India's budget hotel startup OYO takes the fast lane in China

July 19, 2019 09:29
OYO founder Ritesh Agarwal has adopted an aggressive expansion model in the China market. Photo: Bloomberg

In less than two years, Indian budget hotel operator OYO has become the largest hotel chain in China.

Jinjiang Inn, Huazhu Hotels Group and Home Inns Group used to occupy the top three positions. They control 7,500, 4,200 and 3,900 hotels in China respectively.

All of them have spent nearly 20 years to build their current portfolios, and that's already considered fast.

By contrast, OYO’s China operation began with its first property in Shenzhen in November 2017. It now has more than 10,000 hotels in the country.

OYO was founded in 2013 by young Indian entrepreneur Ritesh Agarwal. In 2012, then 18-year-old Agarwal was selected for the “20 under 20” Peter Thiel Fellowship and received a grant of US$100,000.

With that money, he started his first company, Oravel, an Airbnb clone. He quickly realized there were already too many similar websites but what India really lacked was enough affordable budget hotels.

Agarwal then pivoted Oravel to OYO, which partners with hotels to give similar guest experience across cities.

He first started in his hometown and convinced several small hotel owners to use the OYO brand and unify their facilities and services. It turned out to be very successful.

Unlike other hotel chain operators, OYO does not charge any franchise fee for hotel owners to use its brand. Instead, it only takes 3 to 8 percent of the hotel revenue as commission. It also offers subsidies for hotel owners to renovate their rooms.

Agarwal has a very good understanding of the Indian market. He believes most Indian travelers just want a clean room to rest in, while most mid-range western chain hotels offer too many unnecessary bells and whistles, such as a coffee maker, an iron, etc.

Instead, OYO requires each hotel to provide essentials such as free WiFi service, air-conditioning, clean bedsheets and shower.

As a result, OYO hotel rooms are 50 percent cheaper than units offered by hotel chains in India. The brand now has around 9,000 hotels across the country.

Agarwal quickly spotted the vast opportunities in China. But he knows the importance of local knowledge, so he found a partner – Wilson Li, a former chief financial officer of China’s leading car rental company Shenzhou.

Actually, Li’s former colleague Jenny Qian founded China’s Starbucks challenger Luckin Coffee.

It should be no surprise that the two startups follow a very similar path in expanding their presence in China.

Both companies quickly expanded the number of their outlets by burning money. After pumping up the company to a certain scale, venture capitalists and other investors were brought in to finance further growth.

However, such an aggressive expansion model also has its downside. Luckin Coffee continues to suffer losses.

OYO has been criticized for being lax in enforcing standards on franchisees and has drawn lots of complaints from customers.

Agarwal acted quickly and decided to invest another US$600 million in a bid to improve its system and customer experience.

His major challenge in China may have just begun.

This article appeared in the Hong Kong Economic Journal on July 18

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist