CHINA VOICES | The inside story of OYO
Jul 22, 2019
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What follows is a greatly abridged translation of a long-form investigation of Indian hospitality unicorn OYO conducted by Chinese journalists. The budget hotel brand offers rooms in 800 cities globally and is valued at $10 billion after founder Ritesh Agarwal bought a $2 billion stake from Sequoia Capital and Lightspeed Venture Partners on Friday.
Despite the hefty valuation, it appears that not all is rosy in China where company is dealing with layoffs, micromanagement, and zombie hotels.
TechNode has not independently verified the claims made below.
Liu Xue’r and Ran Xiangyu, AI Finance and Economics, July 2, 2019
At noon on July 2, OYO employee Ma Dun opened the company’s Ding Ding office management app and checked the total employee count. 7,417. By 9 p.m. that night, there were 500 fewer. Just a few short months before, OYO had employed nearly 9,000. They’d lost so many people at rapid speed.
This star Indian company has impressive backers: Softbank, Sequoia, Airbnb, and Didi. Diving into mainland China at the end of 2017, it swam to the front of the hotel sector with its free franchise and low commission model. It boasted more than 10,000 hotel franchisees across China, and a total of 500,000 beds. Nowadays, however, the self-proclaimed China No. 2 and global No. 6 hotel chain is swimming alongside a massive iceberg of falsified data, whispers of money-laundering, and massive layoffs.
Layoffs and confusion: Industry insiders reckon the company has laid off roughly half its employees, mainly from the business development (BD) and operations (OP) teams. In some cities, layoffs have been up to 50%. Across the country, OYO is shedding a third of its staff. But OYO continues to deny these facts. “We are recruiting and now have more than 10,000 people on our books, including in BD, OP, and Renovations teams.”
OYO’s China Chief Business Development Officer Liu Fang stayed in his job for just two weeks. Li Ran, vice president responsible for user growth, and East China Senior Vice-President Li Bin left after six months. One former high-level officer at OYO revealed that management in China could only make decisions involving sums of less than RMB 50,000 (about $7,200). Although OYO China was an independent company, decision-making power was retained at Indian headquarters. The Chinese company has never had a CEO of its own, only a number of Chief Experience Officers (CXO).
These constant strategy changes at the top affected the situation lower down the line, including relations with cooperating hotels. And this is where the problems multiplied.
Broken promises: Apart from underdelivering on its promises, OYO faced other complaints and concerns from their hotel franchisees.
In China, OYO promised to give hotel owners three types of support: first, money to renovate hotel fronts and adjust the style to create a unified brand; second, specialist operators to smooth out managerial issues; third, a platform to help owners expand customer channels, increase occupancy rates, and owners’ income.
“From the month we signed with OYO, we haven’t received a single new customers from their platform,” a Shenzhen hotel owner and franchisee told AI Finance and Economics. She was in the first round of Shenzhen hotels that signed up with OYO. She had believed that OYO would recruit quality hotels only, for optimal brand competitiveness. Little did she realize that less than three months later, many small hotels would begin hanging OYO signs on their doors. The first batch of hotel owners got mad. “There’s little to go around in the first place, but if you bring more people to the table, there will never be enough.”
Zombie hotels: The problems went beyond operations. OYO also had a problem with “zombies,” hotels that were on the books but not really present. Then there was the fake discounting and falsification of ratings.
There are two types of hotels on the OYO platform. The first type, requiring prepayment, is generally a hotel with regular operations. The second does not require prepayment, but might be a “zombie.” The authors booked a room in an Jinxiu Jiangnan OYO for RMB 140.6 but neither paid nor stayed there; nevertheless, the system showed the stay to have been completed.
At least 50% of the hotels on the OYO platform are said to be “zombies,” according to company informants. Some 20-30 of the 40 hotels in Xining have no business with OYO. It may be because OYO has a bad reputation, or it could be an unwillingness to advertise their connection to the company or to use its system.
Faulty data: Even though OYO’s Indian parent company has gone through 11 rounds of financing in its six-year history, accumulating capital from giants such as Softbank, Sequoia and Lightspeed, as well as travel firms like Didi, Grab, and Airbnb, OYO’s juicy data points are not worth that much after all. There appear to be too many faulty points and sneaky tactics behind each listing.
2.0 strategy: Attacked from inside and out, OYO now seeks a new way forward. In May, it introduced a Hotel 2.0 strategy. Chief Revenue Officer Zhu Lei announced that small individual hotels would no longer simply pay a fee to be branded as part of the franchise.
OYO would now share the cost of rebranding with hotel owners, and share revenue too. In other words, joining OYO would bring in a minimum income, and OYO was invested in the returns it would receive when the hotel began making a profit.
He Mu said that the 2.0 strategy was guided by two main product types—the first type are stable hotels that are already in good shape. No new equipment or modification are needed, so commission is fixed at a rate of around 10%. The second type are growth product—hotels that need extra work and investment. They give up to 30% back to OYO, and would be subject to longer contracts with the company.
In this way, OYO is trying to strengthen control over hotel owners. For example, owners have to use the company’s property management system (including ID card reader) to record information on their customers. They also have to use OYO’s online and offline payment tools. Whether bookings are pre-paid or paid in person, hotel owners are made to cooperate.
Far away in India, OYO’s management team feels reassured by the new direction. Founder Ritesh Agarwal wrote a letter on June 27 in which he assured investors that the Hotel 2.0 strategy was producing occupancy rates of more than 80%. Up to 97% of hotels were renewing their contracts with OYO. “We are not losing money on a single hotel.”
The truth: One staff member chuckled when he read this: “We know what these facts are made of.” Insiders say contract renewals are at no more than 60%. Take Chongqing, for example. Of 200 registered hotels, zombies account for around 120. In one month, the company registered just 10 or so stable hotels in the city, as well as only two or three growth hotels. OYO’s July 1 announcement had mentioned more than 100 hotels within a month, “and in the past two or three days, 50 a day.”
Between the lines: Seeing things from today’s perspective, layoffs have fully exposed OYO to the public as bare beneath the surface. Under the surface of this iceberg are falsified data, bad optics, and internal confusion leading to disintegration. Negative revelations in the media on June 29 have resulted in the ever-loyal Softbank taking a fresh look at their investment. Ritesh Agarwal is now attempting to secure another $800 million to support his strategy for the China market.
Not only does OYO China have massive internal problems. It must face the naked truth of fierce competition. In a competitive environment that is very different from India, OYO has a host of copycats ready to take it on, including H Hotel, Ctrip, and Meituan.