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Exclusive: SoftBank-backed Oyo torn between profits and growth

Rookie staff and angry hoteliers undermine 'Project Yukichi' for Japan domination

Oyo's ambitious but budget-conscious sales strategy in Japan highlights the startup's tough balancing act as it pursues both growth and profitability. (Photo by Yuki Kohara)

TOKYO -- Oyo, the SoftBank Group-backed discount hotel chain, is almost doubling its sales staff in Japan to try to boost profitability and reach its vaunted goal of becoming the country's biggest hotel chain by next year, the Nikkei Asian Review has learned.

In an apparently contradictory move, however, the push for profitability is also causing the India-based startup to scale back revenue guarantees aimed at persuading hotel owners to sign up to its platform, and has even canceled some existing agreements. Several hotels are now canceling their contracts, multiple sources told Nikkei.

The sales initiative -- code named "Project Yukichi," after Yukichi Fukuzawa -- the 19th-century scholar who appears on Japan's largest-denomination 10,000 yen note -- comes as Oyo Hotels & Homes' main backer SoftBank has made profitability the new mantra for the startups it supports after its Vision Fund recognized $9 billion of investment losses last week.

"Oyo's profit model, which basically offers large incentives to hotel owners and seek returns afterward, has become a big internal debate," a source close to the situation said. "The company now says not to make contracts with hotels from which we can't earn margins."

Oyo, in which SoftBank Group's Vision Fund owns a significant stake after it led a $1 billion funding round in September 2018, was founded in 2013 by Indian entrepreneur Ritesh Agarwal, then 19 years old, and operates a franchise model by providing technology, branding and operational know-how to hotel owners.

The company claims to be the world's second-largest hotel operator, with a portfolio of 1.2 million rooms, including homes, in more than 80 countries. But since it launched in Japan in April it has struggled to meet its ambitious goal of signing up 75,000 rooms by March 2020, as previously reported by Nikkei.

As of the end of October, the Japan venture, a joint company between Oyo and SoftBank, had only signed 5,200 rooms. Last week, SoftBank Chairman and CEO Masayoshi Son declared "that the financials of our portfolio companies must be independent" after he unveiled a group quarterly loss of $6.5 billion, SoftBank's worst result ever.

In order to conserve funds, under the new sales push Oyo is redeploying support staff most of whom have no sales experience.

The aim is to almost double the current 196 sales staff as of Nov. 1, and sign 10,000 rooms per month from December -- hence the project's "Yukichi" code name. However, signing that many rooms would be a huge increase in sales rates that have so far averaged less than 1,000 rooms per month.

Oyo has retained Bain & Co., the U.S. management consultancy, to help implement the project, which envisages sales staff initiating contact with hotel owners and "helping us create a pipeline which is then converted into deals," one internal document showed.

However, minimum revenue guarantees that Oyo had previously used as an incentive to sign up hotels will be sharply scaled back, according to employees familiar with the matter. The guarantees, which Oyo has also used in other countries, were based on projected sales that Oyo expected after it upgraded newly signed hotels and added them to its internet offering.

According to SoftBank, average occupancy rates among 400 Japanese hotel rooms that signed with Oyo in May doubled to 84% in just four months. Ken Miyauchi, president and CEO of SoftBank's mobile unit, which has a 25% stake in the joint venture, last week said he had "high hopes for revitalizing hotels with the power of IT."

Nevertheless, some Oyo employees said the new budget-conscious approach to signing hotels could flounder, and tensions with some hotels were already high.

Several hotel owners also claimed that Oyo had not complied with its earlier contractual obligations to pay them guaranteed revenues, and were now canceling their Oyo contracts.

"One Oyo salesman suddenly asked me to lower the revenue minimum guarantee by 70%," said one furious hotel owner who signed with Oyo in June and was guaranteed several million dollars worth of sales a year over multiple properties. Oyo asked to lower the guarantee in mid-August, when it was supposed to start paying the hotel, according to the owner. He is now pulling out.

In an ironic touch, the monthly statement to the hotel starts with the cheery slogan, picked out in red: "Greetings from OYO -- the world's fastest growing hospitality group."

According to documents seen by Nikkei, the minimum monthly guarantee in September at one of these properties was in fact cut not by 70% but to zero from the more than $100,000 previously agreed. An Oyo employee familiar with the matter subsequently confirmed that the guarantee for all of those hotel's properties were cut to zero in September.

Nikkei Asian Review has learned of at least four such examples where guarantees have been cut. It was unclear how many hotels in Japan were given such guarantees by Oyo.

Oyo declined to comment on its internal sales rates and projections, or on its sales staff levels. As for the minimum revenue guarantee, a spokesperson said: "We have and will follow all contractual obligations."

Oyo added: "We determine the appropriate course of action on a case-to-case basis. This depends on the performance of the hotel, market dynamics and the legitimate needs of the hotel owners"

Oyo is one of the highest-profile investments by SoftBank's Son, who is also close to Agarwal. Reportedly, Son personally guaranteed a loan to Agarwal so he could purchase $2 billion of shares in the company.

Son, who has been criticized for taking a lax approach to corporate governance following the WeWork fiasco, has since recused himself from Oyo investments, according to The Wall Street Journal.

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