Budget hotel aggregator Oyo Rooms wants its fingers in one more pie. It is proposing to buy out cloud kitchen startup FreshMenu for $60million, according to an Economic Times report.
While Oyo’s core offering is a room to stay, food is an obvious addition to the offering. To date, Oyo guests have the option for ordering from outside, eat in the hotel or step out for food. Once FreshMenu becomes part of Oyo, it can market FreshMenu to Oyo guests, offering food of their choice in their hotel rooms. This adds an additional stream of revenue to Oyo and since food is a relatively high margin business, profitability could improve too. To be sure, revenue from food is high even for top-end hotels, some times as high as 45 percent of total revenue.
In any case, food isn’t an entirely new territory for Oyo. At bigger establishments, Oyo does operate kitchens. The Economic Times reported quoting an Oyo spokesperson saying that around 25 percent of its revenue comes from food and beverages. However, a majority of this may actually come from off-market locations where options for food and beverages are limited. Adding FreshMenu to its portfolio could give Oyo an edge even in metro markets, where options for food and beverages are abundant.
FreshMenu would be the fourth major buyout by Oyo. Last year, it bought wedding marketplace Weddingz, apartment operator Novascotia Boutique, and internet-of-things technology firm ABlePlus Solutions. Besides, it is reportedly in advanced talks with co-working space operator Innov8.
Oyo is seeking to make its core Oyo ecosystem stronger through these acquisitions. FreshMenu won’t be an exception.
But FreshMenu may come with its own set of issues. Despite its unique closed ecosystem, with control over everything from sourcing of raw materials to preparation of food to delivery, FreshMenu was reportedly (December 2017) fined by civic authorities for violating hygiene standards at its kitchens. At that time, the company had said it was being unfairly singled out and was confident about its hygiene standards.
In September 2018, when the company was in the market looking for fresh funds, the Economic Times reported that the company kept a 2016-hacking incident secret for about two years. The hacking had led to data of 110,000 users of FreshMenu being leaked. In the same month, Techcircle reported a few of its top-level executives quit.
If Oyo eventually does buy FreshMenu, it will have to spruce up the operations of the acquired business. Flawless execution is essential for a food delivery business to be successful, especially in a hypercompetitive market. Unless Oyo’s customers get value for their money, they will not convert to FreshMenu. If not executed well, the acquisition could see Oyo’s customers turn unhappy and poor utilisation of investor capital.