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Oyo: From redefining Indian hotel industry to fresh restructuring

From a few 100 hotels when it started in 2013, Oyo went on to cover more than 800 cities as of 2019, according to an earlier statement.

Oyo: From redefining Indian hotel industry to fresh restructuring
Oyo's MBG model ensured that hotel partners would be paid a fixed income amount every month, and thus attracted unorganised budget hotel chains in large numbers. (Reuters file photo)

Hospitality and travel tech startup Oyo, which on Saturday laid off 600 of its 3,700-strong workforce as part of a restructuring, has otherwise made a tremendous impact on the Indian hotel industry.

According to the Federation of Hotel and Restaurant Associations of India’s (FHRAI) estimate, it generated total revenue of $22 billion pre-Covid. It is perhaps one of the few unicorns that solved an actual pain point in the consumer internet domain — helping travellers find budget and premium hotel accommodation via the internet. Prior to the arrival of Oyo, online travel aggregators (OTA) such as Makemytrip, Goibibo, Yatra, Easmytrip, and Cleartrip were active in the space.

Also Read: Oyo to fire 600 staffers

However, Oyo’s strategy was different from conventional OTA models, which made money mostly through marketplace commissions. Although Oyo began as an aggregator (marketplace model), by 2017 it started a slow-burn pivot into a full franchise model, where it overtook sales and marketing rights of hotels and big properties while striking revenue share deals with property owners.

From a few 100 hotels when it started in 2013, Oyo went on to cover more than 800 cities as of 2019, according to an earlier statement. As per its latest submission with market regulator Sebi for its IPO, the hospitality unicorn had 168,639 storefronts as of March 31, 2022 (post-Covid), but did not provide the total cities it was active in.

Sources close to Oyo’s operations told FE that in the past two years, it has scaled down much of its business in its foreign destinations including the US, European cities and Japan. This could possibly explain why it stopped providing total city count and moved to measure its room count as ‘storefronts’ instead of providing precise available room counts — a widely accepted key performance indicator.

Also Read: Oyo Hotels and Homes report smaller losses in Jul-Sep’22

In fact, in July 2021, Oyo’s CEO Ritesh Agarwal told Reuters that the startup is shifting its “growth” focus to SEA, India and Europe, while pulling back on China and US.

Oyo’s dominance in the hotel market was so wide-reaching that it caught the attention of many of its competitors, including Make MyTrip (MMT), which was the market leader in the hotel booking space prior to Oyo’s arrival. The story of Oyo’s dominance could be told by simply viewing the shifting gears in its relationship with MMT. MMT first partnered with Oyo in 2014, but delisted it in 2016. In 2016, a group of online travel providers including MakeMyTrip, Goibibo and Yatra jointly blocked Oyo from listing its hotels on their platforms. But MMT resumed its relationship with Oyo in February 2018.

When Oyo was first delisted, the hospitality startup said it made less than 10% of its overall revenue from online booking platforms like MMT and Goibibo. During the time of the delisting, MMT was a clear market leader in the OTA space. But by 2018, things were different, with Oyo pushing an aggressive strategy with its minimum business guarantee (MBG) deals with hotel partners — something which eventually became a sore point for the startup post-Covid.

Oyo still claims that more than 90% of its revenue comes directly through its D2C channels, including apps and websites, and dependency on OTA channels is minimal. In its initial filings with Sebi in September 2021, Oyo said the share of direct bookings on its platform through D2C channels was 74.5% in FY20 and 71.2% in FY21 globally, and 90.9% in FY20 and 94.4% in FY21 for India. Oyo earns an average revenue share of 20-35% of the gross booking value (net of discounts and loyalty points) through direct bookings.

Despite Oyo making a significant chunk of its revenue directly, it still went on to have a working relationship with MMT. Sources, however, told FE that Oyo’s tremendous growth spooked the management at MMT, which was eventually convinced that it needed Oyo’s inventory to maintain its marketshare.

Oyo’s MBG model ensured that hotel partners would be paid a fixed income amount every month, and thus attracted unorganised budget hotel chains in large numbers. With Oyo discounting these hotel rooms below market rates, most hotel chains had no other choice but to move into a franchise agreement with the company, said a founder in the hospitality industry. The founder asked not to be named as he did not want to comment on Oyo publicly. Eventually, Oyo said it had had enough with the MBG model, which led it to the NCLT and multiple cases in various courts. In the DRHP filing in September 2021, it said it has exited from all minimum guarantee contracts, indicating that the model didn’t work in its favour post-Covid.

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First published on: 06-12-2022 at 03:05:00 am