The hotel industry is, like many others, in a period of reinvention. Established models are failing, replaced by start-ups keen to exploit inefficiencies and maximise underused assets. And Oyo Rooms is at the forefront of that reinvention. On the face of it, it has similarities with its latest backer, Airbnb, which has invested a reported $150m in the Indian company – both are “unicorns” that have disrupted a legacy industry, exploiting a previously uncontested market by using technology to their advantage. Like Airbnb, it also seeks out underused real estate, particularly in the case of its home-rental platform.
Oyo began life as an aggregator, leasing and reselling hotels rooms, but it has since shifted to branding entire hotels under a franchise model – similar to Chinese operators such as 7 Days Inn – which is how it now generates 90% of its revenue. Even more so than Airbnb, Oyo brings software and applications to help owners operate small-size hotels, integrating and centralising data and management. This model allows Oyo to define its own set of brand standards, well suited to modern emerging-market travellers that give hotel owners flexibility in terms of real estate, while simultaneously providing a consistent experience for Oyo customers. And acknowledging that control is a key element in the tech space, Oyo controls almost all the “touch points” in the customer’s journey, as well as the back-of-house systems. Its one-stop-shop app, forexample, lets you order room service or a cab, as well as booking a room.
Oyo has targeted distressed real estate, normally in the form of non-performing or underperforming existing hotels. So far, it has been most successful in India’s highly fragmented hotel market. In this environment, Oyo plays to its strengths by centralising operations, standards, analytics, distribution and customer-relationship management, leaving owners with limited negotiating power. Its fees are not uncommon for tech service firms and, in the absence of competitors, go uncontested.
In India, Oyo also benefits from the inexperience of hotel owners. Many essentially see their fixed asset as a sunk cost. They view Oyo’s involvement as a way to enhance their cashflow, while Oyo can offer loans for renovations. Hotel owners are charged a commission of around 20% on franchise room sales. For inexperienced owners, this 80:20 split is appealing in light of the technology they’re provided with. But this imbalance in power, where owners have limited recourse, has led to trouble with platforms in other industries before.
In 2017, Oyo launched its own boutique brand of urban hotels, Oyo Townhouse, which it launched in Britain in September 2018. But competing with traditional hotels in developed markets will be a challenge. The barrier to entry for international expansion comes in the form of stricter building codes in other countries. In India, its consumer-oriented, plug-and-play model allows for the adaptive reuse and “upcycling” of lodging facilities at limited cost. But these might not qualify for hotel licenses in other markets, for a host of factors, suggesting that expansion will be chiefly in markets that are less regulated.
How does this model affect valuations? As with any hotel, surveyors need to evaluate thoroughly the quality of the underlying asset, as well as the terms of the agreement with the operator. Should the agreement end, are there any alternative operators that can drive the same performance?
This model is a highly successful shortterm growth engine. As seen in the US and Chinese lodging sectors, as well as other highly standardised businesses such as fast food, franchising gives the fastest growth trajectory. It also provides small investors with a strong and immediate business opportunity. But many cities have moved against platforms such as Airbnb, limiting the length of rentals or total nights per year, which could affect valuations, particularly if a property is zoned as residential. Basing the value on income projections is more suitable for long-established hotel businesses – and this type of regulatory pressure challenges those projections.
Investing in an Oyo property, or the company itself, is similar to investing in other budget chains such as Super 8 and Wyndham. However, tech firms, as disruptors, do not always follow industry standards, and can introduce changes without notice. This risk should be carefully evaluated by any investor.