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NEWSLINE

Oyo’s Mafia-esque Business Model

Oyo Rooms – a Unicorn with a dynamic plan. But skims off partner hotels.

HEAD SHOT

  1. Oyo helps structure the ecosystem with its bigger reach which means more customers.
  2. But often partner Hotels feel undone by deep discounting, high commissions and arbitrary contract changes.
  3. In 2018, hotel associations in a number of cities voiced out and threatened to end their relationship with Oyo.


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FHRAI warned Oyo of action for contract breaches in December 2018 | Credits: Moneycontrol.com

Filling in the rooms. But it comes at a cost.

India’s original rockstar startup has made a firm base for itself.  Oyo is a focal point for other stakeholders of the industry – hotels, travel agents and service providers.

Oyo came as – a dynamic solution to an unstructured sector. Its promise of optimized and increased business was bought by hotel owners.

But Oyo didn’t just grabbed a slice of the saturated industry, it took the cream of other slices as well. Hoteliers who embraced the start up with open hands, now regret. 

Unhappy hoteliers across the country often cry foul

Hoteliers voice concerns that deep discounting, high commissions and arbitrary contract changes are making their business suffer.

In 2018, hotel associations in a number of cities came together and contemplated legal action against Oyo. Budget Hotel Association of Mumbai President Ashraf Ali’s comments were reported in ET:

Oyo has disrupted the entire market drastically. Rooms that used to sell for Rs 2,000-2,500 are now being sold for Rs 800-900. The minimum guarantee fee is also not coming, so we are not left with a choice.

Being with Oyo may turn out bad business

How the business runs – budget hotels let Oyo take over the majority rooms or complete space for an upfront guaranteed sum. The upfront money is enticing and draws several Hotels into its lap.

Oyo signs up hotels by giving minimum guarantees and buying a significant percentage of rooms. It also persuades hotels to spend freely on upgradation, promising good returns and more footfall.


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Dehradun hoteliers came on a common platform and considered action against Oyo, the room aggregators associating with hotels on SMART SELL MODEL. | Credits: Newspost.live

But things go south for Hoteliers when Oyo starts offering deep discounting and undercut rates to fill those rooms. Then Oyo convinced hotels to forego the earlier signed minimum guarantee documents and enter new ‘dynamic models’.

The new model is apathetic to the Hoteliers. Hoteliers might end up getting charged somewhere around 25-30 percent as commission. They say its not enough, as they pay for majority of the resource alone – staff salaries, electricity, maintenance, supplies.

Hotel owners have complained of negligible profits and almost none in some cases. A notice issued by The Hotel and Banquet Hall Association of Bareilly advising hotels against joining Oyo. The notice had said:

“Beware of Oyo as giving your hotel to Oyo will lead to a total loss of goodwill.”

Arm twisting like a feudal lord

The unicorn has raised a total funding of USD 1.8 billion till date. With the iron strong finances, Oyo loves twisting the arms of small-time hotels.

Individual hotel owners can’t compete with the might of the billion-dollar establishment. Commanding a large loyal guest base enables Oyo to negotiate even lower rates than promised to Hotels.

A hotelier from Varanasi, keeping anonymous, expressed disappointment with the Oyo transaction. He mentioned

With substantial convenience fee now relied, profits have thinned. Having to book independent bookings also on a tab comes as a loss to the Hotel.


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Having to commit substantial portion of their capacity, Hotels are unable to use empty rooms on Oyo tab. | Credits: Pixabay

Adhere or pay

A budget hotel association complained in 2018 saying that Oyo was not honouring previous contracts, demanding new terms and threatening to withhold payments.

Oyo’s ‘smart buy’, which helps it control entire hotel inventories, rates and online travel agency listings allegedly suffocates a hotel’s freedom of doing business their way.

Such agreements tax hotels heavily with charges like run sale charges, platform charges, rate change charges and rank visibility charges.

Associations have alleged that Oyo’s accounting process has become opaque with arbitrary payment deductions and penalties leaving hoteliers with no gains.

Hotels urged the government and the Competition Commission of India to revolve their issue.

Hoteliers are teaming up against Oyo

Hoteliers have had enough of Oyo due to a biased approach and unilateral business decisions.

As per some media reports in Feb 2019, more than 200 partner hotels terminated their agreements with Oyo citing contract mismanagement, arbitrary charges and other disputes.

They are ready to boycott exploitative, unethical and divisive tactics of Oyo that have led to predatory pricing and market distortion. As one of them said:

Oyo has the potential to harm both hoteliers and consumers in the long term.

That’s not good collateral for Oyo’s dynamic plan.

PARTING SHOT

  1. Oyo’s ability to fill hundreds and thousands of rooms at dirt cheap prices banks on burning the investors money.
  2. Oyo’s share amounts to almost 25-30 percent, leaving owners with having a hard time carving margins.
  3. Associations have alleged that Oyo’s accounting process has become opaque with arbitrary payment deductions and penalties leaving hoteliers with no gains.
  4. Oyo has been blamed for pressurizing hotels with a stressful business partnership.
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