Why Oyo is parsing playbook one hotel at a time?

If one could paraphrase OYO’S elevator pitch, it would sound something like this: “OYO standardizes a highly fragmented budget hotel industry with consistent and uniform upgrades in infrastructure quality and service levels to ensure a consistently comfortable and reliable stay for the hotel guest and, in turn, enhance the occupancy levels, revenue, and profitability of the hotel owner”.

So, how does this play out on the ground?

OYO has a feet-on-the-street marketing team that stakes out budget hotels to find partners.

Approaching the right person

The hotel owner who spoke to us runs a budget hotel in North India. OYO approached him sometime last year and offered to take it under its wing on the following terms:

Following an audit report, the hotel would invest in upgrading the hotel to OYO’s prescribed standards.
The hotel would bear all the capex expenditure.

  1. OYO’s only upfront investment involved putting up their branding signage and other branding materials and providing a tablet device to be used for managing bookings.
  2. OYO would be responsible for all 35 rooms at the hotel. It offered a minimum guarantee of Rs 14.5 lakh ($20,400) per month (NB: This sum was arrived at after OYO examined the hotel’s legacy booking and occupancy records). This is the assured sum that OYO would pay the hotel irrespective of how much business was actually generated.
  3. Once this minimum guarantee fee was crossed, the hotel would need to pay OYO a commission of 20% of the excess revenue every month (17.5% as revenue share and 2.5% as “platform fee”)
  4. The booking process would work as follows: Customers book rooms through the OYO website or app or any other OTA/aggregator with which OYO has tied up (for instance, MakeMyTrip and GoIbibo). In addition to this, any customer can walk in and book a room at the hotel counter directly (these bookings would also count against the minimum guarantee).
  5. The payment and settlement process would work as follows: Some bookings are prepaid, for which OYO collects the payment upfront; others pay at the hotel itself (both pre-booked rooms and walk-ins). At the end of each month, the hotel owner is liable to pay 20% of the booked revenue to OYO—OYO consolidates the online and offline payments and settles the balance payment to the hotel after deducting its commission.
  6. The hotel is completely responsible for operating the hotel—OYO bears no operating expenses.
    On the face of it, it is a brilliant model with an irresistible win-win value proposition.

OYO gets additional inventory without any capex or opex—the textbook thin-asset business model.

The hotel owner gets a higher revenue through the increased utilization that OYO’s platform provides, as well as the comfort/insurance of a minimum guarantee that he will earn irrespective of what the actual utilization is.

All kosher, right?

On paper, yes.

On the ground, not so much.

How so?

Let’s examine the metrics one at a time (NB: These numbers are drawn from the actual reports and bank statements over a nine-month period shared by the hotel owner).

Occupancy rate

Claim/promise: Sharp increase (Before: 25%, After: 65%)

Actual: Moderate increase (Before: 70%, After: 80%)

OYO promises a nearly three-fold increase in room occupancy rates from 25% to 65%, but in reality, the owner saw a much more modest increase (from 70% to 80%). Of course, this might have been a function of the original occupancy rate which, at 70%, was already high, to begin with. Perhaps OYO’s value proposition is far sharper for hotels with vastly underutilized inventory. Be that as it may, the hotel owner was not particularly happy with the increase in occupancy.

Why so?

According to the owner, there was a marked difference in the profile of hotel guests before and after tying up with OYO.

Previously, a large chunk of them were corporate guests. Hotel owners prefer corporate guests because they are more profitable on multiple counts. Corporate guests are usually long-term partners with a higher level of loyalty and stickiness. Most corporate bookings are for longish periods—a minimum of three to four days.

Servicing corporate customers carries lower overheads, and most of these guests use the rooms primarily as a place to sleep at night and therefore don’t require constant care and attention in terms of housekeeping during the day (when they usually step out for work).

 

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