Indian upstart hotel brand Oyo is seeking a USD600m refinancing – and is offering generous terms to someone prepared to back it.
The search for funds comes as Oyo looks to regroup after a tumultuous period during the pandemic. And Indian media suggest it could be a precursor of a public listing. JP Morgan Chase has been hired to arrange the funding, which has been promised an interest return of 8.5% for those committing funds, according to a Reuters report. With a five-year term, the funds would pay down other, higher rate lending.
Oyo faces a pandemic-driven reduction in revenues in its home market of India, with the country buckling under a fresh wave of infections. As recently as March, Oyo founder Ritesh Agarwal told staff that Oyo’s India business was growing and that the company was earning the same gross profit dollars in January 2021 as it did a year earlier.
The hit in India comes after the pandemic put paid to other global expansion plans for the upstart brand. Last year, Oyo had to cut back as its business revenues were dramatically, dropping out of some markets altogether, and rearranged internally into three global divisions covering India & Southeast Asia, Europe and international.
In September 2020, Agarwal said the group had USD1bn in cash, but as each month of stalled travel has passed, overheads have been swallowing those funds. By February 2021, the group had cut its activities in Europe and the US, and abandoned a Latin American joint venture, six months after launch. The workforce, once as large as 30,000, had been cut by two thirds, according to a report in the Financial Times, while investor Softbank had slashed its valuation of Oyo by a similar amount, to USD3bn.
Founder Ritesh Agarwal said the focus instead would now be on India and south-east Asia, while in Europe the brand will focus on short-term rentals via the @Leisure brand that Oyo bought in 2019. “Growth will be moderate in comparison to what it was earlier.”
Oyo has come under fire in a variety of markets, as its aggressive expansion model saw it promise – and guarantee – hoteliers improved revenues, when they signed up their hotels under its soft brand. In cases where it was not able to drive more business as intended, there have been accusations that Oyo stalled on paying promised financial guarantees.
Having originally built substantial scale in India, where independent hoteliers in the country’s fragmented market benefited from Oyo’s operational support as well as a pipeline of guests delivered by a smarter distribution operation, the group branched out with a similar model into other markets including China and the UK.
Soundings suggest that the UK venture saw some of the same problems as have emerged in India. The group signed leases and made minimum performance guarantees to help build faster momentum than their initial franchise offering, with the result that Oyo encountered considerable liabilities during pandemic lockdowns. Many hoteliers have dropped away, disillusioned.
In contrast, the @Leisure business, renamed as Oyo Vacation Homes, stands in a better position. As a leading European platform for home rentals, it operates through a number of established sub brands, including Belvilla, DanCenter, Danland and Traum-Ferienwohnungen. In early 2020, the group signed a deal to take over TUI’s interests in vacation homes, agreeing a joint venture with German company e-domizil that saw it expand its Europe footprint into more European country markets, and add 17,000 properties, taking its offering to more than 50,000 properties.
In September 2020, a year after acquisition, Oyo hailed the strong performance of the vacation homes sector. “Although we have only one year of history, several of the brands in our portfolio have more than 40 and 60 years of experience,” said Raj Kamal, CEO of OYO Vacation Homes. “We have found that in periods of severe crisis such as covid-19, strong local brands are more trusted. Europeans continue to want to go on holidays and a vacation home fits perfectly their needs.”
In early 2021, the operation beefed up its executive team as veteran Scandinavian investor Martin HP Soderstrom joined the OVH board, at the same time making an undisclosed investment in the business.
Speaking as news of Soderstrom’s appointment was revealed, Oyo founder Ritesh Agarwal commented: “We are positive that Martin’s deep experience in M&As and working with high-growth companies will add a lot of value to our growth journey in Europe, both organic and inorganic, and support us in our long-term goal of an IPO. Today, Oyo’s Vacation Home business in Europe is leading Oyo’s road to recovery, given customers’ trust and continued preference for small and independent boutique homes and hotels over large five-star properties. I see this trend of small hotels and vacation homes leading a structural change in the industry, and I believe ‘small is the new big’.”
HA Perspective [by Chris Bown]: India’s latest massive wave of covid-19 will have battered a business that was already struggling from overpromising and underdelivering. Despite an exciting start, Agarwal’s disruptive style failed to win him the market forgiveness enjoyed by other tech entrepreneurs such as Tesla’s Elon Musk, who seems to survive missed launch dates largely unscathed. And the Oyo hotel model seems to have failed to gain a similar level of traction in markets outside India, while falling foul of the same shortcomings in the eyes of hotel owner partners.
So, ironically, it appears that a left field acquisition of an allied, established business in vacation rentals will ride to the rescue. As the hotel sector was battered and locked down, so home rentals have won – helping to balance the financial scales at Oyo. It could yet re-emerge as a somewhat different business, albeit one that many more people are now keen on a slice of.
Additional comment [by Andrew Sangster]: The acronym OYO stands for “on your own”, something that had unique appeal in its home market of India but has a somewhat more negative connotation in other countries.
Similarly, Oyo’s growth ambitions outside of its home market are being frustrated. Most spectacularly, Oyo is imploding in China. Previously its second biggest market, the Wall Street Journal reported in January that the chain has shed as much as 90% of its network in China. And it is now cutting back in Latin America. The big remaining hopes for international growth are Europe and south-east Asia.
The problems with Oyo are not just related to the lockdowns during Covid. Its underlying business model has been called into question, the pandemic shutdown has merely shone a spotlight on the issue.
An area of its business, home rentals, has actually been boosted by the pandemic shutdowns. And it might be here that the company can make a pivot that enables it to survive.
Unlike Airbnb or Vrbo, Oyo brands its properties. And it lists on its rivals’ websites. It has one foot in the property brand camp, and one foot in the demand aggregator camp.
In its home market, India, it has been able to become dominant in both areas. Outside of India, it is struggling to make headway.
But with the private rental market remaining exceptionally fragmented, there ought to be an opportunity. Rather than seize this, however, Oyo has bizarrely decided to separate its hotel business from its vacation homes business, running two separate consumer facing websites, www.oyovacationshomes.com and www.oyorooms.com.
In 2019, Oyo bought Leisure Group, the continental Europe based home rental business [as we report above]. But rather than integrating with Oyo Rooms, it has been run separately and properties listed on the site are not branded as Oyo.
The lockdowns associated with the pandemic have challenged all hospitality businesses. But it has particularly challenged businesses that lack a coherent business model. Unless Oyo takes some further decisive action in the near future, it may well prove one of the biggest business victims of the pandemic in hospitality.