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Southeast Asia’s budget accommodation sector has been under the long shadow of China and India. Strange, because the hotel space in Southeast Asia is three times as big as India’s, and dotted with invisible, non-classified hotels waiting to be spruced up, branded, and redistributed efficiently. Maybe existing players prefer that they stay in the shadows. But that won’t be for long as Oyo marches into the region.
The king of budget hotel brands is expected to shake up or wake up a rather sleepy playground, again strange, given that numbers that matter for the sector are bright. In Indonesia alone, where Oyo is putting in $100 million to expand, there are around 300,000 non-classified and 233,000 classified hotel rooms, according to Statistics Indonesia 2016. The majority (70 percent) are three stars and below. Share of supply inched 3 percent towards midscale and budget from upper upscale between 2013 and 2017, according to STR.
On the demand side, the number of domestic travelers — the heart of business for budget accommodations — keeps rising. Last year, there were 264 million domestic tourists, leisure and business, exceeding the Indonesia tourism ministry’s target of 260 million. The International Air Transport Association estimates that the number of domestic passengers carried by Indonesian airlines will rise to 355 million in 2036, making Indonesia the fifth-largest air travel market in the world, behind China, the U.S., India and Turkey.
Yet, despite these solid key metrics, current budget hotel chains have failed to reach any real scale relative to the potential size of the market, the way Oyo has done in India and China. Oyo said it has 4,000 hotels with 180,000 rooms in China, more than the 149,000 rooms it claims in India. And that’s just after a year of entering the mainland.
Huge market yet low penetration to-date
Among the players in Southeast Asia which operate the same model as Oyo, RedDoorz claims to be the biggest. After three years of operation, it boasts 680 hotels and 17,000 rooms in its four focused markets — Indonesia, the Philippines, Vietnam, and Singapore.
Although it is much bigger than the other players like Airy Rooms, Zen Rooms, Hotel Nida, and Go Hotels, that’s a penetration of only 0.6 percent. Southeast Asia has more than 120,000 hotels that are two-star and below, according to RedDoorz founder and CEO Amit Saberwal.
The market is fragmented and many brands are largely national players, including Airy, which is strong in Indonesia, and Go Hotels in the Philippines. RedDoorz is a regional player, but even so, it is Indonesia-heavy. Of its 17,000 rooms, 13,600 are in that market.
Indonesia has been the key battleground, even more so with Oyo’s entry. But there are examples that show how the market is fraught with challenges. Last year, Tinggal (means stay in Bahasa) switched to be a software provider to budget hotels, only after a year in operation. Hotel Nida had a choppy start in Indonesia in 2016, reportedly lacking cash to pay vendors and employees, but has managed to raise a round of $5.6 million in February last year and another $1.5 million in June this year, Crunchbase data shows.
So why aren’t players scaling quickly in Southeast Asia? According to Saberwal, a huge factor is the region is “a hyper-local play.”
Giving an example, he said, “You need to know what kind of inventory is needed during what months. We have every city divided into color-coded grids that are constantly updated and the same team goes to the areas to get properties where we need them most, according to demand.”
RedDoorz said it has hotels in 30 cities in Indonesia now. The archipelago has at least 375 cities, 11 with over one million people, 122 cities between 100,000 and one million people, and 242 cities between 10,000 and 100,000 people.
“And Southeast Asia is not homogeneous. Each country has different languages and buyer behavior,” added Saberwal.
Technology supremacy is a given, and was the downfall of Tinggal, which paid heavily to online travel agencies such as Traveloka to market its rooms.
“Online travel agencies rock in this region. Around 75 per cent of hotel bookings is done through them. But RedDoorz is able to crack this market by having 70 percent of bookings coming directly,” Saberwal said.
It also automates the monitoring of each hotel’s service delivery and give hotels monetary incentives if they tick off all its quality checks, such as making sure rooms are ready when customers arrive and they are immediately checked in.
“We believe localization is the key factor for success in Southeast Asia. No one market is the same. We believe our deep understanding of this region and its dynamics have played in our favor,” said Saberwal.
Instant ‘Grabtification’ for Oyo?
But if Oyo is seen as lacking in local knowledge, that has changed with Grab’s $100 million investment in the company. Imagine, say, Grab’s customer data trips helping Oyo pinpoint where exactly it should put Oyo hotels.
Its entry may see existing players forming alliances of their own, or even be acquired by Oyo.
When asked, Saberwal said, “Never say never but as of today, we are happy to chart our own course. We will continue to execute on our playbook as we have cracked the model on both the customer and properties acquisition side. We will also explore alliances of our own that are relevant to us.”
RedDoorz is targeting to grow to at least 12,000 hotels with 420,000 rooms throughout Southeast Asia by 2022.
Now that, finally, is scale.
If Oyo does not get there first.