Can the Dragon deliver deliverance?

Against all these challenges in India, does China provide a way for OYO to reach both scale and profitability?

OYO’s rapid rise in China is an early indication that at least on the count of scale, there is the promise. In less than 12 months, the number of rooms that OYO has in China equals the number of rooms that it operates in India. According to its China-facing website, OYO launched in Shenzhen in 2017 and has since entered more than 100 cities across the country, with more than 1,000 hotels and more than 50,000 rooms, covering Shenzhen, Guangzhou, Hangzhou, and Chengdu.

Other claims made

Interestingly, the site also claims that OYO “was co-founded by a team of local Chinese elites”, perhaps a hat tip to the fact that internet in China is largely a walled garden that requires local patronage to open doors that the likes of Google and Facebook have not been allowed to enter. The fact that OYO has been allowed to operate in China is probably largely due to the presence of SoftBank and China Lodging Group, a publicly-listed Chinese hospitality company as investors, showing how money can be a moat both in terms of volume as well as access.

The value proposition of OYO in China is similar to that in India. The website says the company offers “five core commitments: clean space, smart WIFI, air conditioning, selected items, and enjoyment (sic)”. But at a price range of 100-200 yuan ($15 to $30) per day, the challenges around small ticket sizes and meaningful margins persist.

Also, unlike other segments where local Chinese startups could compete without having to ward off the likes of Facebook, Google, and Amazon, the travel vertical is a relatively redder ocean. Airbnb already has a big presence in China and local Chinese Airbnb-copycat startups such as Xiaozhu and Tujia are already unicorns.

If anything, now that Paytm seems to have largely pulled back from online hotel booking, MakeMyTrip renewing ties with OYO (after it had removed OYO from its platform a while back) and the likes of Yatra and Cleartrip struggling to stay afloat, India is probably a far less competitive market for OYO than China.

Some other facilities provided

But perhaps these Chinese startups are providing OYO with a playbook. Over the past few years, the hotel industry worldwide has seen a major upheaval. The likes of Airbnb have eroded the power of legacy hotel brands. Hitherto, hotels represented a certain experience and promised a certain quality—the brand became so important that a major part of the revenues of large hotel chains came from franchising (nearly 50% of Marriott’s revenue comes from franchise fees for instance).

But the advent of the internet allowed social media reviews and algorithmic recommendations to chip away this brand advantage and enabled smaller independent operators to compete on the same footing as well-entrenched hotel brands. If anything, OYO now represents the other end of the spectrum as these legacy hotel chains, where instead of franchising out a brand, they are essentially taking over independent hotels and “reverse-franchising” it by applying their own brand on top.

The challenge, of course, is that despite all this, the bottom line is that the model is yet to be proven. And that is where OYO’s key strength lies. It is probably one of the only companies in this space that has the luxury of not having to prove its model.

The alchemy of capital

Whether OYO is a new breed of hotel-like Son says or not doesn’t matter.

Whether OYO uses AI to differentiate itself or not doesn’t matter.

Whether OYO makes a profit or not doesn’t matter.

What matters is that SoftBank and other powerful investors see OYO as a company that is growing and worth backing. And this backing has an alchemical impact on the company. Each marquee investor brings in a new one downstream. A Sequoia investment is followed by a SoftBank investment. A SoftBank investment promises a Tencent investment.