The Motley Fool

OYO: Can this Indian Lodging Company Continue to Disrupt the Travel Industry?

On the way to a popular beach town in Goa, India, it’s hard not to notice the red and white billboards that say “Plane and simple”. These are from OYO, one of India’s most exciting unicorns, with a valuation of US$5 billion. Although it’s an invitation for travellers to stay in any of the hundreds of OYO properties in the area, investors in the startup seem to have taken it more seriously.

After all, since early 2015, investors have poured US$1.7 billion in funding into OYO. While the majority of that has come from the legendary US$100 billion Softbank Vision Fund, China’s Didi, Singapore’s Grab, and the US’s Airbnb have also extended cheques to OYO. On closer inspection, you can see that some of those are Softbank Vision Fund’s portfolio companies themselves.

Phenomenal growth

For a six-year old startup founded by then 19-year old Ritesh Agarwal, OYO has come a long way. OYO boasted over 450,000 rooms globally as of December 2018. Traditionally, OYO rebranded budget hotels to bring on to its own platform and helped these hotels improve customer experience. OYO charged certain fees to the hotels to use its booking platform and services. However, it also spent millions of dollars on getting people to use OYO by offering discounts and deals.

In terms of the number of rooms, China – where OYO launched in late 2017 – leads the pack with 271,000 rooms as of December 2018. That makes OYO China’s second-largest hotel chain, all within a year-and-a-half of its launch. Meanwhile, India, OYO’s home market, comes in second with 172,000 rooms under management.

That’s not all though. OYO is expanding rapidly in Southeast Asia and has also recently entered Japan in collaboration with Softbank. OYO has set itself an audacious goal of having an inventory of one million rooms by mid-2020, which will make it the largest hotel chain in the world by the number of rooms.

Dreaming big

Apart from hotel rooms, OYO is bracing itself for world domination in several other categories. It recently acquired a co-working brand in India and floated one of its own in the market. It is also expanding in the vacation homes category, traditionally Airbnb’s forte. It acquired Weddingz, India’s largest weddings logistics company, in August 2018. Student housing and F&B are some other categories it is actively looking to expand into.

While doing this, OYO has also enforced its leadership team by roping in Aditya Ghosh as the CEO of South Asia. Aditya previously led Indigo to be India’s biggest airline in 2019 – from merely a fringe player in 2008. For most startups, such growth comes at the cost of ever-mounting losses. OYO seems to have done a better job at mitigating this. In FY 2017-18, OYO’s revenues rose 250% while net losses remained steady. For FY 2018-19, revenues are expected to rise by a further 250%.

Devil is in the details

While all of it sounds too good to be true, there is a catch. OYO started as an aggregator of hotels but is now moving into the capital-intensive business model of long-leasing and upgrading properties. Being capital in nature, these investments don’t reflect accordingly on the profit and loss statement.

Moreover, OYO seems to be trying to do too many things at the same time. Building the leadership and foot soldier team to support such growth and ambitions is hard. This comes with a risk of losing focus. In chasing world domination, OYO is also hurting its former and current partners, the boutique hotels that OYO markets via its platform. These hotels have also started to unite to lobby against the unicorn.

Aiming to disrupt long term

Like most other Softbank investments, OYO is a long-term play. It’s racing ahead in its key markets in Asia and also entering new markets around the world. OYO has the money and investor backing to fulfill its ambitions. But can OYO change the face of the global travel industry? The answer lies in whether OYO manages to build robust systems to support its growth or not.

Editor’s note: A previous version of this article incorrectly stated that OYO owns properties. This has been corrected. The Fool regrets the error.

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