Oyo’s business model is filled with gaping voids just like WeWork, which turned out to be a spectacular bust and an embarrassing setback for SoftBank when the market rejected its IPO valuation.
From the humble origins of Oravel Stays, Ritesh Agarwal’s Oyo Rooms is today the third-largest hotel chain in the world. Oyo follows a mixed business model – a hotel aggregator along with a franchise-based approach. In a short span of 6 years, Oyo’s fast growth has attracted many investors and also an equal amount of controversies.
Oyo is right now in restructuring mode, claiming to trim redundancy across both the Indian market and China. Oyo’s current firing spree will result in thousands losing their jobs. As per early reports, Oyo has trimmed 5% of its 12,000 employees in China. In India, the number stands at 12% of 10,000 workforce. Its reason is non-performance of employees. But could the non-performance be linked to an underperforming business model?
Heads Up! Oyo – Oyo’s Firing Spree — By-Product Of A Highly Combustible Business Model?
- Oyo’s rapid growth and accompanied scepticism
- Controversies keep piling up for Oyo
- Intention to cheat?
- A monthly shell game
- Returning ghosts from SoftBank’s WeWork setback
Banking on the potential of filling budget hotel rooms, Oyo aims to become the world’s largest hotel chain by 2023. But the cost of becoming the largest chain of hotels isn’t risk-free. The business tactics that forms Oyo’s approach has regularly hampered the reputation of the Unicorn.
Oyo aims to become the world’s largest hotel chain by 2023 but its business tactics regularly hamper market reputation.
Oyo’s biggest backer, SoftBank, faced similar challenges and also incurred losses with the American WeWork. Likewise, with Oyo, it might be set for a similar disastrous trajectory in the future.
Too big for its shoes – Oyo’s Rapid Growth
Apart from the firing spree, Oyo’s business model and growing prominence continuously raise scepticism, especially when the growth comes with one controversy after another. A recent report in the Economic Times revealed the truth behind Oyo’s pseudo success.
Oyo has been on a fierce global expansion path. It now offers over 1.2 million rooms in 80 countries covering more than 800 cities. The company’s valuation is estimated to be between $10 billion to $15 billion. The meteoric rise, however, directly raises questions on the Oyo business model.
The Controversies that surround Oyo
Several protests have taken place against Oyo over issues like non-payment of dues. Consequently, Indian hotel owners and associations across cities have multiple times mulled taking legal action against Oyo.
In January 2019, FHRAI (Federation of Hotel and Restaurant Associations of India) claimed that around 200 hotels had ended agreement Oyo because of mismanagement of contracts and arbitrary charges. Then in July 2019, FHRAI also filed a complaint against Oyo with the Competition Commission of India (CCI).
Unlicensed and Unavailable Hotels
In fact, Aditya Ghosh, Oyo’s Head of India Operations, has also said that many hotels do not have the required licenses. This makes them vulnerable to government raids. According to the New York Times, to prevent troubles over unlicensed hotel partners, Oyo turned to providing free lodging to the police and other officials.
To amplify its narrative as the third-largest hotel chain globally, Oyo also lists rooms from hotels that have left its services.
Furthermore, to amplify its narrative of being the third-largest hotel chain globally, Oyo also lists rooms not part of the platform. These are hotels that have left Oyo’s services but are still used to inflate the room volume listed as part of its credentials.
Intention to cheat?
Oyo has been accused of reducing the revenue share of hotels against what is specified in contracts. A former operations manager at Oyo revealed that the company sometimes deliberately holds back payments of hotel owners.
Oyo’s tactics include pressurizing hoteliers to renegotiate contracts if it finds the current deal unprofitable. The owner of Bangalore-based Roxel Inn filed a police complaint against Oyo in November 2019 for non-payment of Rs. 35 lakhs. The complaint also accused Oyo of “intention to cheat and cause wrongful loss” where it charged the hotel for nonexistent guests but refused monthly payment.
A former employee at Oyo revealed that the company sometimes deliberately holds back payments of hotel owners.
Similarly, another hotelier from Bangalore sued Ritesh Agarwal and top Oyo executives Anand Reddy and Prathik Singh for cheating and criminal breach of trust.
Overseas expansion faced similar dissatisfaction
In June 2019, Oyo entered the US market with over 50 hotels in 35 cities. However, in October 2019, reports surfaced that Oyo hotel partners were unhappy with the platform. They raised issues like poor software, loss of revenue and also criminal activities inside hotel rooms managed by OYO. The hotel owners also accused Oyo of not paying the minimum monthly due that was guaranteed.
Furthermore, the hotel owners also claimed that they have lost their rights on bookings and room charges. They claim that due to low prices i.e. controlled by the company itself, their hotels attract prostitution, drug-binging and other illegal activities.
Company’s Heavy Model: A We-Work like bust if and when Oyo goes for an IPO
In December 2019, SoftBank and Ritesh Agarwal invested $1.5 billion in the company to expand it further. However, the other two investors and board members Sequoia Capital and Lightspeed Venture Partners reduced their stake. In fact, both the investors sold half of their stakes amounting to $1.5 billion back to Agarwal.
It has also been alleged that Oyo asks its employees to engage in a “monthly shell game”. This means including unavailable properties on its platform with fake photographs to impress investors.
There are gaping voids in Oyo’s business model. That prevents markets from trusting the value it portrays as its worth. So, while Ritesh Agarwal and Oyo boom thick and fast, it feels like a repeat of the Adam Neumann-WeWork story.
Furthermore, Oyo’s prime backer SoftBank’s WeWork setback wounds are fresh. The world’s largest tech investor should be wary of a similar debacle at Oyo, another of its crown jewels.