5/7/2020 Softbank-backed Oyo model under pressure in China | Financial Times

OYO Rooms
Softbank-backed Oyo model under pressure in China
Disputes with hoteliers come as investors and ex-staff point to wider problems at Chinese unit

Founder Ritesh Agarwal says Oyo is on track to be the world’s biggest hotel operator by 2023 ©Sara Hylton

Tom Hancock in Shanghai and Henny Sender in Hong Kong JANUARY 9 2020

Tensions between SoftBank-backed Oyo and hoteliers in China were highlighted

this week when a dozen operators descended on the Indian-start-up’s Shanghai
office to demand compensation for lost income, with some clashing with security
staff.

Prompted by its unconventional practice of offering hoteliers guaranteed incomes,

irrespective of guest numbers, the disputes point to what investors and former staff
say are wider problems with its business model, which is leading to huge losses in
China.

Billions of dollars in backing, including from its biggest investor SoftBank, has
helped fuel Oyo’s rapid expansion in China. It claims to have signed up 19,000
hotels — with 900,000 rooms — in 338 cities since 2017, making it the biggest
hotel chain in the country.

But Chinese hotel owners complain Oyo has cut the payments it had promised
when they signed up.

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5/7/2020 Softbank-backed Oyo model under pressure in China | Financial Times

The huge reach it claims in China helped justify Oyo’s $10bn valuation in its latest
funding round, double the previous valuation, in which its 26-year-old founder
Ritesh Agarwal put his own money into the company after pledging his shares as
collateral to Japanese financial groups. The money was then used to buy out the
Oyo stakes of two venture capital firms, Lightspeed Venture Partners and Sequoia
Capital’s India and Southeast Asian arm.

But given that this was a related-party

transaction, many investors question the
We are not going to be validity of that number, just as they
WeWork questioned WeWork’s $47bn valuation.
Sam Shih, chief operating officer in China Trading of the latter in the secondary
for Oyo market now suggests a valuation below
$8bn.

According to an Oyo filing in November, the company booked a net loss of $332m
on revenue of $900m in the year to March. It said it expected the China operation
to account for roughly 40 per cent of its losses in the second half of 2019.

Investment firms including Warburg Pincus, Sequoia Capital China and DST
Investment, all declined to invest in the China operations, say people with direct
knowledge of the matter, who cite numbers on the financial statements that they
claim made no sense.

Oyo denied it had sought investment from those groups, adding that it was not
currently seeking to raise capital.

It also rejected the WeWork comparison. “I spend a lot of time to make sure we will
not make the same mistakes as WeWork,” Sam Shih, chief operating officer in
China for Oyo, said at an event in Hong Kong last month. “We are not going to be
WeWork.”

Like WeWork, Oyo promises to disrupt a traditional bricks-and-mortar business

with a tech-influenced management strategy valuing revenue growth over
profitability.

Oyo, founded in 2013, says it is the world’s third-largest hotel chain, behind only
Marriott International and Hilton Worldwide. Mr Agarwal says the group is on
course to surpass its competitors by 2023.

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5/7/2020 Softbank-backed Oyo model under pressure in China | Financial Times

The company partners budget hotels to increase occupancy rates, offering

refurbishment and listing on its online booking platform. Typically, Oyo then
charges hoteliers a commission — often about 20 per cent — for each booking.

Its franchise model, with Oyo lending its brand and providing consumers with
reassurance about room standards, was a hit with Indian family-run outlets with
inconsistent standards and little prospect of growth.

But unlike India, where there are few established low-cost hotel groups, budget
chains have expanded rapidly in China since the late 1990s. That forced Oyo to
concentrate on the bottom of the Chinese hotel sector, with rooms often costing
less than Rmb100 ($14) a night.

In China it faces stiffer competition from online booking platforms such as

Meituan and Ctrip, which have hundreds of millions of users.

As a result, Chinese consumer interest in Oyo has been limited. Oyo’s app was
downloaded 880,000 times in the first three quarters of last year, according to
data provider App Annie. By contrast China’s top travel app, Ctrip, was
downloaded 12m times.

In order to prevent Meituan and Ctrip from delisting Oyo’s hotels, the India group
reached an agreement with them in 2019. Chinese media reported the deals were
worth Rmb400m ($57m) and Rmb200m respectively a year. Oyo declined to
comment.

Oyo has battled with a widespread perception among hoteliers in China that
joining its platform would do little to increase their revenues, according to a former
regional manager who left the company in July.

“The word got around hotel owners that

Oyo would just add a new sign to the front
Oyo interfered with my of your hotel and there weren’t many
pricing. This drove my benefits beyond that,” said the former
old customers away employee, who asked not to be identified.

Hotelier
“The emphasis was always on adding
rooms. The company was being pulled
ahead by the need to present growth to
investors,” he added. “There was not enough time to train hotel managers.”

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In June, Oyo switched from charging franchise fees to guaranteeing hoteliers a

monthly income. If a hotel’s booking revenue rose above that amount, Oyo and the
hotel operator would split it.

Analysts say this offers hotel owners limited incentives to improve their service.

“The challenge in any guarantee system is the potential for misalignment, because
the property owner doesn’t share operating risk,” said Mitch Presnick, the founder
of Super 8 Hotels China, which operates 1,100 budget hotels in the country.

Oyo, which planned to add another 3,000 hotels in China in the final quarter of
2019, says 9,000 hotels have adopted its new model. The switch has also allowed
Oyo to take more control over the hotels: it decides room prices and takes all
income from bookings made on other online platforms.

But that has led to discontent among hoteliers, who accuse Oyo of drastically
reducing room rates to improve occupancy. More than 100 hoteliers have accused
Oyo of adjusting its guaranteed payments without notification, and imposing
arbitrary fines.

One hotelier who signed up with Oyo in September had his prices cut from
Rmb88-Rmb138 to as low as Rmb5.9 a room. “Oyo interfered with my pricing,” he
said. “This drove my old customers away.”

Additional reporting by Wang Xueqiao in Shanghai and Benjamin Parkin in

Mumbai

Copyright The Financial Times Limited 2020. All rights reserved.

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