HM on location: After notable '19, Oyo CEO considers next steps

Oyo Times Square
Ritesh Agarwal (left) outside the Oyo Times Square in New York City with Kamlesh Patel, owner of the Oyo Hotel Battleboro in North Carolina. Photo credit: Hotel Management

Over the course of 2019, India-based hospitality giant Oyo went from having a presence in just India and China to making strong inroads with its various platforms in an estimated 80 countries, notably claiming to open an average of one hotel per day in the United States since debuting last July in the country. 

By any calculation, the company’s rise is meteoric, but rapid growth often has challenges. According to its fiscal year 2019 earnings released last week covering April 2018 to March 2019, the company's revenue losses grew from 25 percent in 2018 to 35 percent in 2019, which it credited to the brand’s rapid global expansion.

But at the same time, in spite of those losses, Oyo’s revenue more than quadrupled, reaching $951 million for 2019, with losses in India alone improving from 24 percent in 2018 to 14 percent in 2019. (India contributes 63.5 percent, or $604 million, of the company’s revenue, and the company’s business in the country grew nearly threefold year over year.)

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Ritesh Agarwal Oyo Founder/CEO
Oyo founder/CEO Ritesh Agarwal.
Photo credit: Oyo Hotels & Homes

“Oyo is not a perfect company, like no company is,” founder/CEO Ritesh Agarwal told Hotel Management during an interview in New York City in late February. “But there are opportunities to improve.” The company already has scaled back its global growth plans and now is focusing on “clusters” of locations for targeted growth instead. “We are able to make sure that our mature markets bring results,” Agarwal said, adding while the company’s losses did widen on a year-over-year basis, this was due to the company’s China launch four months before the end of the fiscal year.

Related: Oyo increases loss, looks to scale

Three Phases

Agarwal told HM all of Oyo’s mature markets have improved, and he expects business in these markets to continue bringing “better losses or profit improvements.”  

The company, he said, has “three phases of execution,” noting the first phase is establishing a presence in a market and gaining exposure; the second phase is when the gross margins start coming in; and the third phase is when the gross margins increase, but the costs remain flat. This, Agarwal said, is what leads to operating efficiency. 

“India and Europe are in phase three, where we have operating efficiency coming and increasing [earnings before interest, taxes, depreciation and amortization] margins, especially in our primary hotel and homes business,” he said. China and Southeast Asia, meanwhile, are in phase two. “The gross margins have come in, but we will very soon see operating efficiency kick in.” North America, Latin America and Japan are still in phase one. “We're just getting started, but I'm very happy with the results of North America and specifically the United States where ... in less than a year of execution, we've grown to [operate] over 300 hotels.” When the company reaches the third phase in more markets, he said, it should be able to recoup its losses. “Our company has a strong balance sheet of upwards of $1 billion, so we believe that we can continue investing in that direction.” 

Four Lessons

Looking back over the year, Agarwal said the company has identified three lessons to keep in mind going forward. 

The first is accretive growth, or determining the most valuable markets. “Just within the U.S. we know [of] 60 clusters across 35 states that we're going to actively invest towards,” he told HM. “By using data you can get 90 percent of the cities right, but you're always going to learn about 10 percent of the cities after you have [already] gone there and operated.” 

Second, the company has learned to “overcommunicate” when engaging with both partners and customers. “We've had some feedback from our asset partners that we can do a better job. And when I reflect back, one of the biggest opportunities that we have is to be able to build very deep, tighter relationships with our partners,” Agarwal said.

The third opportunity is to “continue to invest further in building very strong corporate governance for the company,” he said, adding Oyo already has taken steps in this direction, “by means of annually issuing our audited statements for three years in a row, bringing in an outside director and then actively bringing more direction to the company's governance.”  

A fourth lesson—perhaps more personal to Agarwal—was to take more time in making decisions. “Most of the outcomes or decisions that we made would have needed a few months of results to be able to reflect back,” he said, adding the company’s leadership could have looked back on the results of the previous three quarters a quarter earlier than they did. “But that said, I think now every year we'll reflect back on a strategy at the end of the year, which is what we did in December of '19 ... we made a bunch of decisions in early 2020, which are, of course, quite visible and known to the world, including our restructuring exercise, including our decisions of focusing in a certain amount of markets, which we believe will help us make sure that in 2020 we take learnings from 2019. And I'm sure in 2021 we will definitely have learnings from 2020.” 

Restructuring

Another lesson from 2019 was how many partners the company should have. In January, Oyo let go 5 percent of its 12,000 employees in China, “partly due to nonperformance,” according to Bloomberg, and dismissed 12 percent of its 10,000 staff in India with a further 1,200 terminations planned by the end of March.

Related: Oyo under pressure in U.S.

These “team members,” Agarwal said, were in roles that could be handled by centralized services. Before the terminations, he added, the company offered to move the employees into other roles, and adjusted more than 1,500 employees in the second half of the year.  “It's a very tough decision and a very tough situation to be a part of,” he said of the terminations. “But I think at the end of that we feel that we've tried to do it with a very respectable form.” The company, he said, offered terminated team members a severance package and runs a 24/7 outplacement organization to support any dismissed staffers who need a new job. 

Agarwal disagrees with claims that Oyo’s losses drove the decision to let team members go. “Even after the restructuring exercise, we have over 25,000 employees that are in the company as we speak,” he told HM. The company has more than 300 asset owners in the U.S. alone, he added. 

Dynamic Pricing

Following the terminations, the losses and reported owner complaints, Agarwal acknowledged some changes are necessary for Oyo’s future, particularly when it comes to the company’s proprietary technology and dynamic pricing model. This model implements a steeper curve than most businesses use, adjusting the rate depending on location and demand. “I started my life being a front-office manager, so I can empathize that when a customer [stays] for $60, you look at that receipt and think to yourself that this room is worth a lot more,” he said. “But at the same time, the average—and hence the overall—[revenue per available room] is a very valuable context to look at because there were some rooms sold for $60, but still, some rooms sold for $130.” 

The second lesson of “overcommunication” comes in handy in this context. “I was speaking to one of our asset owners recently named Mr. Raj Patel—he's in Baton Rouge in Louisiana—and he explained a lot of details about what his learnings are on dynamic pricing,” Agarwal said. “We were able to go implement [his insights] and we're seeing that the RevPARs are higher, both for Oyo and for the underlying asset owner.” 

Agarwal plans to continue talking with owners and other partners to better explain the dynamic pricing, but he agreed that the company also needs to improve its algorithms to find the right number to make everyone happy.  

And while owners reportedly have complained about the technology, the dynamic pricing and the fees, Agarwal said he has not heard “a single complaint” about occupancy numbers. “That means that we are able to bring some value to the asset partners. Invariably when you speak to a lot of hotel chains, they would say that it takes a year or year-and-a-half before the results come. Here, you have a situation where assets joining a month back are not complaining about it," the CEO said.

Moving Forward

Since the company made its U.S. debut last year, Agarwal said partner hotels have reported a 60 percent increase in RevPAR after at least four months. “For example, our first asset, the Oyo Townhouse Dallas, has seen 19 percent occupancy climb up to 80 percent,” he said. 

For example, Kamlesh Patel, owner of the Oyo Hotel Battleboro in North Carolina, selected the brand for his formerly independent property after previously working with other companies like Wyndham Hotels & Resorts and Choice Hotels International. “When I took over, my property was doing 25 to 30 percent occupancy,” he said. Seven months after rebranding, occupancy is between 70 and 80 percent, and rates improved from between $28 and $35 to between $65 and $70 per night. RevPAR, meanwhile, is now between $25 and $30, and Patel expects to open more hotels under the Oyo brand in the coming months.

For 2020 and beyond, Agarwal said the company now is focused on going deeper into target markets, including in the U.S., Europe and Latin America, rather than broadening its reach to new destinations. “The market is big and we're just getting started,” he said. “Of course, there's a lot for us to improve and execute upon.”

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