SoftBank-backed Oyo's profit strategy is hurting SME hoteliers
Oyo’s latest funding round, which saw it raise $1.5 billion in funding of the targeted $2 billion, has made it one of India’s most valued startups at $10 billion. Of the $1.5 billion, Oyo’s founder, Ritesh Agarwal chipped in $700 million in an arguably worrisome strategy, which has also tripled his stage in the firm to 30%. SoftBank still owns roughly 45%.
An industry source was cited saying “it’s like getting a new credit card to pay for the older one,” as reported by Techcrunch.
Their source further explained, “You build a three story house but to run it you need money. So you sell the house and just have a bathroom in your name. You want to buy the entire ground floor. So you put the one bathroom as collateral and raise enough money to buy a room with an attached bathroom. How? The bathroom’s worth can’t be worth a room and a bathroom. Then you put the new room with an attached bathroom as a collateral and buy the living room and kitchen. And then you own the entire ground floor. But in reality, you still only own the bathroom. And you hope that one day, the bathroom’s worth would be enough to pay for the entire floor.”
While Oyo is not yet a profitable business, founder Ritesh Agarwal said in a statement, “On a year-on-year basis, we have seen that not only are we operating profitably at the building level but at the same time our EBITDA (earnings before interest, tax, depreciation and amortisation) has also improved by 50 per cent. The losses as a percentage of NRV have also been on a steady and significant declining curve.”
That’s not the end of Oyo’s issues.
The firm essentially takes over the operations of hotels across India, renovating and rebranding them to become Oyo Hotels. They then charge a fee or ask for a revenue share in exchange for its services and listings.As Masayoshi Son is pushing his portfolio companies to become profitable, Oyo has been reported to introduce new fees — a “platform fee” and a fee for a “visibility boost” — which has brought the ire of hoteliers upon the firm.
The lower prices that were a key driver of Oyo growth, has since become its biggest hurdle.
Hoteliers have not only been dismayed due to new fees that have added up costs, but also that in a slowing market, room rates have been driven down due to Oyo.
Reuters reported that several hotel groups across India have organised protests, while hundreds have quit Oyo’s network, asking to be taken off its listing platform. However, Oyo still has them listed with a “sold out” banner.
It’s not difficult to see Oyo walking in the footsteps of WeWork. Investors have already become wary of SoftBank-backed startups that grow on low prices at the cost of investors’ capital, as is evident with Agarwal not raising the target amount. As Oyo is pushing into international markets, the bigger question is how it will be able to sustain — and become profitable — in the face of competition, tainted reputation from Indian hoteliers and its increased prices which are in direct opposition to its core offering of ‘cheap’ stays.