October 14, 2019 / 12:26 PM / a month ago

Breakingviews - India Insight: Oyo gives off a WeWorky vibe

MUMBAI (Reuters Breakingviews) - Oyo Hotels & Homes might be the fastest-growing big company in the world. Ritesh Agarwal’s Indian startup is moving at dizzying speed, frantically racing to become the world’s top hotel-room provider and more. Oyo’s rise to a $10 billion valuation and dealings with Japanese investor SoftBank and its Vision Fund also echo some of the hype before the fall of Adam Neumann’s shared office space empire The We Company. 

The logo of OYO, India's largest and fastest-growing hotel chain, installed on a hotel building is seen through wires in an alley in New Delhi, India, September 25, 2018.

Barely six years old, Oyo is budget-hotel chain meets Airbnb and Booking.com. It operates in over 80 countries with 35,000 hotels and almost four times as many holiday homes. With 1.2 million rooms under management, more than double its count in December, it ranks second to the $40 billion up-scale Marriott International. The 25-year old Agarwal is disrupting no-frills travel by implementing basic standards of cleanliness and service on rooms, and using technology to set dynamic pricing online, aiming for higher occupancy rates and higher yields on assets.

“The proof point of this being a very secular need around the world is the pace at which we have been able to grow not just in India and China but even in so-called mature markets”, Aditya Ghosh, Oyo’s South Asia chief assured the audience at the World Economic Forum in Delhi earlier this month. Oyo’s astonishing expansion has helped win investments from Airbnb as well as Chinese and Singaporean ride-hailing firms Didi Chuxing and Grab, respectively. 

Only a few Indian startups have gone global and Oyo already claims the top spot for a branded hotel chain in China, where it has almost 600,000 rooms and its brand has inspired copycats. Agarwal’s ambitions have no borders; the United States is one of its fastest growing markets alongside the UK. It is catering to everyone from millennial travellers to business guests. Oyo’s garish red and white logo is hard to escape in hotels across the world.

Yet even Oyo’s own investors readily admit the heady rise and diversification of the company’s business is fuelled as much by an unprecedented availability of capital as it is burning consumer need. “You could not do this five or six or seven years ago, or a decade ago, there was definitely no possibility. That [capital] is also a big enabler into why founders and startups are making these choices”, Shailendra Singh, managing director of U.S. fund Sequoia said at the WEF in Delhi.

One of the biggest suppliers of capital to Oyo has been Masayoshi Son’s Vision Fund. Just as its investment pumped up the valuation of WeWork’s parent to as much as $47 billion before it crashed back down to around a quarter of that ahead of its aborted initial public offering, Oyo has attracted similar scrutiny. Its own estimated worth has just doubled to $10 billion, partly on the back of an unusual move by Agarwal to buy stock worth $2 billion in the business, tripling his stake to 30%. Agarwal received a loan from Japanese banks to subscribe to new and existing Oyo shares.

One thing is clear: Agarwal and his investors are valuing the loss-making company as a disruptive technology play more than a traditional hotel giant. At 5.6 times Oyo’s annualised revenue of $1.8 billion in December, the multiple it fetches privately is around twice the level of Hilton Worldwide and Marriott International, and closer to the likes of China’s Alibaba and U.S. video-streaming service Netflix.

Still, Oyo has funds to burn. From franchising and leasing hotels, Agarwal’s startup – not unlike Neumann’s during its rise - is putting more capital to work, making bigger acquisitions. Oyo drastically increased its holiday home count this year with the purchase of @Leisure Group from Germany’s Axel Springer. A deal to expand the luxury market in Saudi Arabia also illustrates how Oyo is broadening its ambitions, nipping at the heels of its premium lodging rivals.

Joint ventures, meanwhile, are helping Oyo continue its headlong expansion without owning properties outright. One tie-up with a U.S. investment and management company pulled in the 657-room Las Vegas Hooters - a far cry from the startup’s modest original offerings. Another partnership with a SoftBank-backed firm will presumably allow the Japanese group to grow without breaching a clause restricting the Vision Fund and its affiliates’ Oyo ownership to less than half. That’s redolent of the cosy arrangements that prompted potential investors to baulk at The We Company’s IPO. 

WeWork’s parent ousted Neumann as chief executive, and its new bosses are trying to shed side businesses to refocus on its core. Upstart Oyo still appears to be charging headfirst into new areas including “cloud kitchens”, and wedding planning. One recent acquisition of a shared workspace firm has even turned Agarwal’s outfit into a direct local competitor to the company Neumann founded. And as the Indian group dabbles in new things, Oyo’s executives appear to be finding it hard to offer a succinct description of the company’s businesses. 

“Wherever there is an intersection of real estate, a large number of consumers, and technology, we find that’s our core area, that is the kitchen”, Ghosh explained, in a discussion comparing Oyo’s rapid diversification to that of other Asian unicorns like Indonesia’s Go-Jek. But while its highly-valued regional peers rely on multiple services to lock users into a single online window, Oyo’s offerings appear, for now, more like separate businesses - a lumpy online-offline conglomerate of sorts. 

Yet for all its chic spaces and promises of making “living the good life” a reality for middle-class consumers, Oyo is still at heart a real-estate company whose profits depend on charging fees from franchisees or pocketing the difference between what it pays to lease property and what it charges for rooms and other services. With breakneck growth, Oyo is starting to run into more problems too: hoteliers complain of deep discounts, and consumers of inconsistent service.

Oyo’s rise is formidable, as was that of The We Company. In its mission to “elevate the world’s consciousness”, Neumann lost sight of the foundations of a sustainable business. Agarwal may benefit from a pause to ensure the house he has built endures.

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