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Home E-commerce

Five Troubled Rooms of Oyo that Hospitality Startups should Avoid for Scaling up Smoothly

IndiaTechDesk Editor by IndiaTechDesk Editor
November 8, 2021
in E-commerce, Travel
55 3
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Five Troubled Rooms of Oyo that Hospitality Startups should Avoid for Scaling up Smoothly

SoftBank is the largest outside shareholder at Oyo

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In India, after a unicorn files for its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) to go public, the time after that is utilized to make preparations for the launch of the Initial Public Offering (IPO) day.

However, it is not the same with Oyo, as India’s third-largest startup is busy shoving the dirt under the cupboard that has reached alarming proportions since its inception.

Two petitioners Zostel and Indian Hospitality Industries Apex Body, the Federation of Hotel & Restaurant Associations of India (FHRAI), have written to SEBI to reject Oyo’s filing.

The germination of the malaise results from an integral core Indian startup reality where winning matters as it is the winner that takes it all and Ritesh Agarwal, CEO of OYO, has left no stone unturned be at the forefront and, in turn, has irked many.

The stressed budget

The Draft Red Herring Prospectus (DRHP) filed with the regulator said that the management will have broad discretion overusing the net proceeds from the public offering.

However, half of it will pay back a mezzanine loan or term loan B (TLB) of INR 4,972 crore ($660 million) raised this July from institutional investors. The remaining amount will go towards business expansion, and no more than a quarter will be put to corporate purposes.

In July, the $660 million loan—the total of borrowings now—was then raised to service other existing loans. The loan carries an interest of 8.25 percent over the benchmark LIBOR rate—the interest rate that major global banks lend to one another.

OYO has weathered net losses since its inception in 2013. It may not be profitable yet, but the company did manage to narrow losses from INR12,799 crores in 2020 to INR3,929 crores in 2021.

Atop that burden, its total income decreased catastrophically by 69 percent, from INR1,3413 crore in 2020 to INR4,157 crores in 2021.

The financial state could make it more difficult to meet financial obligations and even harder face up to fluctuations in the economy.

An army of disgruntled employees and ex-partners

As Covid-19 kicked in, OYO changed its business model, resulting in around 600-800 employees to reduce running costs even further. Most of those laid off are from the renovation and operations departments.

Softbank-backed Oyo started charging their hotel partners a share of the entire revenue they generate on their properties since December 2020.

Oyo stalled offering a minimum guarantee to their hotel partners and providing management staff for these sites. Oyo used to send its management staff to these hotels to maintain consistency and monitor the quality of their partner hotels.

This sudden knee-jerk reaction to surmounting losses the hospitality industry faced has left many in the business with a bitter taste. In the future, Oyo got to retain them if it wants to reap the benefit of post-pandemic tourism.

International expansion dreams went awry

The company snowballed across Indian borders to Malaysia, Indonesia, and Europe, with the bulk of its storefronts. OYO maintains it was instrumental in streamlining unorganized and scattered hospitality sectors in the countries in which it invested.

They boast of more than 157,000 storefronts operating in more than 35 countries, listing millions of rooms on its platform.

OYO plans to expand further in the U.S., Latin America and Europe.

Yet, it scaled back in China—a country it once saw as a future growth market. In April 2020, 30 percent of the 10,000 China-based OYO employees were asked to leave. Analysts in India believe that it is a business that has been built in a rush.

Investor’s aspirations turned into dramatic overreach

Softbank that backs Oyo has already tasted the sour with its troubles at WeWork and Uber Technologies Inc.

Even in its attempt to secure 1 million rooms to disrupt both the staid hotel business and short-term apartment rentals in Japan, SoftBank exposed its flawed investment strategy of pumping billions into startups and pushing them toward outsized growth.

It only left the investment management company with infuriated potential partners, alienated workers and jeopardized its reputation with local customers, according to interviews with more than two dozen of them.

Impending court cases

OYO has 21 cases registered against the company, subsidiaries, directors and promoters.

In the last three financial years, the company has spent nearly INR 1,166 crore as legal and professional fees.

It also estimates that any adverse outcome in legal proceedings involving Zostel and the Indian Hotelier Association may adversely impact their business.

Tags: Covid-19hospitality sectorindian startupOYOSoftBank
IndiaTechDesk Editor

IndiaTechDesk Editor

IndiaTechDesk is part of beSUCCESS Media group, focusing on Indian startup and tech news, trends and analysis. Write to us at press@indiatechdesk.com.

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