OYO Rooms might not be a very known brand in the western part of the world but one can consider them as an omnipresent hotel chain in China and India. OYO Rooms was started by a teenage entrepreneur Ritesh Agarwal in 2013. The legend says that Agarwal started this company to counter the challenges of low-cost hospitality in India that he faced when he was traveling across the country at the age of 17 as a college dropout (Agarwal, n.d.). Ritesh is currently 26 years old and is the CEO of a company that is considered to be the third-largest hotel chain in the world (Oyo Rooms, 2020).
This article delves into the working of OYO rooms and estimates the impact of COVID-19 pandemic on the functioning of the business in the long run and the short run. This article, while based on data from 2018 and 2019, makes estimates about the growth model of the company given its recent expansion into more than 70 countries around the world. I will also study and make estimations about the scope of the pandemic and the expected duration of the current lockdown in Europe, the US and India and the time taken for the opening up of markets in China.
OYO Rooms is the third-largest hotel chain in the world that primarily works on the platform of franchising. Until 2018, OYO Rooms acted as a hotel aggregator. A hotel aggregator is a person or organization that assures the owner of a pre-existing hotel the booking of a certain percentage of rooms and discounts profits out of the given rationed rooms. To put it in simpler terms, if Hotel ‘X’ has 100 rooms and OYO Rooms agrees to take charge of 10% of its rooms, OYO Rooms would have to pay the owner of Hotel ‘X’ the cost of renting out 10 rooms for a given period regardless of occupancy. In return, OYO would list the availability of rooms on its website and would offer discounted rates to customers. However, after some restructuring in 2018, the company switched to a franchising model, wherein it would obtain 100% control of the hotel at hand (S.H., 2018).
It was seen that OYO Rooms benefitted out of this business model as the business, alongside expansion, made a four-fold jump in its revenue model, clocking more than $ 951 Mn up from $ 211 Mn (Oyo Rooms, 2020) in FY 2018-19. Subsequently, the annual losses reduced from 24% to 14% in India (Oyo Rooms, 2020). Currently, OYO operates in China, India, South East Asia, Middle East, Europe, and the US – encompassing more than 850,000 Rooms and 19,000 hotels in more than 70 countries (Clark, 2019).
The demand structure of OYO Rooms works on two primary customers – tourists and business travelers. Until recently, OYO primarily served to middle-income tourist travelers by offering hotels stays for less than US $ 8 a day in cities like Mumbai and Delhi, which is extremely low given its competition. However, with the aforementioned changes, OYO hotels’ business model has attempted to serve long-duration business travelers and high-income tourists by operating in premium tourist destinations and localities. Unfortunately, diversification for OYO Rooms could not have come at a worse time as the premium properties are more expensive to maintain and the demand will continue to remain low compared to previous years because of the restricted household and industry purchasing power.
As OYO’s new strategy was placed into the market, the looming fears of COVID-19 had started to play its effects on the market. Before the lockdown in India, hotel chains across the country had reported a drop in occupancy rate, going from as high as 70% to a mere 30% (Economic Times, 2020). Currently, other than a certain selection of hotels, all the hotels across the country are having an occupancy rate of 0%. Meanwhile, as per the government order, all businesses are required to maintain their employment contracts throughout the course of the lockdown. This means that a company like OYO will have to sustain fixed costs in upwards of 40% of their monthly operational costs (approximately 30% for labor salaries and 10% for other operational expenses). To put it into context, OYO will have to sustain expenses amounting to a minimum of US $33.8 million[1] (Oyo Rooms, 2020) in India without any revenue during the entire course of the lockdown. Given that OYO has not announced any layoffs (but pay cuts for employees, executives, and founders), we might see expenses to line up to the same amount as 2019. In addition to that, an analysis made by HVS Research suggests that we might be expecting a decline in annual occupancy rates by about 16.7% if demand picks up by July and about 20.5% if demand picks up by October-November (BW Online Bureau, 2020). This data also suggests that the entire hospitality industry in India might experience a decline in RevPAR by about 31% and 36.2% in the two given scenarios (BW Online Bureau, 2020). This means that OYO Rooms might experience a decline in revenues by about US $187.24 million[2] in the first scenario and US $218.65 million[3] in the second scenario. It implies that OYO might experience losses in upwards US $283 Million[4] (Net Loss of 70.04%) in India itself.
OYO’s foreign operation adds on to the loss-making ability of the company. As stated earlier, OYO also operates in about 70 other countries. According to the data given on its financial portfolio, OYO made an average loss of 72.41%[5] in countries outside India. Given the brutality of the situation at hand and the expected losses to increases in India by nearly 60% because of the novel outbreak, it can be expected that OYO’s foreign operations might incur net losses in upwards of 100%.
All the scenarios that have arisen out of the pandemic have not helped OYO’s cash portfolio. According to a statement given by an OYO Rooms spokesperson to Business today, OYO said that they have about US $1 billion as cash on their balance sheet (Kaushik, 2020). Considering a scenario in which OYO does not receive any financial assistance from the Government of India, its founders or Softbank, OYO might (conservatively) end up losing about US $633 Million[6][7] in cash before the end of the year.
This pandemic has massive costs for everyone – every business and every household. However, tourism and travel companies including commercial aviation will be the hardest hit and OYO seems to be no different. In a scenario wherein OYO might end up losing about 64% of its cash reserves in one year, it might be difficult for anyone to model a future path for this organization given the vulnerability of the virus and the possibility of a second phase. In conclusion, OYO will have financial troubles shortly and it would not surprising if OYO ends up requesting funds from Softbank (effectively giving up the controlling stake to Softbank), closing down businesses outside India and handing out pink-slips to a majority of its employees.
Footnotes
[1] Assumption: Expenses recorded for FY 2019 remain constant at $ 676 Mn for India. Hence, (($ 676 Mn*.4/12) *1.5 months) = $ 33.8 Mn
[2] Based on consistency of revenue in 2019
[3] Based on consistency of revenue in 2019
[4] Expected loss in revenue = 202.825 Mn. By assigning p=.5 Total combined loss = 83 + 202.825 = 285.825 Mn. 285.825Mn/ (581(revenue from 2019)-202.825) = 75.58% (Oyo Rooms, 2020)
[5] Combined data of China and the rest of the world from financial numbers of 2019
[6] 633 Million $ = 285 (expected loss in India) + 307 (expected loss in China @ 100%) + 41 (expected loss in ROW @ 100%)
[7] In this calculation we are underestimating losses for the ROW at 100% when they were recorded at 107% for FY 2019)
Bibliography
Agarwal, R. (n.d.). About the CEO. Retrieved from Oyorooms: https://www.oyorooms.com/officialoyoblog/author/ritesh-agarwal
BW Online Bureau. (2020, April 10). COVID-19: Impact on the Indian Hotels Sector, A Report by HVS. Retrieved from Businessworld.in: http://bwhotelier.businessworld.in/article/COVID-19-Impact-on-the-Indian-Hotels-Sector-A-Report-by-HVS/10-04-2020-188770/
Clark, P. (2019, June 19). Hotel Unicorn OYO plots 300 million dollar push into the US market. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2019-06-19/hotel-unicorn-oyo-plots-300-million-push-into-the-u-s-market
Economic Times. (2020, March). Covid-19 impact: Luxury hotels slash room. Retrieved from Economic Times: https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/luxury-hotels-slash-room-rates-adopt-cost-cutting-measures/articles%E2%80%A6
Kaushik, M. (2020, March 4). Oyo Hotels has $1 billion cash, expects losses to continue in FY20. Retrieved from Business Today: https://www.businesstoday.in/current/corporate/oyo-hotels-sitting-on-over-1-billion-of-cash-expects-losses-to-continue-in-fy20/story/397457.html
Oyo Rooms. (2020, February 17). Annual Report Card FY 2019. Retrieved from Oyo Rooms: https://www.oyorooms.com/officialoyoblog/2020/02/17/annual-report-card-fy-2019
S.H., S. (2018, Jan). Oyo now gets over 90% of revenue from hotels under franchise model, says CEO. Retrieved from Livemint: https://www.livemint.com/Companies/yWrc6mPjkdLAQ5xczUO23J/Oyo-now-gets-over-90-of-revenue-from-hotels-under-franchise.html