OYO’s Global Expansion Risks Sacrificing a Vital Focus

(Bloomberg Opinion) -- Cobble together a disparate collection of independently owned budget hotels. Implement quality standards in exchange for the right to carry a big-brand logo. Then offer them access to your booking platform for a cut of revenue.

That sounds like a $5 billion business, and it’s what OYO Hotels has become.

A $1 billion round from the likes of SoftBank Group Corp.’s Vision Fund, Sequioa Capital and Lightspeed Venture Partners puts OYO on the growing list of Indian unicorns. Founder Ritesh Agarwal has big plans for the startup, which already has 10,000 hotels in 160 Indian cities, as he told Saritha Rai of Bloomberg News.

By 2023, we will be the world’s largest hotel chain. We want to convert broken, unbranded assets around the globe into better-quality living spaces.

I’m concerned that Agarwal’s focus on expansion could put the whole venture at risk.

Around 60 percent of the new money will go into China, where OYO began operations last year, and it’s already added Nepal, Malaysia and the U.K. “We plan to rapidly scale our business in these countries, while continuing to invest further in technology and talent,” the firm said in a recent statement.

VCs love numbers — 230 cities and more than 8,500 hotels in India, 171 cities and 87,000 rooms in China, a 25 percent cut of every booking — and it appears Agarwal is giving them just that. With more than 150,000 heads resting on its pillows per night, according to Agarwal, and rooms running between $25 and $85, OYO could be bringing in as much as $1 million a day in revenue.

But franchising is hard. It requires clear standards and military-like discipline. Unfortunately, there are enough anecdotes around to suggest OYO’s management may be struggling to keep order among its franchisees while maintaining the focus on adding more.

A widely publicized example was the four-day harassment ordeal recently recounted by Jordan Taylor, a vlogger who publishes under the name Travellight. In her account, it was only after she told the world about staff at one hotel attempting to enter her room, turning off the air conditioner and making sexually suggestive calls that OYO shut down its connection with the franchisee. In another case, a woman reportedly was raped by a manager at an OYO franchise hotel in Gurgaon, outside Delhi.

OYO says it’s aware of those incidents and has addressed them, including working with police. While the firm will continue to focus on expansion, customer experience will remain a priority, and it’s also working to tighten quality and safety processes, an OYO spokeswoman said Wednesday.

Then there was the traveler who wrote on Quora of a New Delhi booking being canceled while he was en route from Europe to India, and then arriving at a replacement hotel to find that it was overbooked.

These undoubtedly are isolated incidents, representing a tiny fraction of all the stays at OYO properties over the past five years. There may be thousands of glowing accounts. But the margin of error is thin for the company, because its whole model is built on the claim that it brings hotels up to standard so that you can trust any outfit bearing the OYO name.

Airbnb Inc., Uber Technologies Inc. and Didi Chuxing have already been through growing pains and scandals. Each is likely to encounter further problems. There’s an implicit understanding by consumers, though, that service providers on these sharing platforms are independent, and one bad apple doesn’t necessarily taint the whole barrel.

Agarwal can’t use an “independent contractor” label to excuse slip-ups. OYO built its $5 billion value by promising users (and investors) more McDonald’s and less Airbnb.

That means each franchised hotel on the OYO network lives and dies by the reputation of the whole. It also means Agarwal needs to spend less time expanding and more time policing.

If he uses that $1 billion to run a tighter ship, there’s every chance the firm could be the world’s largest hotel chain within five years. If quality plays second fiddle to expansion, OYO risks becoming a brand name that’s of little value to anyone.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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