Global hotel and home chain OYO has funded money again recently.
As Wall Street Journal reported, OYO’s founder and Chief Executive Ritesh Agarwal led a $2 billion share buyback in the company on 19th July. The buyback, which is still subject to shareholders and regulatory approvals, will be operated through a Cayman Islands company called RA Hospitality Holdings, and financed by institutional banks and finance partners, the company confirmed. It is said that Ritesh would put this funding into OYO’s China branch.
Rumors have been swirling that OYO is about to launch a new round of financing. But after a series of negative news came in – including layoffs, losses, and data fraud – it was their founder who raised money for the company. Is it true that OYO is no longer able to finance from external fund?
OYO Booming in China
Founded in 2013, OYO is known as “the Uber of budget hotels”. In India, OYO on the one hand offers consumers a low-cost, standardized hotel booking service by integrating and upgrading unbranded hotels to meet some basic standards, while allowing those unbranded hoteliers to increase occupancy and revenue by joining the platform on the other.
Until now, OYO is active in 800 cities in 80 countries, including the U.S., the U.K., Indonesia and Japan, with more than 23,000 hotels in its portfolio.
Since its arrival in Shenzhen in November 2017, OYO has integrated more than 10,000 hotels and 500,000 rooms in China, signing contracts with nearly 20 hotels per day.
In China, OYO mainly provides three kinds of support to the home owners: firstly, help the hotels do some brand and logo renovation and interior decoration for free; Secondly, provide an operation manager to help owners sort out the internal operation and management issues of the hotel; Thirdly, bring about a set of marketing improvement system to help the hoteliers expand their OTA and offline channels.
In addition, relatively loose franchising policies also help OYO China achieve rapid growth. This is mainly reflected in the following aspects: no franchise fee, no mandatory use of PMS (Property Management System), no mandatory control of in-store operation. As for the commission, OYO only extract 2% to 8% from hoteliers’ cash flow.
But a staff who had been in charge of OYO’s inner operation work in China said that the ecology of unbranded hotels in China was quite different from that of in India. For many local customers, these hotels are more like walk-in hotel: the motive that they want to check-in a room is either because they want to play mahjong with friends, or their distant relatives come along and stay for a few nights. In fact, those types of consumers account for 70% of the whole source of customers for these hotels.
Therefore, OYO has only three channels for getting incremental customers: one is from OTA (Online Travel Agency), the other is offline tourism, and the third is OYO’s own channels. But in Chinese market, OYO cannot obtain sufficient customers through the above three channels. Concerning online travel, OYO is facing with the competition of OTA platforms. In offline tourism, most of these small and medium-sized hotels do not have enough capacity to receive and serve huge numbers of tourists. And finally, OYO’s own APP’s influence is so limited that it is hardly able to bring many orders for themselves.
Behind the one-sided pursuit of data is the systematic management problems in OYO.
Though on entering China, OYO assembled a localized management team, the actual effect of OYO’s localization, however, is not quite ideal from today’s perspective.
In OYO China, there is a large assistant management team consisting of more than 30 Indian employees. Nominally, its responsibility is to communicate China business with Indian executives, nevertheless, the more important role it plays is “to monitor Chinese employee”, an old OYO employee said.
Moreover, local management teams are not fully empowered. “The company CXO’s new budget approval authority is only 50000 yuan, isn’t it incredible? “
An Indian consultant hired by OYO also described a similar phenomenon: Indian employees are the core of the company, not Chinese executives or staffs.
Paradoxically, while the local executives have little authority, their workforce are quite large. By the end of 2018, the number of Chinese employees had swelled to more than 6000.
Echoing the rapid expansion of personnel scale, there is the problem of corruption.
According to Tech.sina.com., in order to get more bonuses, many OYO teams recruited much more employees than they really needed. Additionally, the phenomenon of arbitraging travel expenses is so serious that the losses on this item could reach 100 million yuan. There is even a saying around the company that if you are short of money, just find Indians to get it.
The Indian headquarter is unwilling to delegate power to local executives, which leads to inefficient internal management on the one hand. At the same time, the local teams are seriously corrupted and consume OYO’s resources. Thus, with the team’s centripetal force being challenged, OYO’s top managers came up with the simplest solution: layoffs.
According to Jiemian News in late June 2019, OYO China began to execute large-scale lay-offs that the number of first-line employees would decrease a half. Another information source from OYO’s competitors suggested that the overall reduction in the number of persons would be 20%, covering the entire team.
For these sayings, OYO did not deny it directly. Their response is “in order to meet the needs of new strategic objectives, OYO will continuously and steadily improve the company’s organizational capabilities”. It can be seen as an indirect acknowledgment that the team is adjusting.
Surrender to the OTA?
In addition to the internal troubles, OYO also has external enemies. As mentioned above, the most important source of customers of OYO China comes from OTA platforms. Ritesh Agarwal also admitted that the contribution of this channel accounted for over 20% of OYO’s booked nights.
But in October 2018, OTA giants decided to fight back when aware that OYO’s rapid growth has encroached upon their territory. Meituan and Ctrip successively removed OYO hotels from their shelves, which directly aggravated disputes between OYO and its hoteliers and led to OYO’s heavier pressure of revenue.
OYO had to make compromise with them. In May 2019, OYO paid 400 million yuan to Meituan and 180 million yuan to Ctrip as channel fees. What’s more, OYO had to pay additional 20% service fee for each order obtained on those two platforms.
But in fact, the compromise cannot resolve all the conflicts. In the long run, OYO is unable to bypass Meituan and other OTA platforms.
In January 2019, Beijing Meizhu Bicheng Technology Co., Ltd. was established. It is worth noting that the business model of Qing Hotel, one of the brands of this company, is quite similar to OYO. Interestingly, while Meituan and Ctrip blocked OYO hotels, Meituan’s team asked hotel owners to terminate their cooperation contracts with OYO and join in Qing Hotel.
Almost at the same time, Lvyue Travel launched an OYO-style brand hotel named Sucha Hotel. Lvyue Travel’s strategic investor is Ctrip. In March, Tongcheng-Elong established Suzhou Hippo Hotel Management Co., Ltd., whose brand OYU only has slight differences from OYO.
Traditional hotels are also on the move. On May 30th, Ji Qi, founder and president of Huazhu, went to Chengdu for the press conference of the launch of H Hotel. Supported by Huazhu, H Hotel is also a hotel brand competing with OYO China.
OYO model 2.0: to the refined management
Faced with severe competition, OYO launched its so called 2.0 model, whose keywords are scale expansion and refined management.
According to OYO China, the 2.0 model is mainly targeted on their core cities. OYO pays the owner a monthly minimum guaranteed deposits in advance, with a higher percentage of commission charged for the excess amount.
The 2.0 model also updates its PMS system, which incorporates several new analysis functions including customer source analysis, data vulnerability verification, automatic price adjustment and etc. This means that the leaders of OYO start to rethink their original profit model, intending to strengthen the control of franchisees.
But it is unknown whether the new mode would take actual effect.
“In the hotel industry, nearly no one will guarantee revenue because the risk is too high”, said by He Yong, director of commercial program of Argylehotels.
What’s more, increasing the control of franchisees has already irritated the latter.
According to an internal staff of OYO, though the 2.0 strategy has been operating for a month, its implementation is not smooth. Not a few owners refuse to cooperate with the headquarter because they believe that many of the new clauses are actually imparity clauses.
For OYO China, adopting 1.0 model can achieve large-scale growth at the cost of low efficiency and waste of resources. While 2.0 strategy improves operational efficiency, it also leads to resistances from hoteliers, which in turn will weaken the scale effects. So it is hard to achieve large scale growth and refined management at the same time. At the end of the day, what OYO will face is a hard choice between rapid growth and refined management.