Oyo/SoftBank: not so fast
India-based group’s next stage of growth is international expansion, but China’s hotel market is not a good fit with its model
Oyo is a curiously familiar concept. It has a beguiling business idea but has hit roadblocks after raising a tonne of money, some of it from SoftBank.
The Uber-like platform for hotels, like many start-ups, is investing heavily for growth. Businesses backed by the Japanese tech investor epitomise this greed for speed. The India-based group views current issues as teething problems that can be fixed through restructuring. Last month it axed 2,000 staff, exited 200 cities and purged 1,000 hotels from its platform. It is, in time-honoured words, “on the path to profitability”.
Oyo lifted revenues more than fourfold last year while net losses ballooned sixfold, according to numbers filed on Monday. By now, Oyo is well into its next stage: international expansion.
All the improvement last fiscal year came from the home market: for every dollar it brought in there, Oyo shelled out $1.12 compared with $1.22 the previous year. In China, its next biggest market at roughly one-third of revenues, it matched every dollar of revenues with $1.64 of spending. The sliver of sales from the rest of the world was less than half the operating expenses there.
The China segment looked vulnerable even before the coronavirus took a swipe at domestic tourism. Competition — from the likes of Tencent-backed Meituan Dianping and Ctrip — is far tougher than in India. Hoteliers gripe about reduced payments and little added value.
The real problem is more fundamental: China’s hotel market was never a good fit with the Oyo model. Oyo standardises ramshackle mom-and-pop lodgings; China has already moved up that curve.
Oyo owes its current mooted worth of $10bn to a funding round in which owner Ritesh Agarwal bought shares. He says the deal underscored his confidence in his company. Maybe so. But such “up rounds” have sometimes fattened valuations to impress other investors or prepare the ground for an initial public offering.
Mr Agarwal bristles at inevitable comparisons with WeWork, the flexible workspace company which backer SoftBank was forced to rescue. The onus is on him to provide evidence to the contrary.