Bengaluru/New Delhi: Oyo Rooms, the SoftBank Group-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, four people aware of the development said.

By exercising complete control over the day-to-day operations of these establishments, the Gurgaon-based company intends to improve the consumer experience and have a better repeat rate, the people said on condition of anonymity.

It will also help the firm curb potential malpractices by some hotel owners, which in the past have led to significant cash burn for Oyo.

Oyo (Oravel Stays Pvt. Ltd) launched a pilot in Gurgaon, one of the persons cited above said. The company’s website now offers an option for this initiative in Delhi also.

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. The company was also struggling to offer customers a standardized 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 its app.

The lease contract ranges between six months and several years, depending on the location and the pricing of the property. Financial details of the contracts could not be ascertained.

Ritesh Agarwal, founder and chief executive officer of Oyo Rooms, confirmed the development.

“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," Agarwal said.

According to Oyo, Flagship is part of a strategy to try newer means of creating supply and build more efficiency and predictability in its business.

The company will also be partnering with online food-ordering firms, which would allow consumers to order food using the Oyo app; and with hyper-local services start-ups 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; it runs them on a franchise model.

While the move may improve customer experience, it is likely to put a greater financial burden on the company, especially at a time when a slowdown in funding has hurt 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, the consulting firm formerly known as Ernst and Young.

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, India has at least 22 such start-ups (some of which have different models), which 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 have launched their own budget hotel businesses, putting them in direct competition with Oyo and Zo Rooms.

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

Note: this story has been amended from its original version to reflect where Oyo is offering this initiative

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