In December 2016, OYO, India’s largest budget hotel aggregator, announced yet another change to its business model—an entry into fully managed hospitality through a new brand, “Townhouse”. And it was a complete departure from OYO’s strength: budget hotels.
On paper, the new business model is one of the oldest in the business. OYO plans to lease existing hotels and guesthouses, refurbish them and then operate them itself for a few years. The owner of the hotel gets a hefty guaranteed fee and additional revenue share. While OYO hires the staff, runs the hotel and manages customer experience. Unlike the aggregator model, growth would be slower but more controlled. This business model mirrors that of several larger players such as Sarovar Hotels & Resorts and Marriott International. Since it is a proven business model, raising funds from private equity players for this business shouldn’t be too difficult either.
India is set to be in the top five markets for business travel. According to a report by the India Brand Equity Foundation (IBEF), spending in this market is set to go to $90 billion by 2030. International hotels have started to find traction within the business traveller market as well. So have homegrown players. Makemytrip (MMT), which acquired its closest rival Ibibo in October 2016, is set to raise over $300 million in a fresh round of funding. Airbnb claims it has 22,000 properties in India already. Chicago-based Hyatt, too, plans to open its top-end segment, Centric, in India. Meanwhile, homegrown brands like Treebo and FabHotels have been cranking up their presence too.
OYO, itself, raised $250 million in its latest round led by SoftBank.
There is money to be made. And OYO sees that opportunity.
Come for the wifi, stay for the rooms
For OYO, Townhouses aren’t just rooms. But also co-working spaces and cafés that will drive demand to the hotel. OYO claims those are its moats, along with its budget hotel aggregation business.
“A co-working space and a café? Are they trying to be Starbucks?” asks a competitor, only half rhetorically.
Let’s step back and unbox how the business model truly works.
OYO, so far, has five Townhouses. Four across NCR and one in Bengaluru. The aim is to reach 100 by the end of the year, sources say. A tall ask. And this is why. OYO approaches each property owner, pays Rs 75 lakh to Rs 1 crore as lease for a period of three-five years. In some cases, it has a revenue share agreement too. OYO denies that the model is based on the franchise concept. It says that the entire model is based on revenue share. Sources within the company, however, insist that OYO calls it a lease, instead of a licensing fee. But it serves the same purpose.
“It then spends about Rs 2 lakh per room on upgrading it.
