Oyo Rooms starts leasing hotels

Bengaluru/New Delhi: Oyo Rooms, the SoftBank-backed online budget hotel aggregator, has started leasing hotels and guest houses under a programme called Oyo Flagship in a significant shift from its pure play aggregation business, said four people aware of the development on condition of anonymity.

By having complete control over the day-to-day operations of the establishments, the Gurugram-based company intends to improve the consumer experience and have a better repeat rate. It will also help them arrest malpractices by certain hotel owners, which have led to significant cash burn for the company in the past.

One of the persons cited above said Oyo (Oravel Stays Pvt. Ltd) launched a pilot in Gurugram around three months ago. The company has since extended the initiative to at least 30 properties in Delhi NCR, Bengaluru and Mumbai.

This is a shift from Oyo’s earlier strategy of booking a part of the hotels’ inventory, and holding it captive for Oyo customers.

Such a strategy often resulted in hotels making fake bookings, which led to Oyo bleeding more money at a time when investors have become cautious about their bets. Besides, the company was struggling to offer customers a standardised service across all its properties.

“We are leasing hotels and guest houses with low occupancy, as well as residential properties based on their location. A lack of good inventory of hotel rooms prompted us to think this way,” said one of the four people cited above.

Oyo largely deploys its own staff in these properties, such as managers and front staff, in a bid to improve service, said another person cited above. The number of staff ranges from four to six, depending on the size of the property. The company is also planning to integrate services such as food ordering and laundry within the app. The contract for the leases ranges between six months to several years, depending upon the location and the pricing of the property. Financial details of the leases could not be ascertained.

Oyo did not reply to an email seeking comment.

The company will also be seen partnering with online food ordering firms such as Zomato, Foodpanda, which allows consumers to order food using the Oyo app; and with hyper-local services start-ups Helpi and Urbanclap for services such as cleaning.

The new vertical will compete with Matrix Partners and Saif Partners-backed online budget hotel booking start-up Treebo (Ruptub Solutions Pvt. Ltd), that blocks the entire inventory of a hotel. Treebo, however, doesn’t lease properties but runs them on a franchise model.

While the move may improve customer experience, it is likely to put greater financial burden on the company, especially at a time when a slowdown in funding has impacted homegrown start-ups, including Oyo.

“It is going to be more capital intensive, because if you lease a property and cannot sell it, you have to incur a cost for that. It is like some of the aggregators who were trying to guarantee some of the budget hotels a minimum occupancy. Secondly, by having too many leased properties, you may possibly get into conflict with your own network,” said Ashish Basil, partner-technology, transaction advisory services at EY.

Budget hotel aggregators were supposed to be the next big thing for investors and entrepreneurs, but as with most other new, unproven businesses such as food-tech, investors and entrepreneurs seem to have overestimated the potential of the business.

According to data available with Tracxn, a start-up tracker, there are at least 22 such start-ups in India (some of which have different models), who have raised close to $200 million in total funding.

Budget hotel verticals launched by online travel agencies have also made investors in hotel start-ups more cautious. MakeMyTrip, Yatra and Goibibo launched their budget hotel businesses, putting them in direct competition with Oyo and Zo.

The online travel firms have already delisted Oyo and Zo Rooms from their platforms, signalling their ambition to build a budget hotels business independently.

“We’ve built a strong and growing business at Oyo by offering predictable stays with consistency in customer experience. Flagship upgrades this customer offering and delivers a boutique experience to our guests,” said Ritesh Agarwal, founder and chief executive officer of Oyo Rooms.

“We train staff, transform properties and undertake audits for all our partners. The Flagship model involves a deeper engagement with the property-management,” he added

According to the company, Flagship is part of their strategy to try newer means of creating supply and build more efficiency and predictability in their business.

It also indicated that these would be a premium offering to its customers and that it is willing to deploy a large volume of capital. However, it did not divulge further details.

“Leasing or other forms of economic arrangement with supply partners is just one aspect of the Oyo business model…. we are not pivoting or fully adopting the property leasing model,” he added.