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Oyo Rooms founder and CEO Ritesh Agarwal talks:
Fast-growing Indian-based hotel company Oyo Rooms increased its fiscal year 2019 revenue 350 percent to $951 million, with about 64 percent of total revenue derived from India and 32 percent from China. During the same fiscal year, which covered the period from April 2018 through March 2019, net losses grew from $53 million to $335 million. Founder and CEO Ritesh Agarwal sat down with BTN senior lodging editor Donna M. Airoldi to discuss Oyo's recent results and the company's plans for the future. An edited transcript follows.
BTN: You've had an eventful 2019, with expansion in China and entering the United States mid-year, then growing revenues four-and-a-half times from fiscal year 2018. To what do you attribute that increase?
Agarwal: The three times plus growth was primarily India-focused. Global growth is roughly 4.5 times, but what we attribute the growth to is a combination of three factors. We saw, of course, new unit addition, so the new hotels drive the additional revenue. We also saw increased same-store revenue, because we saw a large amount of consumers who are repeat customers for Oyo. Ninety percent of our revenue in India comes from either repeat customers or word-of-mouth customers. The third thing that we saw was the asset utilization, specifically with weddings, [which] was a big additional revenue for us in India. … We hosted 50,000 weddings last year.
BTN: What was your average occupancy in fiscal 2019?
Agarwal: What we saw was, on a year-on-year basis, especially in our non-seasonal markets, we were able to see a few points of occupancy rise, which is where the same-store revenue growth is attributable from. [After the interview, in an email, Oyo wrote that global occupancy has been about 60 percent for fiscal 2019.]
BTN: And what was your average revenue per available room?
Agarwal: Generally, the average room rates held, which means that you would not see a significant jump or reduction in ARRs, but because occupancy [rose a little] through your RevPARs you would have seen some kind of an increase. [The company said it does not yet report RevPAR figures.]
BTN: Your losses were $335 million, or 35 percent of revenue. What was the root cause of the increased losses?
Agarwal: Our losses actually increased at a global consolidated business [level], but our losses actually went down at an India level. India losses went from negative 24 percent to negative 14 percent [year over year]. So, that is close to half a reduction in losses. But our losses widened primarily owing to our new launch in China. We had launched China around November , and the fiscal year ends at March. The way you should think about Oyo's business is that there are three different phases we have. The first phase is what we call the growth and presence. During that, we're investing in bringing the people together to bring assets, and partner with the first version of properties. The second phase is, you have enough density to start charging a reasonable gross margin. And then the third is, once you have the good gross margin for your effort, you start growing so quickly that you get operating efficiencies leading to directional EBITDA improvement. India is on phase three, and China was in phase one, which is why we got the initial loss increases. We do anticipate that in the coming fiscals, China will also improve as we think about the underlying net loss margins.
BTN: In India, what steps did you take to get the loss percentage reduced from 24 to 14, and will you be doing the same in China and elsewhere around the world?
Agarwal: I think what happened is the phases changed. India went from being a presence-based market in fiscal 2017 and in fiscal 2018, and in fiscal 2019 we saw the gross margin increase. Our gross margin went from 10 percent to 14.1 percent [during] fiscal 2019. Within that, we also saw that Oyo's operating efficiencies started kicking in because the cost structure remained the same, but the revenue grew much quicker. So as we grow to other markets, the same two things will apply, which is with scale, gross margins will improve, and along with gross margins, operating efficiencies will improve.
BTN: But during the year you removed a fair amount of inventory in India, correct?
Agarwal: Oyo Hotels did let go of some inventory, but that was a very small number, and primarily owing to customer service improvement. The intent was, we run every quarter checks of our customer service, and there are some assets that we feel [do not meet our expectations]. We request them to leave and come back with improved experiences. This is primarily India-focused. We do not do that in the U.S., because in the U.S., we provide capital improvement for improvement of the underlying asset experience. The infrastructure is not the reason why we would ever let go of assets, but there may be other reasons. [The company later confirmed it cut approximately 18,000 rooms in India, adding that more than 100 hotels had returned in January after improving their customer experience, and that Oyo is working to bring back more.]
BTN: It's no secret that you recently cut back on staff. Can you confirm the numbers for India, China and the United States?
Agarwal: Oyo still has over 25,000 direct employees and over 200,000 indirect employees [who] work in our hotels, but the 25,000 people are on our payroll. That's a significant workforce still working for the company. India is the only country which has given out their numbers. We had a total of about 12,000 employees and roughly 15 to 20 percent were impacted, which is about 2,400. [The company did not confirm numbers for China or the U.S., but Bloomberg reported about 600 people were let go in China, and Skift reported that 360 were let go in the U.S., representing more than one-third of the U.S. staff.]
BTN: What did you learn from the vast expansion and then the subsequent need to scale back?
Agarwal: This is something that well-run companies need to constantly do: be introspective and look at the previous year and say, what did they do well that they should double down on, and what did they do that they could learn from? You never know when you launch in 100 cities whether all 100 are going to work. Or you can make sure that out of 500 [cities], you can eliminate 400 with a lot of data and learning, but among the final 100, you will still get 10 percent or 20 percent of the cities wrong. And we did the same. At the same time, we feel quite pained that the outcome has led us to say goodbye to a lot of our fellow colleagues. We're doing the best we can to make sure that all of them get severances and they get 24/7 outplacement services. There are over 300 companies who we are connected with, to be able to potentially reach out for employment. So we are trying to do our best, but at the same time, there are three important parts of our 2020 strategy that we have laid out. The first is accretive growth. Any additional properties we bring on should drive some kind of gross-margin addition. Second is a deeper relationship with the consumers as well as our partners. And the third is stronger governance along with better training systems within our company.
BTN: You had a blog post on Feb. 17 that mentioned the need to improve guest satisfaction and partner relationships. What are you doing to improve customer satisfaction?
Agarwal: Our CFO wrote this blog where we've clearly laid out our charter for customer service and partners. There are a few important steps we are taking to improve on our consumer service. The first is making sure that we continue to become more and more transparent. We are actively providing consumers more details like ratings, a lot more reviews, context and comparison with other Oyo hotels in the neighborhood; what's good and what could be potentially improved on. The second is, we are enabling capital either directly or through third-party banks and financial institutions for the asset owners to improve their underlying infrastructure. And the third is that we are providing service-based training by means of our centralized service training program for our asset team members to make sure we can provide better services for them. Our aspiration is to make sure no Oyo hotel across the world should have less than a seven out of 10 rating. We believe that there's a big opportunity there.
BTN: And in the United States?
Agarwal: Here in the U.S., we still have some hotels that haven't gotten there, and the reason for that is, when we received those hotels, they were already at very low ratings. So we have to work very hard to improve the averages, but the good news is we are seeing positive momentum and we are being appreciated by customers very quickly.
BTN: Then regarding partner relations, I read that in November 2019 you introduced Oyo Club Red, which is a rewards program for property partners. Is that mostly for India or is it a global program?
Agarwal: Oyo Club Red is in India, but we intend to roll it out across the world. We realized we have a program where we penalize partners for not delivering good customer service, and we realized that the partners that were doing a good job were not getting appreciated. [And] we and our broader network should be learning from them while at same time they should get appreciated.
BTN: Is it a program where you have to attain certain levels in order to be invited into the club?
Agarwal: Yes. It's collaborative partners with a [Net Promoter Score] of 85-plus. They get some additional benefits, from their ability to get better margin structures from us to additional rewards, to more consumer demand, to getting preferential B2B customers, because B2B customers have a better RevPAR and a better repeat rate, so we prioritize them across various places.
BTN: Speaking of your business segment, data from last year show that about 30 percent of your bookings in India are for business travel.
Agarwal: Yes. It's important to note that this 30 percent is B2B business rather than business, because there may be a lot of customers in the rest of the 70 percent who may be still reserving the Oyo hotel from the mobile ad but for business. That roughly 30 percent is from customers reserving us through the enterprise tools, or the agents are reserving us using the agent tools. We recently announced we saw an 80 percent jump on the calendar year between 2018 and 2019 in our corporate enterprise business. We see enterprise as a very attractive business, not just in India but across the world. Here in the U.S., we see a significant amount of demand from large corporations having a large amount of employees traveling. We see small and medium businesses which are young, or old, but family run. And Oyo operates in urban destinations like New York and Las Vegas, but we also operate in a large number of small towns in the U.S. We see, for instance, a large amount of trucking companies who would sign annual contracts with us for staying at Oyo hotels on the freeways. We have a specific product called Oyo for Business where you have the ability to set budgets for your employees, you can have approval systems, centralized invoicing, requests for proposals, and so on. That has enabled us to attract a lot of partners to join us.
BTN: What percentage of the B2B and enterprise segment is your U.S. business?
Agarwal: We will give you an exact answer. [About 20 percent, Oyo confirmed in a follow-up email.] But I believe that in the U.S., 20 percent to 30 percent of revenues are enterprise opportunity because the one additional thing that I did not talk about that we are seeing in the U.S. is also the airline business. That is also quite attractive.
BTN: You mean flight crews?
Agarwal: Not just the crews, but also from airline cancellations and so on. Especially when the weather is not good, there are some cancellations of flights.
BTN: What are your plans for the U.S. market when it comes to business travelers for 2020 and 2021? How do you plan to grow that share?
Agarwal: The business travel market is something we are very focused on. The reason is, we are finding good quality space right from Times Square in New York to Killeen, Texas. That spread is very hard among hotel chains. On top of that, finding an experience that is consistent and is always 10 percent to 15 percent better priced than other competitors, while being convenient to reserve and use is a proposition that is hard to beat. We're quite enthused about the opportunity in B2B sales with corporates, small and medium businesses, and trucking companies and airlines. We see all four as very significant opportunities for growth.
BTN: Do you have a designated corporate sales team?
Agarwal: Yes. [The company later confirmed it has an eight-member team that it plans to grow.]
BTN: In India, you started out by signing a lot of independent hotels. In the U.S., independent hotels dropped from two-thirds of the market in 1990 to less than 40 percent today. How are you finding your hotels to sign into the network in the U.S.? Are they mostly independent? Hotels leaving chains? A combination?
Agarwal: It's everything. But the way we find them is really by references. Our asset owners end up giving us multiple hotels of their own and they call other people and tell them to sign up with Oyo. References are our single biggest way of growth in the U.S.
BTN: Where do you see the business in the next five years?
Agarwal: Our longer-term aspiration remains the same. That is, we want to serve our customers to get better spaces at the right price point. Last year we served 180 million customers. Our belief is these consumers are constantly looking for better service, the right price point, the right locations, and our focus is making sure that we serve them for those specific services.
BTN: What might the percentage breakdown look like, for India, China, the U.S., the rest of the world?
Agarwal: That's a little before-time now because the markets are in different phases. Today, our biggest sources of revenue across the world are Asia, Europe and the Americas. The Americas are our fastest growing part of our business, because they're also the youngest, but the results that we have seen in the Americas are very satisfying.
BTN: The coronavirus obviously is impacting your Chinese business.
Agarwal: It's very early for us to predict how long the impact would be. At Oyo we've provided free cancellations for all our customers. We have, as management, taken pay cuts. I have taken a 100 percent salary cut, and we are trying to [provide] N95 masks and all the other support that we can. One of our Oyo hotels is near the hospital [in Wuhan] which got built in 10 days and we are providing rooms either free or at least one-fifth of the prices of any other hotel in the neighborhood for the doctors who are coming to that hospital.
BTN: Let's discuss your investments in data science and analytics. How do you use them in your operating model?
Agarwal: One example is, in the U.S., we figured out there are 60 clusters across 35 states where if you operate, we get significantly more gross margins than other markets. Which is why we are highly invested in making sure that our teams are in those markets going and scouting more assets and bringing them together. It ranges from site selection, asset management, operations to serving customers. I went to an Oyo hotel this morning, and if they get the elevators fixed, because they are so slow, they'll get a 7 percent jump in RevPAR. Our systems can constantly read all the feedback that is coming in, predict the cost of [fixing] it, what the potential jump in RevPAR could be. And if you invest that cost, what's the marginal jump in net operating income that you can generate in your property? We also see opportunity in being able to manage consumer distribution—that is, how do you get more B2B customers versus B2C customers?
BTN: Can you talk a little more about your performance in the U.S. so far?
Agarwal: In less than a year after launching here, we manage over 300 hotels. Our revenue run rate at the end of December 2019 came out at roughly $178 million. For a company that had just started in the middle of the year, to grow to that scale in a matter of months is definitely a sizable impact. We have been able to also bring in asset partners who have multiple assets with us. And most importantly, the quality of management we have recruited both in the U.S. as well as globally has been truly beneficial for us.
BTN: And growth projections for this year?
Agarwal: We have been opening one hotel a day in the U.S. for the last few months. At this point in time, I think that's enough, especially because of the focus on consumer service and partner experience. Our view is, that incremental one additional hotel is not as valuable as making sure that our consumer services are very well-organized.
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