Skift Take

OYO Rooms founder believes that the future of travel is brands becoming their own distributors, which is, of course, every brand's dream. It may turn out to be true for super brands in isolated cases but it would be a very fragmented and unsatisfying user experience. There is a lot of convergence going on but the mammoth online travel agency sector isn't checking out anytime soon.

Founded in 2013 and flush with $126 million in funding, OYO Rooms has taken the notoriously haphazard budget hotel sector in India and built the country’s largest branded hotel network by implementing standards for everything from air-conditioning to the thread count of sheets.

Ritesh Agarwal, OYO Rooms’ 22-year-old founder and CEO, talks about Uber a lot and feels a kinship with some of the disruptive aspects of the on-demand ride service. There are several parallels he sees between the two companies but Agarwal especially admires how Uber has largely become its own distributor through the Uber app.

“Today the brands and distributors are fighting with each other, but in the next five or 10 years, companies are going to be created that are going to be Internet-first and also brands,” Agarwal tells Skift.

“… Hopefully, in the next five or 10 years, there’ll be many more products across the travel segment, hotels, airlines etc. where the distributors and the brands are the same thing,” he adds.

Agarwal’s vision of the unification of brands and distribution — and that’s a dynamic that Agarwal believes OYO Rooms can execute — comes in the context of brands and distributors fighting with one another. In fact, Agarwal’s comments follow the moves by online travel agencies MakeMyTrip, Goibibo and Yatra to delist OYO Rooms in October in a fight over market shares and margins.

The competitive heat is intensifying in the India hotel and online sector as MakeMyTrip has launched its own budget-hotel brand, Value+ hotels, and there is speculation that OYO Rooms is poised to acquire a competitor, Zo Rooms.

Skift spoke with Agarwal about the evolution of OYO Rooms and his vision for the future of distribution.

Skift: Can you tell me more about your business model and what it means for the hospitality industry in India?

Ritesh Agarwal: There’s a lot of unbranded supply out there. Our belief was for all of this unbranded supply, there was consistent quality of experience that are extremely important to be able to drive the hotel. We started with just one hotel. Today, we partner with more than 4,000 hotels in India across 160 cities. We book a million room nights a month and continue to be a fast-growing business in India. I think because the model is we go to an unbranded hotel, we tell them that we want to work together to standardize the facility and the total experience. If you do that, you get a lot of business. The hotel owner invests in the standardization of the hotel as per all our standards, and then we drive significant bookings for him, massive, in fact. For every 600 rooms, we have one quality auditor who goes in and, by the use of a mobile app, audits every room every three days. This enables a consistent experience over and over again.

Skift: What star level are these hotels?

Agarwal: The kind of supply varies significantly depending on the city you’re talking about, so it might be one-, two- and sometimes three-star hotels. It might have an apartment. It might be a bed and breakfast. It might have villas. It might have guesthouses. It doesn’t really matter. What really matters is ensuring that you have a decent-size of room, 350-thread count single-stripe satin linen, 68-inch mattresses, 32-inch LCDs, 1.5-ton air conditioners and free Wi-Fi.

Skift: You said right in the beginning that the hotel owner has to invest in the hotel in order to bring it up to your standards. How much is that investment typically? I’m sure money is tight. What if the hotel owner can’t afford to make such an investment?

Agarwal: There’s no one size fits all because if there’s a hotel that has really good rooms but not great linen then the cost is lesser. The other hotels, if they are really bad, perhaps their walls are corrupted, there is a higher investment. On average, what we’ve seen is a $60 to $70 investment per room to bring all of these hotels online. This $60 to $70 becomes part of a process that is driving 60% to 70% occupancy because of OYO. This is a very, very strong partnership that in three days from the day of investment, they are able to recover the money and on the fifth day are actually making money and increasing the occupancy by two to two-and-a-half times.

There are lots of people who just don’t feel that they want to give away the cash. We have a partnership with banks that are able to give a loan and they have to continue remaining a partner of OYO. And OYO, in their monthly payments, will deduct the principal and the interest that they have to pay.

Skift: You mentioned that you have an auditor who goes around to inspect the hotels, one for every 600 rooms. How often does that auditor go back to the hotel? Is it a matter of the auditor inspecting those rooms once every two years? How do you stay up to date in enforcing your standards?

Agarwal: We have two methods of doing it. One is our auditor, and one is our customer support. The way we think about it is very similar to how Uber thinks about the business. I’m going to have a quality analyst who’s going to make sure that these cars are always up to date. I’m going to audit each hotel of mine once every three days, and then I use a mobile app which has geolocation and is a real-time image-focused app. We can see if the guy went to the hotel or not because I know his location. Second is the images tell me whether the consumer feedback was in line with the kind of feedback that we heard from the broader experience perspective.

Skift: The app is for you and your auditors. It’s not a consumer app?

Agarwal: No, we have a consumer app as well. We have multiple apps. We have a consumer app. We have an auditor app. We have an app for a merchant, the hotel owners.

Skift: How do the guests rate the hotels? Do they write reviews? Or is it like Uber?

Agarwal: The first kind of audit is our quality analyst. The second way to ensure everything’s up to date is the consumer score that we receive at the checkout of the customer. Right at the checkout, consumers can score us on a rating of one to five. It is very similar to Uber in that it is a forced rating that the consumer needs to give us before he makes another reservation. Because consumers use it very, very frequently because of the new use cases. That is the reason why we remain up to date in terms of the quality of experience.

Skift: What happens if the consumer reviews say the quality of the hotel is not so good and the hotel falls below your standards?

Agarwal: If any hotel falls below a three-star rating over a certain number of stays, we shut their hotel down off our network.

Skift: How often does that happen?

Agarwal: Because we audit the hotel very, very closely it happens comparatively infrequently. But in terms of individual volume it’s close to 35 to 40 hotels out of our network.

Skift: How large is your network now?

Agarwal: Four thousand-plus hotels.

Skift: They’re all in India at this point, right?

Agarwal: Yes. They’re all in India at this point of time.

Skift: Do you have a standard commission? Or does it depend on the volume? How does that work?

Agarwal: It depends on the volume. We are moving toward a standard commission, but at this point of time, it’s not standard.

Skift: You’re only in India now. It’s a big country. You have a lot of room to grow.

Agarwal: A lot of room to grow, right.

Skift: Do you think your model has any relevance to the hotel industry in other countries?

Agarwal: I think across the world this is finding significant relevance. We are a managed marketplace across accommodations, including apartments, hotels, guesthouses, bed and breakfasts, motels and so forth. We have more than 20 emulators across five to six countries across the world who are trying to do something very similar to OYO. A bunch of these are validations of what we’re doing. It has a natural impact in so many other parts of the world that people have either an enormous trust deficit or an amazing hassle-free experience requirement in the accommodations industry. They can transact in a matter of a couple of seconds, get turn-by-turn directions to the hotel, check into the hotel automatically, be able to order food by using the mobile app. And then they go to check out and just walk out of the hotel instead of waiting at the reception to be able to close the transaction. We’ll find similar needs in so many other places. But like you said, India is a very large country, and we are very excited to be solving the problem in one country and one room and one guest at a time.

Skift: How has your thinking about the business changed since you founded it?

Agarwal: When we began the business, I thought it would be a hotel chain business. We now think that we are going to take any piece of land in the world, standardize it and bring it online. In some point of time, I believe this because people will start using things at these hotels for reasons that they haven’t even thought about. Imagine, five or six years back, we used taxis for very limited reasons and already we’re using them for reasons they we never would have thought of in the past.

We see the same thing happening with hotels here in India. The cost of paying overtime to your driver from one city to another in the same suburb is higher than the cost of staying in OYO. The cost of fixing electricity at your house is higher than the cost of staying over at an OYO a few meters away and having an air conditioner and all that. That’s really what we’ve seen. Markets have expanded significantly since OYO bought into a bunch of markets. Our mission has changed from being India’s most loved hotel brand, but changing how people feel about staying away from home.

Skift: What is the use case for people staying at these hotels? Who are they?

Agarwal: You’ve got multiple people. In general, one of the major use cases that we figured out are the first, second and third job young employees, and indeed tourists. And then, of course, in city use cases young millennials.

Skift: I’m wondering how your millennials are different than our millennials in their habits.

Agarwal: I think they are not very different. I think the only difference is more culture in India where a significant portion of millennials still end up staying with their families. It’s generally not socially acceptable to see your kids come back drunk. For them, it is so much better when you can just drive back and stay at an OYO instead of going back home and hearing tantrums from their family.

Skift: How are guests booking these hotels? Is it all mostly on mobile?

Agarwal: The majority is mobile. You should definitely open our mobile product and try to experience it. It is literally a different experience than you can expect across the world. It takes two seconds to make a reservation. We have three options in our platform. You press one of these hotels, and click book. In two seconds, you get booked, and then you get turn-by turn directions to the hotel and then you can check in. It’s a very flawless experience.

What we realized over time in this process is that on one side you’re seeing Starwood and Marriott and Starwood and a bunch of these hotel brands merge. On the other side, you’re seeing Accor buying Fastbooking trying to consolidate the distribution side of being a brand. OTAs like Orbitz are merging [with Expedia] because they believe together they have a market power of distribution that that the brands don’t have. My belief, which is very different from a lot of these guys, is that effectively, in the next generation, brands and distributors are not going to be different. Today the brands and distributors are fighting with each other, but in the next five or 10 years, companies are going to be created that are going to be Internet-first and also brands.

A brilliant example of that is Uber, which is a brand itself and also the largest and the only distributor of its own inventory. We believe that OYO can do the same thing. We are a hotel brand in India. We compete with the likes of Taj Hotel, Indian Hotels and Lemon Tree and so on, but at the same time, we are the largest distributor of our own platform. We book more than 90% of the rooms ourselves by our own mobile product. That is something that we feel very confident about and hopefully, in the next five or 10 years, there’ll be many more products across the travel segment, hotels, airlines etc. where the distributors and the brands are the same thing.

Skift: Yeah, but that doesn’t really help consumers. If I have to go to a million different apps in order to compare what kind of hotel is out there, that’s not a very good guest or user experience.

Agarwal: Great question. I love this question. Here’s the thing. There are three things that define whether the brand can be the largest distributor of its own product. The first one is predictability, which is I should be able to trust the experience which is what a brand stands for. The second one is affordability. The third is the most important. If you can get 80% to 85% of the supply on your network you don’t need to go to 10,000 apps. You just need to go to one app, which is the most trusted one, which is available already for the right price. That’s why Uber doesn’t need an OTA.

Skift: On the other hand, Uber and Airbnb are making a lot of distribution deals.

Agarwal: Exactly, exactly, exactly. Because in the future, if these guys become the real brand, we’re just sitting on top of both of these guys, then effectively, hotels will become commoditized. These guys will then not have any value because the brand is then Airbnb, the brand is then Uber, the brand is then OYO and so on, which is why it’s very important for people to realize that the brand and distributors in the next five to 10 years are going to be the same thing.

Skift: The hotel industry would love to be its own distributor. They’re spending billions of dollars trying to get people to book direct on their channels, but they haven’t been able to do it. They reluctantly partner with the online travel agencies because they have no other choice.

Agarwal:  Absolutely, which is very similar to how various other industries operated in the past. At one point in time, whenever the 70% to 80% of hotels who can come in together and ask consumers to transact on the platform, my sense is the distribution world will change. To me, the reason is because hotel industry, although branded, it’s still so fragmented across brands. It’s just very difficult for a consumer to go ahead and book on just one platform.

Skift: What is going on with MakeMyTrip and its dispute with Oyo Rooms? Why did MakeMyTrip delist Oyo Rooms and launch Value+ hotels?

Agarwal: OYO Rooms unlocked a huge opportunity in the hospitality industry. It didn’t happen overnight or by serendipity. A lot of consideration went into distilling the problem (a lack of standardized budget hotel options in India) and even more hard work went into enabling a solution. Once customers saw the proof-of-concept, they were quick to adopt us as a preferred hotel-brand.

OTAs in India have been clear that their long-term growth is dependent on growing their revenue from hotels. I think what happened here is that they wanted to capitalize on this emerging sub-segment by marketing direct-to-consumer. But they are doing this at the cost of taking away the element of “choice” — which is a fundamental basis of why customers go to OTAs instead of going to a supplier-direct channel.

Competition is good for the customer and the industry. But it is a tougher yet ultimately smarter thing to identify opportunities where synergies can be unlocked or utilized for the growth of the ecosystem.

Skift: How does this all fit into your view that brands will one day be their own distributors?

Agarwal: That distributors are launching sub-brands is, to me, an endorsement of the fact that travel preference in general will move to brands being their own distributors.

What remains to be seen is if advantages provided by a brand versus a distributor create greater relevance for the customer. We have already seen airline brands such as Air Asia and Indigo build that engagement with their customers and start to dominate over platforms. In the hotels’ category, it is only brands that hold large amounts of inventory and can deliver access and availability that will be able to take on distributors.

If a brand can overtake the value that the platform provides, they can be very successful in becoming the first port-of-call for the customer.

Skift: How much funding have you raised to date?

Agarwal: A little more than $126 million.

Skift: OK. Is that going to be sufficient for a while? Are you doing additional fundraising?

Agarwal: We’re not fundraising. I think we still have an amount of capital available. We know what we want to do, and we have our heads put down and we are growing really, really fast. I mean this is very capital-efficient. It doesn’t need tons and tons of capital to grow and scale. Yeah, I think we’re not fundraising, but if we do it at some point in time, we’ll do it to further improve our position of leadership in the market.

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Tags: ceo interviews, distribution, gds, makemytrip, oyo rooms

Photo credit: Ritesh Agarwal is the 22-year-old founder of India's OYO Rooms. OYO Rooms

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