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Big boys of hospitality beware! OYO enters the premium segment

From starting up as an aggregator of alternate accommodation, OYO's ambition changed midway in its journey to become an alternate hotel company that would own, lease and manage properties.

twitter-logo Manu Kaushik   New Delhi     Last Updated: September 20, 2019  | 16:10 IST
Big boys of hospitality beware! OYO enters the premium segment
OYO India has 2.7 lakh rooms in over 500 cities across the country. The hotel chain has so far raised nearly $1.7 billion in equity funding from investors such as SoftBank.

The fastest-growing hotels chain OYO Hotels and Homes is reportedly planning to acquire ITC Hotels-managed Fortune Select Metropolitan Jaipur from UAE-based real estate group Emaar Properties. If it happens, the buyout would mark the entry of the home-grown chain into the four-star hotels category - a domain of chained hospitality majors. Although the acquisition would not be significant, it seems to have unnerved the big hospitality players, which until recently considered themselves largely immune to the OYO's rise in the hotels space.

OYO, which started as a hotel aggregator in 2013, pivoted into management and franchisee of hotel assets, primarily in the budget and economy categories, in the recent years. Backed by the Japan-based SoftBank, OYO's strategy to forge into the upper midscale and upscale categories is driven by its strategy to tap into the big potential in these segments.

In 2017/18, the room inventory of upscale and upper midscale categories (in the branded-chain hotels) is 53 per cent, as per consultancy firm Hotelivate. The inventory in the budget and mid-market categories, where the OYO currently operates, is 35 per cent. In 2022/23, the share for these categories would remain largely same - upscale and upper midscale at 52 per cent, and budget and mid-market at 37 per cent, highlighting an equal proportion of growth in new inventory in all these segments.

Hotelivate data also shows that the occupancy rates in the upper mid-market category (69 per cent) was better than budget (63 per cent), mid-market (68 per cent), upscale (66.7 per cent) and luxury (64.3) in 2017/18.

"The operating margins in the premium market can be as high as 40 per cent whereas the mid-market segment is about 22 per cent," says Pavethra Ponniah, vice president at credit rating agency ICRA.

In India, the upper midscale and upscale categories are dominated by large international chains such as Marriott, InterContinental, Accor, Radisson, and Wyndham Hotels. Indian chains such as Lemon Tree Hotels are also doing well. OYO India, on the other hand, has 2.7 lakh rooms in over 500 cities across the country. The hotel chain has so far raised nearly $1.7 billion in equity funding from investors such as SoftBank, Lightspeed Venture Partners and Sequoia Capital. Its valuation, as per the last round of funding, was $5 billion, which is expected to rise to $10 billion after the founder Ritesh Agarwal buys back shares worth $1.5 billion - a debt-funded transaction, which is reportedly approved by competition watchdog CCI (Competition Commission of India).

Experts say that the OYO has been trying out new business models and changing strategies in a mega hits-and-flops game. From starting up as an aggregator of alternate accommodation, OYO's ambition changed midway in its journey to become an alternate hotel company that would own, lease and manage properties. But it has been largely concentrating on the economy and entry-level mid-scale segment where traditional hotel companies have limited presence.

This strategy saw a change once again with OYO's clear desire to be recognised as a pure-play hotel company and be included in the list of hotel chains - along with the large Indian and global players - where it was not finding itself despite the claim of having reached a considerable size in terms of the number of rooms. As an extension to that image building, OYO is now eyeing acquisitions in the upper mid-scale and upscale segments through buying operating assets or leasing them. It has been reported that the chain aims to have 5,000 rooms in this category in this financial year.

"With the creation of a separate team, which focusses on acquiring hotel assets in these segments, OYO wants to get into the big league. How it plans to compete with the legacy big boys - something which it has not had to do in any serious measure so far - remains to be seen," says an industry consultant.

"The OYO story keeps getting more fascinating at a rate most of us are unable to keep pace with. With their strides across the globe, OYO is rapidly gaining ground in key mature markets in Europe, Asia and the US," says Mandeep Lamba, president at HVS Anarock, the South Asia arm of global hospitality consulting firm HVS.

For global hospitality chains, which were keenly watching the OYO's moves from the sidelines, it's time to gird up the loins. 

Also read: OYO acquires Copenhagen-based data science company Danamica

Also read: Oyo to rebrand Hooters Casino Hotel in Las Vegas

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