OYO stuck between a ‘Soft’ and a hard place!

Give us back our rooms

Hotel owners across India are forming associations to protest allegedly unfair business practices by OYO.

They are agitated at the 25-30% in commissions being charged as well as high discounts being offered by players like OYO, which spoils the market and reduces their (hotels’) brand value.

Steep discounts are core to the business models of companies like OYO, since investors like Softbank incentivize them to ramp up subscriber numbers, even if it impacts profitability.

OYO needs to find a middle ground, since the coming together of hotels can seriously threaten its business model and survival in the market.

Fortunes are fickle, and times can change fast. Last year, OYO Rooms achieved a valuation of US$ 5 billion from a US$ 1 billion funding led by Softbank, which made it the most valuable hospitality chain in India. Buoyed by the success of its business model, it has expanded at a blistering pace into global markets, particularly China over the past year.

But in the beginning of 2019, OYO is facing a sobering reality check in the Indian market, which threatens to unravel the aggregator model that has brought it fame and fortune in the hospitality industry.

The Budget Hotel Association of Mumbai has stated that it is planning a city-wide boycott of OYO. It has also formed a pan-India association called the Hotel Association Confederation of India (HACI) which has a strength of around 8,000 hotels to further put pressure on the firm.

Previously, the Federation of Hotel and Restaurant Associations of India (FHRAI), which is an all India body of hotel owners and operators, had cautioned OYO of nationwide protests if it did not come to the negotiating table. FHRAI has already taken action against MakeMyTrip and GoIbibo.

Ashraf Ali, joint convenor, HACI, commented, “Our new proposed organisation, HACI, has the support of 47 pan-India associations which have about 8,000 hoteliers as members. OYO has become more stubborn and our concerns still exist. They are trying to contact individual hoteliers, which is not useful.”

Hotel owners are agitated at the 25-30% in commissions that aggregators are charging. Moreover, OYO offers add-on discounts on bookings, leading to market cannibalization as they cannot do the same. They also feel it reduces their brand value.

FHRAI members are also protesting against OYO’s endorsement of illegal and unlicensed bed-&-breakfast apartments, flats in residential/commercial buildings and other such independent structures as hotels.

OYO has countered the allegations fiercely and threatened legal action for breach of contract against any hotel on its platform that boycotts bookings under the influence of small vested interest groups. The company also stated that most of these boycotts are done by small groups who have no property connected to OYO.

Despite being criticized, OYO has continued to engage with its franchisee hotel owners on a one-to-one basis as confirmed by Ayush Mathur, Head of Supply, OYO Hotels & Homes. He adds, “However, some such individuals have also been threatening to ignore the agreements and not accept online bookings, which will lead to breach of contract and involve legal liabilities as we cannot and will not let anyone hamper the customer experience. We will take strict legal action and take them to court,” he added.

Mathur also asserts that prices of rooms are determined by OYO as per agreements with hotel owners, as is the case with similar aggregators in the industry. OYO holds the inventory, and pricing is dynamically determined. Moreover, he also assures that OYO has never charged franchise fees above 25%, unless it has incurred some capital expenditure to transform a home/hotel space for better footfalls and occupancy.

The real problem is that aggregators like OYO are backed by huge investments. They can offer upto 50% in discounts and cashbacks even as the original room owners would struggle to do so. For the hotels, this steep price drop is spoiling their market. Online travel agencies and room aggregators are able to manage because of their deep pockets. Besides, the discounts build customer stickiness and also provide them with a database to push promotional campaigns.

On the other hand, this impacts avenues for growth for individual hotels. A similar pattern has been observed in the foodtech sector, where restaurants are blaming firms like Zomato and Swiggy for spoiling the habits of customers and also attempting to build private labels by leveraging the databases and insights that they have gained. This brings them directly in competition with the restaurants themselves.

An OYO spokesperson counters to DNA that it is not a room aggregator/online travel agency or marketplace but a “full-fledged hotel chain that leases and franchises assets”. Since it owns inventory through lease/franchise, he adds that there is no question of underpricing, high commission rates or deep discounting.

The analysis suggests that resolution may be tough due to different priorities. Without discounting, players like OYO cannot ramp up the subscriber numbers that investors like Softbank are pushing to increase its valuations, even if it is at the cost of profitability. If OYO stops discounting, subscriber numbers will fall and it will be disastrous for its valuation as well.

It is ultimately a question of balance of power. With hotel owners coming together and even approaching the Ministry of Tourism, it may not be inane to imagine them attempting to push aggregators like OYO out of the market by establishing a competitive platform, for instance. OYO needs to talk to these associations and find a middle ground, however challenging it may appear at the moment.

Economic Times carried a report on OYO’s response to protests by hotel associations. You may view it here.

DNA has presented a deep dive analysis into the factors driving the rift between OYO and hotel owners. You may view this feature here.


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