All-in affiliation costs at major hotel companies

 

However, it you add technology platform charges at Marriott and other flags, which can be steep, as well as third-party commissions, we can see the path towards how Oyo could, all-in, wind up being cheaper than other flags.

But it means that in order to justify its fee, Oyo had better deliver on its promises to hotel owners. It really needs to boost not just occupancy, but RevPAR, and ultimately operating income, in order to justify its costs. That might be more challenging to do in the U.S., where the battle for the budget space is long running and fierce.


Conclusion

Will this mounting list of operational challenges spell the end of Oyo? It’s hard to say, but probably not, in our view.

Oyo is certainly experiencing growing pains of a high order; worse than its outward facing releases would like you to believe. But conversely, those that denounce the company as a fraud would seem to be taking it too far. To wit, Oyo says it has one million rooms globally; we checked to the best of our ability, and our numbers tied. Its publicly released fiscal year performance numbers match the income statements we reviewed, which were in turn signed off on by the company’s auditors.

So yes, Oyo can be aggressively rosy, but no, it’s not a house of cards.

Despite many well-documented and legitimate complaints by owners and customers, at the end of the day, we have to respect what the market is telling us. Thousands of hotel owners and millions of guests have signed on with Oyo — there must be something about the product that resonates. Oyo still loses gobs of cash, but it has in turn raised similarly massive amounts. And it is, with each passing year, narrowing its negative margin.

Perhaps then, Oyo’s greatest threat doesn’t come from the business of selling hotel rooms, but rather from its sky-high valuation. Keep in mind that while theoretically linked, the valuation of a company is not closely tied to its operational performance in the short-term, especially in private markets. It’s entirely possible to have a good company with a bad valuation. And in today’s world of seemingly limitless venture capital, we suspect that there are a lot of those going around.

Maybe that is what Oyo will turn out to be. It is clear to us that the hospitality formulation Ritesh Agarwal hit upon served a much-needed niche in the market and it will be hard to put the genie back in the bottle now. Oyo is verifiably growing and appears to be narrowing its operating losses.

The crucial next questions are: Can Oyo hit cash flow positive and can it continue to post the growth rates demanded of it by its enormous valuation? If both happen, Oyo will be a great success. If both fail to materialize, no cash and no forthcoming new capital to save the day, the results could be disastrous (see: WeWork). But that is not the most likely outcome in our view. We see a plausible scenario where Oyo hits the first goal but not the second. If Oyo becomes cash flow positive, or stems its cash burn to a manageable level, but fails to meet aggressive growth targets, the company could continue as a going concern but at a slower growth rate and lower valuation.

When Oyo first started out as a local Indian budget hotel chain few could have imagined it going up against Marriott. Yet here we are, six years later, and at least from a room count perspective, Oyo is nipping at the heels of the largest hospitality brand in the world. Now the world of hospitality needs to pay attention that that Indian budget hotel chain. We expect for many more changes, challenges, and innovations to come out of the Oyo story.