PremiumMUMBAI : Last week, in a video message to Oyo employees, the company’s 26-year-old founder Ritesh Agarwal admitted that its revenues had plunged by “over 50-60%" in recent weeks, and that its cash “runway has come under severe stress." In response to this crisis brought about by the covid-19 outbreak, he said Oyo will reduce “every controllable cost," cut capital expenditure and abandon its pursuit of acquisitions.
But Oravel Stays Pvt. Ltd, or Oyo, which had already cut more than 5,000 jobs in recent months, does not “intend" to fire more people, Agarwal reassured the company’s 25,000-strong workforce. “Oyo will emerge stronger and more resilient after this crisis," Agarwal said.
In the circumstances, Agarwal’s words were defiant—and highly optimistic. After pursuing its ambition of becoming a global hotel superpower for three years, Oyo is now facing an unprecedented crisis that threatens to wipe out a large part of its business for the foreseeable future and dent its $10-billion valuation.
Even before the covid-19 outbreak, Oyo was facing a barrage of problems across its sprawling operations in India, China and dozens of other markets. The company’s hotel suppliers in India and China, the two markets that comprise an overwhelming majority of its business, were complaining of broken promises and delayed payments.
Investors and analysts criticized Oyo’s headlong expansion, which was backed and largely financed by Japan’s SoftBank Group, and questioned its ability to forge a viable business model. Many said that Oyo was overvalued and predicted that the company would be the next WeWork, another SoftBank-funded startup whose failed initial public offering last September triggered a wider reckoning for internet startups globally.
These problems had brought about a crisis at Oyo, albeit one that many fast-growing unicorns face when their business models are scrutinized after years of binging on easy capital. Oyo’s management believed that the company could tide over the crisis by reducing operational costs, extracting more money from hotel suppliers and cutting loose badly performing properties.
But the covid-19 outbreak could push Oyo from a manageable crisis to the brink of disaster, and there’s little the company can do about it. Like other hospitality and travel firms, Oyo is likely to see a significant decline in its business over the next year as people avoid non-essential travel. Hundreds of millions may suffer income losses and cut back on discretionary spending like travel for much longer.
“Worldwide, the travel and hospitality industry has been devastated, and this is not a short-term thing; it’s going to take a long time for the industry to recover," said Anindya Ghose, who teaches business at New York University’s (NYU) Stern School of Business. “Oyo is not a four-star, five-star chain or even a three-star chain. They are in budget space and their clientele is very different (than premium hotels’), and the income of this demographic, because of job losses, furloughs, etc will be hit very hard by the crisis. All this tells me that things are going to be dire for a long time for Oyo and other companies like Oyo."
Market powerless
Apart from its customer profile, there are other reasons loss-making Oyo is more vulnerable to the crisis than established hotel chains like Marriott International, Indian Hotels and others that have bigger balance sheets and generate profits. For the year ended March 2019, Oyo reported a loss of about $335 million on revenues of $951 million.
Unlike a traditional hotel chain, Oyo has built itself as an internet startup that accumulates market power through network effect—as more independent hotels sign up with the platform, the more customers it attracts and the more it becomes attractive for hotels and so on. By accumulating market power, the startup makes rivals irrelevant, raises larger amounts of capital at increasing valuations and then starts to generate profits by increasing commissions and/or prices.
To this end, Oyo raised about $3 billion over the past four years to spend on attracting and retaining hotels and customers, making technology investments and building a large workforce. Along with establishing itself as the biggest hotel chain in India, Oyo expanded to 79 other countries. It bought hotel brands in the US and The Netherlands. Ignoring the taboo about foreign companies entering China, Oyo splashed cash and became the second-largest hotel chain in that country within 18 months after launching in late 2017.
But the covid-19 crisis has deprived Oyo of the ability to use whatever market power it has acquired so far in India, its largest market, to raise capital at higher valuations. The loss of market power in India and other markets—before it started generating profits—means that its high-risk strategy could become a ticking time bomb for Oyo and its investors, chiefly SoftBank.
The outbreak has also made it more difficult for Oyo to revive its flailing China business, where its famed execution ability has been found wanting. In mature markets like the US, UK and mainland Europe, severe travel restrictions have led to a sharp fall in business even as it continues to incur operating costs.
Oyo now faces a prolonged battle to save its business from collapse.
Over the past month, the company has moved fast to cut expenses and conserve cash. It has invoked the force majeure clause with its hoteliers in India and refused to make fixed monthly payments. Instead the payments to hotel suppliers will be made based on customer bookings.
In some of its international markets, Oyo has put thousands of employees on temporary leave. Agarwal has foregone his salary for the rest of the year while members of the company’s leadership team have taken pay cuts of 25-50%. Oyo has reached out to governments in India and other countries to offer some of its properties as quarantine centres or for hosting medical workers, aircrew and others.
However, the company will have to do much more to survive. Though Agarwal has said that Oyo won’t cut more jobs, the company may need to revisit its plans given the sheer size—about 10,000—of its India workforce. Oyo needs to reduce whatever costs it can, shrink its business voluntarily by only keeping profitable properties and raise more capital urgently, analysts said.
An Oyo spokesperson reiterated that it is not considering job cuts at this time. “The company does not have plans to exit any market and nor are we freezing our operations in any market," the spokesperson said. The company declined to comment on fund-raising.
India-China focus
Before covid-19, the company worked with some 18,000 hotels in India and more than 10,000 in China. In India, a majority of Oyo’s suppliers are independent hotels. Some of these businesses, like other independent hotels, have begun laying off staff as revenues dried up over the past month. “A lot of hotels that are operating leased properties will find it difficult to survive this," said a senior executive at a smaller hotel startup.
Late last month the US government announced a $2-trillion stimulus package of which travel and hospitality businesses were the biggest beneficiaries. In India, too, Oyo, along with other travel and hospitality firms, may be forced to seek relief from the government. “It’s an important issue that the government of India has to think about—whether it’s going to provide targeted stimulus to industries like hospitality, domestic airlines and others that have been destroyed. I think a lot of the future of Oyo and similar companies in the space will be contingent on what policies the government enacts," NYU’s Ghose said.
In China, Oyo’s problems are of another order. Even before covid-19, Oyo was in “deep trouble" in China, said Michael Norris, a Shanghai-based technology analyst. Partly because of fraudulent behaviour by some of its China employees and hotel partners, Oyo changed the way it worked with hotels in May 2019. But hundreds of Oyo’s hotel suppliers in China complained that the company had reneged on its promises and was paying them less money than before. As a result, many of them left Oyo’s platform.
Oyo faces structural challenges in China where budget travellers are increasingly opting for better chains like Quanji (All Seasons) and Atour Hotel Group. Budget hotels, too, have begun to offer more value-added services, and the space is starting to look crowded with the entry of Meituan and Ctrip, two large travel platforms that direct traffic to Oyo.
By the end of last month, at least three top leaders at Oyo China, including Sam Shih, the senior-most executive, had left the firm. The company’s overall staff has reduced to less than 3,000 from a peak of 8,000-9,000. The Oyo spokesperson confirmed that the firm had cut its staff in China but said that senior leaders like Ping Wang (supply head), Zhu Lei (chief revenue officer), Jia Zhou (technology head) and others continue to “lead the company in China."
Despite these problems, Oyo may have to keep investing in its Chinese operations.
“On the one hand, China hasn’t been a successful market for Oyo. But on the other hand, because of the covid-19 situation and the strict lockdown in India, in the short to medium term, China may be Oyo’s best-looking market. You’ve got a recovery (from covid-19) in China, and domestic tourism in China might enjoy a bit of a resurgence with the summer months coming. Oyo’s been battered and bruised in China but maybe it has to dig in its heels and continue trying to salvage its reputation and its operations," Norris said.
The analyst added that the next three months will be crucial for the company.
Apart from India and China, Oyo will have to figure out a new strategy for more mature markets like the US and European countries. In these markets, Oyo generates higher revenues from every property compared with Asian properties, but their costs are far higher, too.
SoftBank, the saviour?
Late last year, Agarwal invested $2 billion in the company through a complex deal. Agarwal put $700 million in fresh capital into Oyo and completed a secondary share purchase from Lightspeed Venture Partners and Sequoia Capital India, two of its early investors, for $1.3 billion. The deal tripled Agarwal’s stake in the company to about 27%.
Agarwal financed this landmark transaction through loans from Japanese banks that were guaranteed by SoftBank founder Masayoshi Son, who is close to the Oyo founder. Oyo shares were used as the collateral for Agarwal’s loans. The entire transaction was done based on the expectation that Oyo’s valuation would continue to soar, as it had in the past two years. The company’s valuation had increased to $10 billion in last year’s round from $850 million in September 2017.
Now, however, Oyo’s valuation is likely to reduce, investors said. “The question is not ‘if’ but ‘how much’," a Mumbai-based venture capitalist said.
Across the world, hospitality firms that have far better financials than Oyo have seen their value erode. Shares of US-listed hotel chains Marriott International and Hilton Worldwide have plunged by more than 40% over the past three months. Shares of Huazhu Hotels Group, a Chinese rival of Oyo’s, have also dropped by more than 30% in the same period. Earlier this month, Airbnb, which holds a small stake in Oyo, saw its valuation drop by 16% to $26 billion in a funding round.
To see out the covid-19 crisis over the next 12-18 months, Oyo will need another large round of capital though it just raised $1.5 billion late last year. As few investment firms globally have the appetite for making such a risky bet, it may be left to SoftBank to bail out Oyo. The Japanese firm has already invested $1.5-2 billion in Oyo and owns about 48% in the company.
A SoftBank spokesperson said SoftBank “remains committed to Oyo in the long term" but declined to comment on specific funding plans.
There are complications, though. SoftBank itself has raised a small fraction of the $100 billion target it had set for its second Vision Fund. Its reputation as an investor has taken a battering after WeWork’s failed IPO and other disappointing bets like Uber and OneWeb. This week, SoftBank’s parent company forecast an operating loss of $12.5 billion for the year ended in March, largely because of markdowns of its internet investments.
Additionally, according to Oyo’s articles of association, SoftBank is prohibited from increasing its stake in the company to more than 50% without Agarwal’s approval. However, for Oyo to survive, those terms may soon have to change.
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