After scorching start, Oyo looks to get its business basics right

After breakneck — critics would say reckless — growth that has thrown up issues of quality and allegations of dubious practices, Oyo Hotel and Homes is learnt to be pulling back and focusing on improving its business fundamentals.

According to sources in the know, the Gurugram-based firm may exit certain international geographies so that it can stabilise its operations in existing markets. Some plans, such as launching cloud food services and cloud kitchens, may be deferred, or even shelved completely.

The firm is said to be firing 2,400 employees, or 20 per cent of its workforce in India, mainly in sales and business development. 

“Some roles at Oyo will become redundant as we further drive tech-enabled synergy, enhanced efficiency, and remove duplication of effort across businesses or geographies,” Oyo founder Ritesh Agarwal wrote to employees on January 13.

Oyo is a network of low-budget standardised hotels started in 2013 by Ritesh Agarwal, who was 19 years old at the time. The hunkering down is in response to a backlash from hotel partners and recent media reports such as The New York Times’ article earlier this month alleging irregularities and dubious ethics.  

In a statement issued to the media, Oyo in its defence talked of the fact that its phenomenal growth in the past 16 months is something large organisations would have taken 60 years to achieve.

Experts say what the statement omitted was how the rapid pace of expansion into newer markets and new business lines came at the expense of stabilising the core business. They say the scorching pace turned up enough loose soil to warrant a course correction.

Japanese investor SoftBank, which owns half the company, is said to have insisted on workforce and services rationalization. SoftBank has been the lone investor in all rounds of funding since 2015 and, having cumulatively put in $2 billion, it is naturally determined to prevent Oyo going down the same path as The We Company in which it had invested $17 billion, and which began sinking under mounting losses. SoftBank recently shelved its IPO and fired the founder-chief executive.

“Oyo needs to show operational efficiency and in the international business they have not been able to do it and certainly, there is pressure from investors to improve it. They are looking to exit some of the hotel (partnerships) and the geographies,” said a person familiar with Oyo’s business strategy.

Over 2018-19, Oyo expanded to China, Japan, the US, Latin America and Europe — 80 countries in total — through acquisitions and partnerships. The company posted 150 per cent higher losses at Rs2,384 crore in FY19 and projects to make losses till at least 2022.

“There are regions such as China and Japan where they had expanded massively. But they have not been able to get the kind of occupancy that they needed. In some places, perhaps the management control was not effective,” said the same source.

Over the years, Oyo has attempted various business models, from taking up and managing entire hotels to offering minimum occupancy guarantees to full serviced premium apartments. But lately, it has faced criticism from hotel partners who allege anti-business and predatory practices: holding back dues, bumping up commission rates unexpectedly, and in some cases, not honouring services contracts. Oyo has said that all agreements and fees are case-to-case and insisted that it has always held its end of the bargain. 

The New York Times’ investigation revealed that Oyo has been accused of signing on-board thousands of unlicensed hotels in return for offering free rooms to government officials to deter the enforcement of regulations. 

“Recent investigations into Oyo’s business have also revealed that hotel partners have reportedly raised issues, ranging from poor software and loss of revenue, as well as criminal activities within rooms that are managed by Oyo,” said Salman Waris, managing partner at technology law firm TechLegis.