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Oyo has an American dream

Oyo’s American dream comes with a host of challenges despite the Indian unicorn being able to leverage on investor Airbnb’s home expertise

July 18, 2019 / 12:36 AM IST
The CEO and founder of OYO Hotels & Homes, Ritesh Agarwal will take a 100 percent salary cut for the rest of the year to enable building the runway for the company.

The CEO and founder of OYO Hotels & Homes, Ritesh Agarwal will take a 100 percent salary cut for the rest of the year to enable building the runway for the company.

It’s destination US for Oyo.

Last week, the budget hotel chain said it will be investing nearly $300 million in the US over the next few years. The announcement comes within three months of the Indian startup securing a $200 million cheque from its American competitor Airbnb for an undisclosed stake.

The US is the newest obsession for Oyo, which was founded after taking a cue from Airbnb’s business model -- with modifications to suit Indian market -- in 2013. Oyo primarily deals in the budget hotel space whereas Airbnb’s core is homes. In the US alone, Airbnb has close to 600,000 homes listed on its platform and globally, it lists around 6 million homes. Oyo, a smaller and younger player, has 23,000 hotels on its network, and only 50 of them are in the US.

Oyo’s American dream is part of its larger goal of becoming the world’s largest hotel chain by 2023. During the past couple of years, it has spread wings in Malaysia, Nepal, the UK, the UAE, Indonesia, the Philippines, China and Japan as well.

Not just this, Oyo has pushed into new territories such as apartment renting. The Indian hotel aggregator has started franchising, which may become a tough nut to crack. Franchising requires maintaining clear standards and quality under strict discipline. And, it becomes more difficult with a spread across geographies.

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The US market will also present a host of challenges despite Oyo being able to leverage on Airbnb’s home expertise.

For one, Oyo will have to fight a lot of organised players with deep pockets. Initially, like other markets, Oyo would reach out to owners of independent properties that it would want to manage and run for better efficiency. If it manages to strike a deal with the Asian American Hotel Owners Association, it may get some 18,500 hotels in the US in one fell swoop. Of this, around 20 percent are independent hotel owners. If it manages to bring independent hotel owners under its platform, then it could potentially emerge as a key competitor for major hotel chains.

Two, growth is slow in the US hotel market. According to a March joint study by CBRE Hotels Americas Research and Hotel Horizons, US hotel room revenue per available room, a key metric, will go up by 2.5 percent in 2019 and around 2 percent in 2020.

In comparison, the hotel market in China is growing much faster. A report by AT Kearney predicted China’s hospitality industry to be worth $100 billion with 6.3 million rooms (8 rooms per 1,000 capita) in 10 years, from $44 billion with 2.5 million rooms (4 rooms per 1,000 capita) at present.

Despite fast expansion, Oyo has managed to bring down its losses as percentage of sales, to around 20 percent in 2017-18 from 45 percent in 2016-17. The target was to bring it down to 10 percent by March 2019, but the numbers are yet to come in.

According to travel data firm Skift, Oyo will initially focus on major US cities like New York, Los Angeles and San Francisco. Oyo’s unique selling point is “hard to ignore prices”. In the US, as Skift estimated, average price would be around $24 a night. That’s really hard to ignore considering average rent for hotel rooms per night in the US stands at $128, according to Statista.

But will the cheap pricing be enough for Oyo’s success? It may not be that easy. The Wall Street Journal mentioned in a report that average ratings of Oyo hotels is low at 1.8, with 39 percent giving just one star. And reviews have so far been bad with complains of bugs among other issues. To win consumers in the US, Oyo will have to develop a robust military-like system for standardised quality of service. Otherwise, Oyo is unlikely to fulfill its American dream.
Sounak Mitra is an Associate Editor, Moneycontrol. He has been writing on corporate issues and policy for more than 15 years, having previously worked with Mint, Business Standard, Mergermarket, The Telegraph and The Times of India.
first published: Jun 28, 2019 03:34 pm

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