Ghosh was one of the most sought-after corporate leaders, having won universal acclaim for his performance as CEO of India’s largest airline IndiGo. Ghosh’s “business acumen, his problem-solving capabilities, and his customer-centric approach to innovation that helped him build an influential brand that is loved by all, makes him an excellent choice", Oyo founder and CEO Ritesh Agarwal said last November.
Barely a year later, Ghosh has resigned from his position, to be replaced by Rohit Kapoor, another senior Oyo executive. Earlier this week, Oyo said that Ghosh will become a director on its board and termed the move an “elevation" for him.
Agarwal’s statement explaining the move echoed his words from last year. “Aditya’s strong business acumen, problem solving capabilities, passion for building an organization with strong corporate governance and a high performing work culture that thrives on principles of diversity and inclusion, makes him the perfect choice for this larger and more strategic role, at a global level," Agarwal said on 2 December.
But according to two people familiar with the matter, Ghosh’s exit as CEO and his move to the board wasn’t what the company had in mind when he was appointed last year. Ghosh’s move to a non-operational role was an admission that the decision to hire him hadn’t worked out for both parties, said the people cited above.
“At Oyo, the power lies with Ritesh and a small group of senior leaders who have been at the company for many years. Aditya was on cordial terms with Ritesh but his management style was different, and he was never part of this circle. He was struggling to have the kind of authority and influence that he had enjoyed at IndiGo," said one of the two people cited above.
Oyo disputes this account. Ghosh achieved key targets such as improving service, safety and security at Oyo properties, and others ahead of time, said the company. It added that Ghosh will now play a bigger, global role and his move will strengthen its board of directors.
“India has doubled in size in the last one year, and our margins have improved considerably for the India and South Asia business. To meet the changing business requirements, multiple leaders have been expected to ‘step-up’ and play a larger role. Many leaders, therefore, have been promoted in the organisation, and Aditya’s elevation is no exception," an Oyo spokesperson said in an email.
The expansion spree
Ghosh’s exit comes as Oyo is in the midst of a historic expansion spree. Over the past two years, it has launched in dozens of countries and spent hundreds of millions of dollars buying hotel firms. Since September 2017, the pioneering startup has raised $2.5 billion and seen its valuation soar to $10 billion.
In recent memory, no other Indian consumer company, much less an internet startup, has ventured with such gusto into difficult international markets like China, the UK and US all at the same time.
Within 18 months of entering China, Oyo established itself as the second-largest hotel chain in that country with about 9,000 properties on its platform. In India, it is by far the largest hotel chain with about 18,000 properties. In May, Oyo bought Amsterdam-based @Leisure Group for more than $400 million. It spent $135 million to buy the Hooters Casino Hotel in Las Vegas in August. Oyo has also been expanding its Townhouse brand, and entering new businesses like food and office sharing.
But, suddenly, just as the company closed a landmark funding deal that saw Agarwal triple his stake to 30%, Oyo is facing a moment of reckoning.
After a long funding boom, US startups such as WeWork Companies Inc., Uber Technologies Inc. and Lyft Inc., which had binged on capital, have received a reality check from public markets. Japanese technology and investment firm SoftBank Group Corp., which has been at the forefront of the startup funding boom, is facing hurdles in raising its second $100 billion fund. The impact of these developments is now spilling over to Indian startups that have spent billions of dollars to expand, but are nowhere near profitability.
Oyo is near the top of the list of companies whose unprofitable business models are being scrutinized by investors and analysts. Questions are being raised about its headlong expansion in China and whether the company has moved too soon without a sufficient understanding of the local market. In India, too, there are concerns about its ability to retain hotel partners as it increases commission rates to improve margins.
Oyo versus WeWork
The most topical concern about Oyo, however, is its apparent likeness with WeWork, the office sharing startup that has seen a plunge in valuation and required a $9.5 billion bailout by SoftBank in October to stay afloat.
Critics say that Oyo and WeWork have many similarities: both are in execution-heavy real estate businesses, a fact that isn’t reflected in their valuations, which are in keeping with those of internet firms; both have expanded recklessly without proving their business models can become profitable; and both have used large quantities of capital to paper over weaknesses in their models.
These viewpoints are reflected, to an extent, in Oyo’s numbers. According to a valuation report filed with the Registrar of Companies last month, Oyo’s revenues rose to ₹6,457 crore in FY19 from ₹1,413 crore in the previous year. But total expenditure also jumped to ₹9,027.53 crore in FY19 from ₹1,835.38 crore a year ago. These are unaudited financials, but they give an indication of the cost of Oyo’s expansion.
Critics also point out that WeWork’s disastrous expansion was possible only because of the close relationship between SoftBank founder Masayoshi Son and Adam Neumann, co-founder and CEO of WeWork. Similarly, the Japanese billionaire has been known to say that he sees Agarwal as a “son". SoftBank owns 48% in Oravel Stays, the company which runs Oyo. Agarwal’s $2 billion share transaction in Oyo was funded by loans backed by Son personally, according to earlier reports in Mint and other publications.
At closer look, however, Oyo’s business model differs from WeWork’s in important aspects. Oyo doesn’t have billions of dollars due in lease payments to office landlords that nearly crippled WeWork earlier this year.
The major upfront payments that Oyo makes to its hotel partners are “minimum business guarantees" that it uses to lure new hotels. These costs reduce over time as occupancy rates increase. Oyo requires far less capital to grow than WeWork did.
Their raisons d’être are fundamentally different, too. WeWork is creating a new kind of office environment that is significantly different from the way corporates have been used to working. Oyo, on the other hand, is more of a classic efficiency-increasing internet platform that makes a sector— hotel bookings and stays—more efficient and predictable by using technology.
Agarwal, too, has been stressing privately that the personal excesses of Neumann and the corporate governances issues found at WeWork are absent at Oyo. The 26-year-old also makes it a point to seek mentoring and advice from experienced corporate leaders such as former managing director of Bharti Airtel Ltd Manoj Kohli, who is now the executive chairman of SB Energy Corp., SoftBank’s renewable energy initiative.
Issues of dominance
Actually, the difficulties facing Oyo in daily operations are similar to those that dog all internet marketplaces: balancing the interests of suppliers and consumers.
Over the past six months, as Oyo has become increasingly dominant in the budget hotel space, the firm has been hiking commission rates. Some hotels that Mint spoke to said that Oyo charges commission rates (including fees and charges) of more than 40%. A few hundred hotels have left the platform recently.
Oyo maintains that only a small fraction of its overall supplier base have irresolvable differences with the company and most of the hotels on its platform continue to have a working relationship with the firm.
Still, problems with suppliers are bound to increase. As capital becomes scarcer and pricier in the post-WeWork era, Oyo will have to constantly find ways to cut losses. A senior Oyo executive, speaking on condition of anonymity, said that the company will avoid raising prices and instead continue to increase “operating efficiencies".
But an investor in the hotels space pointed out that it will be tough for Oyo to sustain its present room rates, which in many properties are less than half of the listed price.
“The only way (they can sustain the current prices) is by getting more money from hotels. But if you overdo that, then working with Oyo becomes an unattractive proposition for hotel owners," said the investor.
Oyo’s troubles with some of its suppliers, and investor concerns about the unprofitable unicorns in general, have come as a boon for two of its smaller Indian rivals, Treebo Hotels and FabHotels. Late last year, the two firms were battling for survival—and even considered merging but eventually decided against it.
But over the past three-four months, both Treebo and FabHotels have seen a sharp increase in sales growth, said a person familiar with the matter. Treebo executives have a term for hotels that it lost to Oyo last year only for them to return: “ghar wapsi". Including these hotels, Treebo has poached a few hundred properties in the past six months from Oyo, said the person cited above, on condition of anonymity.
Despite the recent improvement in sales, however, Treebo and FabHotels remain far smaller in size. The two firms together have less than 2,000 properties, compared with 18,000 for Oyo India. Fundraising for Treebo and FabHotels will continue to be difficult because of Oyo’s dominance.
But Oyo doesn’t look invincible any more. In late October, the Competition Commission of India said it will investigate whether Oyo and MakeMyTrip violated competition rules following a complaint from the Federation of Hotel and Restaurant Associations of India.
China holds key
A large part of Oyo’s $10 billion valuation has to do with its international expansion, especially in the China market. China is a far bigger market than India and demand for budget hotels is growing rapidly.
Accordingly, Oyo has expanded at a dizzying rate. It already has 9,000 properties in Asia’s largest economy.
But two people familiar with the matter said that Oyo’s occupancy rates in China were less than 40%, compared with its average occupancy rates in India that hover between 60% and 70%. The company also encountered fraudulent behaviour by some of its China employees and hotel partners as it lacked controls and processes in the first year of operations.
The Oyo spokesperson confirmed that its China properties had low occupancy rates earlier, but said that they have picked up after the company introduced a new model called Oyo 2.0 in May 2019 for its China hotel suppliers. Under this model, Oyo provides technology tools, capital for improving properties and other support to its suppliers. Since its introduction, Oyo’s average occupancy rates have jumped to 75%, said the spokesperson. Oyo has also fired some employees and instituted stronger internal controls over the past few months.
While Oyo has established itself as one of the top two hotel chains in China in terms of size, it has seen tepid interest among local Chinese investors. Two Chinese firms, Didi Chuxing Technology Co. and Huazhu Group, have invested in Oyo, but have together put up less than $150 million of the $2.5 billion raised by the company in the last two funding rounds.
Huazhu Group is also Oyo’s chief rival in China. Its H Hotels brand has been competing in the budget hotel space with Oyo. Huazhu, which is listed on Nasdaq, is a licensee of hotel brands across price segments.
Oyo has bulldozed its way to the top of the Chinese market by splurging capital and is far bigger than H Hotels, but Huazhu’s overall numbers give an indication of the slower, profit-focused approach that publicly-listed firms need to adopt to please markets.
In 2018, Huazhu reported revenues of $1.46 billion, an increase of 22% over 2017. Its net profit in 2018 was $106 million.
In the first three quarters of 2019, the Chinese hospitality firm’s revenues have risen just 10% over a year ago, according to its published results. Huazhu’s market capitalization is around $10 billion—the same as Oyo’s.
When asked whether Oyo will continue to prioritize growth over margins, the Oyo spokesperson said that the company “has heard the market. We have always been on the path of profitability and are committed to financial prudence with a focus on sustainable growth".