From US to China, how OYO is taking a homegrown business model worldwide

A rare emerging-market unicorn aims to upend the hospitality business—but first it has to fix that runaway ceiling fan
Founded just six years ago by a 19-year-old entrepreneur from one of India’s poorest states, Oyo Hotels and Homes has grown so fast that it already ranks among the largest hotel chains in the world.

In fact, going by the number of properties it claims in its network, Oyo is by far the biggest, twice the size of No. 2 Wyndham Hotels & Resorts.

But oh, those properties. Here in this fast-growing diamond and textiles hub, around $20 buys you a night in the Hotel Ostria—misspelled by an owner who was shooting for “Austria”—atop a faded office building that also houses an industrial-parts supplier and a heart clinic. A bedroom in a Darjeeling hotel features plastic plants and a sign warning of power cuts and water shortages.

Earlier this year, a guest at another Surat affiliate was awakened in the early hours when a fan crashed from the ceiling. A local Oyo representative, known within the company as an area “captain,” raced to the scene, apologized to the fortunately uninjured guest and found him a new hotel.

“These kinds of things can blow your mind,” said the captain, Mansur Naiya.

Oyo founder Ritesh Agarwal, now 25, created a lodging empire by persuading thousands of unbranded, usually badly run Indian hotels to put themselves in his hands as franchisees or lessors. Oyo asks owners to upgrade them to meet some basic standards—clean linen and bathrooms, air conditioning, Wi-Fi, breakfast and properly groomed staff—and rents their rooms out at bargain-basement prices, using homegrown technology meant to optimize occupancy rates.

The formula has been a hit with India’s burgeoning middle-class—and with some of the biggest names in venture capital. Oyo has drawn more than $1.5 billion to date from SoftBank Group Corp , Sequoia Capital, Lightspeed Venture Partners and Airbnb Inc. An emerging-market unicorn among unicorns, Oyo was valued at $5 billion at its last round of fundraising. While India has several startups that have grown by copying Western models, Oyo is the first to try to take a homegrown business model world-wide.

Most of the company’s revenue comes from fee-paying franchisees and bookings. Oyo is also part listings platform, like Airbnb, and part reservations site, like For India, where all three approaches are in short supply, that has turned out to be a recipe for rapid expansion.

Mr. Agarwal is now taking Oyo global. It already has more rooms in China—around 450,000 by June—than in India. He figures Oyo’s room count could reach 2.5 million world-wide by 2023, compared with 700,000 as of May, the company says.

“Doing these things at a consistent scale for hundreds of thousands of rooms today and millions of rooms in the future is where the big challenge comes,” says Mr. Agarwal, who owned 10.6% of the company as of March 2018.
The biggest challenge for Oyo may be establishing itself in Western countries, where owners need less advice and have more options to upgrade facilities or get online to sell rooms.

Oyo is facing a bumpy rollout in the U.S., where it already has more than 50 hotel partners. Owners in the Dallas area say they are surprised by how much their room prices have been slashed—to as low as $15—and say they wouldn’t break even without compensation the company is paying them.

“U.S. market is very different because the overheads are not the same,” said Piyush Patel Jariwala, 40, who runs the Oyo Hotel Fort Worth East Gateway Ballpark in Fort Worth, Texas, which Oyo helped him upgrade.

Oyo said its system of varying prices provides US hotel owners with higher revenue and occupancy.

In India, Oyo has caught a tsunami of middle class expansion over the past decade, as more Indians earn enough extra cash to develop a taste for tourism, and business travel has also increased.

Oyo expects India revenue for the year ended March 31, 2019, to be 14 billion rupees ($200 million), up from 4.16 billion rupees a year earlier. The company’s losses in India were roughly flat at 3.60 billion rupees in the financial year ended March 31, 2018, compared with the year earlier. Oyo, which doesn’t disclose comparable global figures, won’t say when it expects to be profitable.

Mr. Agarwal grew up in the eastern Indian state of Odisha, where his parents ran a grocery store. He says he started selling SIM cards there at age 13. “In the family I grew up, the big opportunity was that I could run the provisional store,” he said. “Even bigger would have been if I had got an engineering degree and worked for an IT company.”
Trips to New Delhi to attend entrepreneurship conferences gave him a glimpse of bigger ambitions. Around the age of 18, he says he visited 100 hotels across the country—persuading owners to let him stay free of charge—so he could study them.

Platforms like Airbnb were starting to take off and their success caught his imagination. He launched an aggregator called Oravel Stays Pvt. Ltd., which remains the official name of Oyo today. But customers had many gripes, ranging from no room service at the hotels booked through the aggregator to faulty plumbing and unkempt staff.

“The challenge in India was not so much aggregation,” said Bejul Somaia of Menlo Park, Calif.-based Lightspeed, an early investor that now owns a 13% stake in Oyo. “There was a lot of variability in supply quality. There was no trust. Those were the issues that needed solving. I often talk about repairing or fixing the supplier rather than simply aggregating it.”

In 2013 Mr. Agarwal switched to a business model focused on helping owners improve their operations. That same year, Mr. Agarwal became the first Asian resident to win a $100,000 fellowship prize from PayPal co-founder Peter Thiel. That also won Mr. Agarwal some mentoring time in Silicon Valley and encouraged him to think big, he said.

Back in India, Mr. Agarwal spent nights in different Oyo-branded hotels, toting an overstuffed backpack to meetings during the day.

“Once I said to him, ‘what’s in that?’ ” Mr. Somaia said. “It was most of his belongings. I think that’s also why he understood his owners and the market so well. He was living it.”

In 2016, Oyo switched from asking owners to sign up a few rooms to allowing them to take on the franchise, lease their buildings to Oyo, or sign up for a deal where Oyo provides staff.

On a recent day inside Oyo’s headquarters outside New Delhi, tech workers cram together on rows of desks, fine-tuning algorithms that decide everything from prices to room design. On the wall it says: “Affordable is cool and cool is affordable.”
The company’s 1,200 software engineers have created more than 20 apps and an operating system designed to overcome every hurdle associated with running thousands of hotels. They are used by customers, cleaners, auditors and reception and sales staff.

One of the apps allows agents to make on-the-spot offers for franchisee or licensee deals through their phones to hotel owners, shortening a process that can take large hotel chains weeks. Another algorithm analyzes images of rooms to determine if customers will like them.
Hundreds of miles away in Surat—projected by advisory firm Oxford Economics to be the world’s fastest-growing city between 2019 and 2035—the Hotel Relax Inn is less than a mile from the station where traders stream in to do textile and diamond deals.

Owner Jigar Lakdawala, 38, signed up with Oyo in December, he said, because the company said it could increase occupancy by an extra 15 per cent.

Before Oyo, Mr. Lakdawala listed his hotel on aggregators and only 10 per cent of his bookings came from online. Now 40% book online, and they stay for longer, he said, adding that he likes being able to monitor his bookings and prices on Oyo’s app.

Mr. Lakdawala wouldn’t say how much he pays Oyo as a fee, which is usually around 20 per cent of revenue in India. That differs from most aggregators, which only charge for rooms booked through their websites.

Oyo delivered on its promise of extra occupancy but profits aren’t any higher, he said. The company makes millions of tiny changes to its prices every day according to demand, the time of year and even the weather. As a result, hotel owners say, rooms are filled but customers often pay less.
Oyo says its hoteliers make more money because higher occupancy only marginally raises operating costs and the company helps with efficiency savings.

In many cases, Oyo elevates hotels to bare-minimum standards.

In a double room in Mr. Lakdawala’s hotel, one of Oyo’s red and white runners covered the end of the bed and mini toiletries sat by the sink in the bathroom. A porter threw open a window to show off a view of traffic thundering past on an overpass. The noise usually abated around 11 p.m., the receptionist said. An air conditioner in the window had newspaper stuffed into gaps around it to keep out dust.

Mr. Lakdawala followed Oyo’s suggestion to install Wi-Fi and televisions, put four pillows on the beds, soften the lighting and add a breakfast of bread and tea. He figured Oyo’s recommendation that he host unmarried couples was taking things a bit far.

Brothers-in-law Pradip Sharma and Ravi Sharma, who happen to have the same surname, stayed in the hotel to do a textiles deal as an alternative to sleeping in their car. “They offered the lowest rates. Plus we got breakfast too. It helps when you are in a new city,” Ravi Sharma said.

Oyo employs its captains to monitor clusters of the hotels. They check on accounts, customers and room presentation using online checklists. Mr Naiya, the captain who dealt with the falling ceiling fan, looks after around 12 properties of the more than 40 signed up with Oyo in Surat. Guests in his cluster are connected to his cellphone by Oyo’s call center, and he says his performance is evaluated partly on the percentage of unhappy customers.

“We are having the budget hotels, but we are providing the service up to the five star,” Mr. Naiya said.

In some places, Oyo has signed up so many hotels that they compete.

Tourists come to Darjeeling in the foothills of the Himalayas in India’s northeast for the clean mountain air, to visit tea plantations and ride a toy steam train. An advertising billboard welcomes visitors to “Oyo City,” and along busy narrow streets, the red and white signs of the more than 50 Oyo hotels stand out.

Brothers Suraj Darnal, 41, and Suman Darnal, 42, signed their Bloomfield hotel up to Oyo because they said representatives promised them 50% occupancy in the off-peak season.

Instead, in that period not a single room was rented out, the elder Mr. Darnal said. The brothers said they hadn’t made enough to cover renovations made to the property. “If they cannot resolve the issues, I will close,” the younger Mr. Darnal said.

Yet their guests seemed happy enough. Student Akash Sau booked through the app. “We didn’t want to have the mental tension about whether we would get a room,” by just turning up, he said.

“While the Bloomfield hotel has seen a dip in occupancy in the off-peak season, data and the internal receipts suggest an occupancy which is significantly higher than unbranded hotels in the vicinity,” an Oyo spokeswoman said in response. She said 18 of Oyo’s 58 partners in Darjeeling have spent more than two years with the company.

“We have generally learned that the best proof of the pudding is the scale of retention,” Mr. Agarwal said.

Still, some analysts wonder how well Oyo’s model will travel to Western countries.
Mr. Patel Jariwala, of the Oyo Hotel in Fort Worth, said he signed up earlier this year because Oyo offered to pay for $200,000 of upgrades in return for 5% of his revenue.

But he said his rates have been reduced to as little as $15 from his previous lowest rate of $60. He said his staff tried to game the system by booking rooms under their own names, hoping to push up prices at the hotel. When Oyo found out, he said, they changed the status of his property to “sold out” until July 7.

“I am waiting for them to tell me what is going on,” he said.
/> Vibhuti Agarwal in New Delhi contributed to this article


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