In 2021, a leading news website of India wrote this about OYO. At the time, many people agreed with this statement. Just the year before, OYO had posted its record loss of 13,123 Crore Rs. Yes, that was pure loss of almost 1.6 Billion dollars in just one year. And what’s even more shocking is that it wasn’t the pandemic year, the year I am talking about was the Financial Year 2019-20, so all that happened before COVID-19 hit. In addition to these bad financial numbers, the company was also fighting several battles in court. First, there was this case filed by the Federation of Hotel and Restaurants Association of India, which accused OYO of manipulating.
Revenue numbers and hence lying to hotels about actual revenue figures. There were cases filed against Ritesh Agarwal too, where the hotel owner claimed that the management of OYO changed the terms of their agreement and that it was done with criminal intent. And finally, OYO’s biggest shareholder Softbank was pressuring the company to go public, so that it could recoup its investment from the company. Following this, Ritesh Aggarwal did file for the IPO but had to later withdraw it because of concerns over its profitability and regulatory challenges, as multiple organisations had appealed to cancel OYO’s IPO. Now, these were pretty big challenges, and to think that a 28-year-old founder could get through them was very ambitious.
But today, in 2024, things are looking way better for the company. It has posted its first-ever profitable year, with a net profit of 229 Crore Rs, and is projecting three times of this the next year, to 700 Crore Rs. So the question is, how did this happen? How did one of the most promising startups in India, first go through such tough times, and how did its founder, along with his team, come out of it? This is what we will discuss in this episode of Backstage With Millionaires. To understand the issues that OYO faced a few years back and how Ritesh Aggarwal saved the company, we need to learn a bit about OYO’s early days, as that would really set the context. OYO was started in 2012, by 19-year-old Ritesh Aggarwal. His initial idea for.
The company was to build a listing platform where people can find and book budget hotels near them and he named it Oravel Stays. This idea was loosely inspired by Airbnb, which at the time was an up-and-coming budget stay startup in the US. Now, Ritesh’s journey wasn’t like other typical startup founders we see today, people like Deepinder Goyal or Bhavish Aggarwal. He didn’t attend any top universities like IIT or IIM and also didn’t have strong financial backing from his family either. If it wasn’t for this guy, Ritesh won’t be where he is today. The guy’s name is Peter Thiel, a Silicon Valley entrepreneur and investor. He made his fortune by founding PayPal and later becoming one of the early investors in Facebook.
Peter is someone who doesn’t believe in conventional education and likes to back young and hungry founders, who want to build something. To do this, he started something called Thiel Fellowship in 2011, where he would select 20-30 young people every year, to drop out of college and build something. He would also give seed funding of $100,000 for this. Now, Ritesh got extremely lucky and received this fellowship as soon as he started Oravel Stays and what would have taken him years to learn and figure out, he learnt in just a few weeks. One of the key insights was that finding and booking a hotel in India was not the main challenge, it was the quality of stay. And if he could use technology to standardize and give quality experience to the customers, he could build a very big business.
This pushed Ritesh to rethink his entire strategy, he started by changing the company’s name to OYO and used the money he got from the Thiel Fellowship to hire his early team. For the first couple of years, OYO’s business model was very simple. It would onboard a hotel partner, and take care of the guest experience, right from giving a smooth booking experience to giving essential services like clean sheets, free wifi, AC and running water. In addition, OYO would also do the marketing for that hotel. For doing all this, OYO just charged a small commission from the hotel owners, which ranged from 15-25% depending on various factors. And, now that the hotel booking experience was so much better than before, hotel owners had seen an increase in bookings and total income so they didn’t mind paying this commission to OYO.
By 2016, OYO had grown significantly, it had a presence in 100 Indian cities and had over 5,500 hotels on its platform. Also, by now it had become India’s largest branded hotel aggregator. But this was the time, when OYO was about to change completely, and this person is the main reason for that. His name is Masayoshi Son, the founder of Softbank, one of the most valuable companies in the world. In addition to Softbank, Masa also manages the largest tech-focused VC fund in the world, called Vision Fund. To understand how Masa influenced OYO, we first need to learn a bit about his investment philosophy.
See, Masa believes that technology will change humanity forever, and he wants to invest in the most disruptive companies and visionary founders. In the past, Masa had invested in legendary companies like Alibaba, Uber and Bytedance, and with a similar philosophy, he invested in Ritesh Aggarwal and his company OYO. His vision with OYO was that this company could disrupt the global hospitality industry by standardizing and scaling budget hotels. With this vision, Softbank first invested in OYO in August 2015, and over the next four years, it invested over 1.5 Billion dollars into the company. By doing this, Softbank also became the largest shareholder in the company, having close to 47%.
Stake at its peak. And because of this, Softbank now controlled the major decisions of OYO. Now, once Ritesh Aggarwal had Softbank’s backing, he started to think bigger and aim for a global scale. OYO did this by taking a two-pronged approach. Firstly, in order to onboard more hotels, it launched something called a ‘Minimum Income Guarantee’ Model, where the company told new hotel partners, that irrespective of how many bookings it gets, OYO will give a fixed income every month to them. This motivated many hotel owners who had initially been hesitant to join the young company. As for the ‘minimum guaranteed income,’ it varied based on several factors,.
But in most cases, it was 50% to 200% higher than what these hotel owners had been earning before. Another issue that hotel owners had earlier faced was that there were so many fluctuations in their business, in peak seasons, their hotel was overbooked, but in off-seasons, there was little to no demand. And when OYO promised them a fixed, predictable income, these people couldn’t say no. For eg, this Bengaluru-based inn owner claimed that he was promised 7 Lakh Rs per month by OYO as a guaranteed income. And of course, all this money came from Investors, particularly, Softbank, whose sole focus with OYO at this time was to capture as much market as possible. The next thing that OYO did, after Softbank came on board, was aggressive expansion.
It first started with India, where according to this article, the company hired a sales team of thousands of people, to talk to new hotel owners and convince them to join OYO. The next target was the global market, and the company started by expanding to Southeast Asian countries. Its promise of a guaranteed income was loved by hotel owners in other countries as well, and by 2019, OYO was present in 80 countries. One market, where OYO saw unprecedented growth was China. See, China at the time was a market similar to India. Its budget and mid-tier segment were highly fragmented like India. There were many small, independently owned hotels, with inconsistent quality and a lack of brand standardisation. It provided.
OYO with a great opportunity to replicate its success from the Indian market here in China. By the end of the Financial year 2020, OYO had partnered with over 19,000 hotels in China alone. This number for context, was more than India itself. A similar aggressive strategy in other countries in Europe and North America made OYO the third-largest hotel chain in the world in terms of total rooms only behind Marriott and Hilton. Now from a distance, this rapid expansion looked good, and it reflected in the company’s revenue as well. OYO’s total revenue increased from 32.8 Crore Rs in FY-16 to 13,168 Crore Rs in FY20, more than 400 times in just 4 years. But this growth came at a big expense.
See, as OYO grew from being a small India-based hotel aggregator to one of the world’s largest hotel brands, the company made many changes to how it ran. The first one was to fundamentally change its relationship with hotels, from being an aggregator earlier, the company now started to work on a franchise-based model. This was done primarily for two reasons, one, to have more control over a user’s experience, and second to scale fast. But for hotels, this was a major change. See, earlier hotels were independent and only partnered with OYO. The hotel owners had total control over prices, listing and other management. But once OYO switched to the franchise model, it took control of the entire inventory. So now, OYO decided on the prices of these.
Hotel rooms and also issued a long list of guidelines, which these hotel owners had to comply with. And of course, all hotel owners were not happy with these changes. Let me give you an example to explain, Let’s say there was a three-star hotel, which was earlier priced at 2000 Rs. Now, since OYO managed the supply and hence the price, it could increase or decrease this price depending on what its algorithm thought would be better. This led to many hotel owners thinking that they were now at the mercy of OYO, on how much would their hotel earn. Next, OYO did all this very quickly, As I mentioned earlier, OYO set up a team of thousands of sales people to register more hotels, and as a result, their total number of hotels in India,.
Increased from 6000 in 2017, to 18000 in 2020. And if you include hotels outside India, then this number shot up to 43,000 hotels in 2020. That’s a crazy growth in just three years. Because of this rapid expansion, execution got screwed. A lot of hotel owners, who didn’t read the terms and conditions properly, were sold OYO’s franchise in lieu of good income. But when the dust started to settle, the tough reality started to kick in. To begin with, many hotels as I said, didn’t read terms and conditions properly, and because of this they failed to meet the promised standards. This led to customer dissatisfaction, and both the hotel and the customer blamed OYO for this. The next issue was OYO’s unclarity over its revenue model. Remember,.
The ‘guaranteed fixed income’ promise that OYO sold to many hotel owners, well by now OYO started realising that this model doesn’t make sense. What started to happen was that OYO had made this promise to a large number of hotel owners both in India and other countries, but while doing so, it had over-expected the demand, and when this demand wasn’t met, OYO had to pay these hotels every month out of its own pocket. Just to give you an idea, of how much money this was, in FY2019-20, OYO’s total losses were 13,123 Crore Rs, and I am sure a lot of money was spent for this. OYO, of course, realised that this isn’t sustainable, and they hurriedly started changing this model. Company now introduced a revenue-sharing model, where both parties will.
Share the amount of total booking value. But the thing is, it wasn’t communicated properly to many hotel owners, which led to protests and even cases against Ritesh Aggarwal. And the issues that I just mentioned, weren’t only happening in India, it was also happening in other countries like the US and China. Small hotel owners in these countries, who mainly joined OYO in order to earn a guaranteed income, now got angry when OYO changed this business model. A lot of these hotels sued OYO and its subsidiaries in their respective countries. Now, just so when OYO was trying to douse the fire over these many mishaps, it was hit by another massive blow. COVID-19. Travel and Hospitality was one of the hardest hit sectors during the pandemic. In the early days,.
OYO promised to support to its hotel partners, but as the lockdown period extended and the demand didn’t pick up, the company took several measures to stay alive. To begin with, it laid off thousands of employees, both in India and overseas. This was followed by shutting down properties which weren’t making money. Now these issues were still manageable, the biggest issue the company faced, was pressure from its investors, especially Softbank. See, Softbank at this time was going through a rough patch. It’s biggest investment in WeWork had failed and it had lost almost $15 Billion, and it was a big setback for Masayoshi Son. He now had to make money from his other investment like OYO, if he had to survive.
This was when OYO, which was already running terribly bad, was allegedly forced to go for an IPO. In September 2020, OYO filed for the IPO. This IPO wasn’t accepted by a lot of people because of OYO’s heavy losses, and there were organisations like SEBI, who were investigating the company, for alleged fraud. And the time it looked like things weren’t going to work out for OYO and it might become another WeWork or BYJU’S. But fast forward to today, OYO has posted a full profitable year, with a net profit of 229 Crore Rs. So how did Ritesh Aggarwal and his team turned around their business? Well to begin with, OYO changed its entire focus from ‘growing at any cost’ to ‘growing profitably’. To do this,.
The company first delisted thousands of old hotels which were not performing well, this includes hotels which had low visitor turnout or that they had low-customer experience. In addition, the company also removed hotels which didn’t agree with its changed business model. Because of this, total number of OYO hotels in India reduced from 18,000 at its peak to 8,000 now. And what’s really interesting is that, it did not affect OYO’s total revenue, which is actually increasing now. This is happening because OYO is focussing now on making more money from the existing hotels, by improving the customer experience and cutting cost using technology. To give you a number, OYO’s gross booking value or top line revenue has increased from 2.19 lakh Rs per hotel to Rs 3.9 Lakh now, almost 80% increase in just one year.
Another point, which I earlier mentioned, was OYO’s change in its business model. Earlier while the company worked on a ‘guaranteed fixed income’ model, which added heavy fixed cost for the company, OYO now works on revenue-sharing model, which removes any sort of financial or other kind of pressure from OYO. Now hotels are as much responsible as OYO, to give a good experience to the customers. Next, thing OYO is doing now is changing its brand image from a ‘budget-friendly’ hotel chain to one that is available in all segments. So, for the affordable segment, it has OYO Townhouse, for people who prefer homestays, there is OYO Homeluxe.
Next, for corporate travellers, OYO has two options depending on price and location. These are the options, under OYO’s own brand. The company has also launched two new brands, Palette, and Sunday, both of which are premium hotel and resort chains. So what you are seeing here is that OYO has spent the last 10 years learning about the hotel business, it has made all sorts of mistakes and learnt from them, and the company is now applying these learnings to get into every segment of the hotel business. Now, these were changes done in India, but OYO has taken a new approach for its global business as well. Firstly, it has scaled down from 80 countries to 35 now. This also means a.
Bigger focus on the markets that are bringing in revenue and where the company does not have to go up against big competition. For eg, the company has scaled down its business in countries like China and doubled down on countries like the UK, and Nordic countries. As a result, while OYO’s overseas base has shrunk, its revenue has actually increased. Now these were the changes that the company has already done, but there are some ongoing things the company is doing, which look very promising. The first one, is tapping first-generation hoteliers. See one reason, OYO faced so many difficulties in the past, was because it was dealing with legacy hotel owners. These were the people who weren’t too comfortable with technology and made the process too complex.
OYO is now looking for young first-generation hotel owners, who OYO can train to run their hotels more smoothly. For this, the company launched a dedicated accelerator program, and it’s already running 1000 hotels under this project. Next thing, OYO is doing, is tapping future growth areas, which look promising, and one particular area which I want to mention here, is spiritual tourism. See post COVID, India has seen a massive rise in spiritual tourism, it is happening firstly, because people are looking for new ways to reconnect with themselves and two, the government has focussed on this a lot through schemes like PRASHAD and Swadesh Darshan schemes. According to a report by the Ministry of Tourism in 2021, 67.7 Crore people.
Participated in spiritual tourism, generating a revenue of 7.9 Billion dollars. This number increased to 143.9 Crore people and a revenue of 16.2 Billion dollars in 2022. And according to the same report, this revenue could grow 4x to 59 Billion dollars by 2028. And OYO has jumped on this trend pretty early on. In January 2024, they announced they will be opening 400 new properties in Indian cities to cater to this new demand, with a heavy focus on Ayodhya, Varanasi and Puri. Because of these efforts, OYO is projecting a net profit of 700 Crore Rs in FY-25, almost three times of FY-24. And the company is already on track to do this, they did 132 Crore Rs in net profit in Q1 of FY25, so it will be really interesting to see, where they end this year at?.
In the end, let me know what you think of this eventful journey of OYO? What was your biggest takeaway, share it in the comments and I will see you in the next one.
