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Oyo Hotels CEO Ritesh Agarwal. He founded the company in 2013 when he was 19 years old. Since then, it has become India's largest hotel chain. (Photo by Akira Kodaka)
Startups in Asia

India's Oyo aims to disrupt global hotel industry

Born entrepreneur brings high tech hospitality to budget business

KEN KOYANAGI, Editor-at-large, Nikkei Asian Review | India

GURGAON, India -- Ritesh Agarwal was born to be an entrepreneur.

The 24-year-old founder of Oyo Hotels was in elementary school when he started computer programming. Today, his app-based hotel chain is India's largest, and he is now preparing to expand into Europe and the Middle East following huge growth in his home country and China.

Agarwal was 13 when he started his "first business in life" -- selling mobile-phone SIM cards and fast-moving consumer goods on the street in his small hometown in the eastern state of Odisha.

A year later, he declared to his middle-school classmates that he wanted to become an entrepreneur, even though he had not yet fully comprehended its meaning. "If you want to be the cool kid in the class, you say something nobody else understands," Agarwal told the Nikkei Asian Review.

Digging up the definition in a dictionary, he read that an entrepreneur is "somebody who solves a problem and creates a business in the process."

The problem he set out to solve presented itself when Agarwal was just 19. He realized that almost none of the world's major hotel chains run properties with fewer than 100 rooms, but more than 90% of hotels fall into that category -- and he saw big potential in that huge under-cultivated inventory.

"Nobody had ever tried," he said. "So I decided to tackle that segment, thinking to myself that an entrepreneur would take a 5% chance."

Oyo, which is owned and operated by parent company Oravel Stays and based near Delhi in Gurgaon, was founded in 2013 by Agarwal, who turns 25 next month. Since then, it has become India's largest hotel chain by number of rooms and enterprise value, or market value plus net debt.

When the company secured $1 billion in venture capital funding in September from the existing shareholders -- including SoftBank Vision Fund, Sequoia Capital and Lightspeed Venture Partners -- it valued the company at about $5 billion. That is more than twice as big as India's largest publicly traded hotel operator, Indian Hotels, owner of the upmarket Taj hotels, whose market cap was roughly $2 billion as of Oct. 19. After the latest funding round, Agarwal is estimated to hold less than 10% of Oyo.

An Oyo hotel in Noida, near New Delhi. (Photo by Akira Kodaka)

The business strategy is based on the fairly simple principle of bringing common standards and processes to the highly diverse small budget hotel sector. Run by individuals and families, these hotels have been largely underdeveloped and ignored by major chains. But Agarwal is offering these independent hoteliers the opportunity to benefit from the economies of scale that these big hotel operators enjoy by joining his rapidly growing Oyo franchise.

"Once joining the Oyo chain, room quality and service quality both improve while prices go down because of better efficiency," Agarwal said, adding that the occupancy rate of a small budget hotel in India typically increases from around 25% to 65%-70% within a month after joining. Room rates typically range from $25 to $50 a night. The lowest-price-range brands of global majors normally price their rooms above $50. In return Oyo receives franchise fees or a share of revenue.

Establishing that business model with the first Oyo hotel took almost two years, during which time Agarwal spent nearly a year in Silicon Valley on a fellowship grant from Peter Thiel, the co-founder of PayPal and an early investor in Facebook.

The number of rooms in India under Oyo's inventory management soared in the two years ending June 2018, from 1,000 to 100,000. (Photo by Akira Kodaka)

During his stay in California, Agarwal met many entrepreneurs, including Thiel, and "learned two things," he said. "One is that being innovative is OK, and the second is to think big."

"In India, many people say you should copy American success models to be successful in India. Also in India, you are taught to think just enough," he explained. "In California, I realized it is OK to try original models, and I should be thinking global rather than just India."

After returning to India from California in 2014, Oyo's explosion began.

The number of rooms in India under Oyo's management soared in the two years ending June 2018, from 1,000 to 100,000. The company then added another 33,000 rooms during the third quarter of this year.

Meanwhile, since entering the Chinese market in November 2017, its room inventory there reached 129,000 by the end of September. That pushed Oyo into the top 10 ranking in terms of room inventory in China, putting it on track to surpass its home market in India in the near future.

Worldwide, Oyo added roughly 140,000 rooms to its network during the quarter ended September. That far outstrips Marriott International, the world's biggest hotel operator, which added a little over 20,000 rooms in the quarter ended June.

Marriott still had a far bigger global room inventory at 1.28 million by June this year. Oyo, by comparison, had an inventory of just 270,000 rooms as of last month, spanning operations in India, China, Nepal, Malaysia, Indonesia, the United Arab Emirates and the U.K.

But, with growth accelerating both in India and China, and ambitious expansion plans for the U.K., the UAE and Indonesia, Oyo's expansion is likely to continue at a breakneck pace. It could even overtake Marriott by room number sometime in the near future.

Oyo is looking at other growth opportunities in the rest of Southeast Asia and continental Europe.

Oyo's secret for such rapid growth is in part due to the fact that it is not yet going head to head with global hotel giants. But it is also thanks to its innovative approach. The company has brought a "completely new model of running a hotel," Masayoshi Son, founder and chief executive of SoftBank Group, Oyo's largest shareholder, noted in August at a news conference in Tokyo.

Oyo's success can be seen in the sharp increase in revenue reported in its annual accounts. Consolidated revenue was declared at $19 million for the year to end of March 2017. Agarwal says revenue for the rest of calendar 2017 was growing at 130% over the previous year and in 2018 it is up by between 200% and 300% on last year.

But the company's fast growth comes with some risks. A market-research analyst has warned that at Oyo's pace of growth, "their organization can easily be overstretched, which may drag facility and service quality down and damage their brand."

Agarwal says that Oyo has established a virtuous cycle of very rapid organic self-growth driven by individual investors and hoteliers by instantly providing them with comprehensive support thanks to innovative technology and a high degree of human organization.

"We forward-invest in our capacity building," he said, in contrast to major hotel operators, which typically invest following demand.

Oyo employs about 700 software engineers out of a total 8,500-strong workforce. This engineering team releases about 20 new pieces of software every day, including new mobile apps and updated versions of existing apps.

Oyo has up to 700 software engineers among its 8,500 corporate employees, and they are constantly releasing about 20 new pieces of software everyday. (Photo by Akira Kodaka)

One of the company's most effective apps, dubbed ORBIS, instantly calculates a hotel's projected occupancy rates and revenue after joining Oyo by analyzing "hundreds of thousands of items of data in that particular local lodging market," Agarwal said.

Traditional hotel chains typically take 10 or 11 months to sign a franchise or management-contract deal with a property owner, he said. "At a major chain, a negotiator needs to call his city boss, and then the city boss calls the country boss, and the country boss calls the regional boss, and so on," he said. "At Oyo, ORBIS on his mobile phone is the boss."

The app calculates all the risks involved in a deal and makes a decision on whether to approve it. "It is data science," Agarwal said. "We typically sign a deal 10 days after the first meeting with a property owner."

After signing a deal and renovating rooms, the hotel owner can run his hotel by using dedicated mobile apps, which handle everything from inventory management to bookkeeping to housekeeping.

The company also has an army of workers to convert existing rooms and buildings into Oyo branded ones. "We have 700 civil and construction engineers working 24/7 in India and China to make sure renovation and construction works are completely under our control," Agarwal said.

Agarwal says he learned two things while on a fellowship in Silicon Valley a few years ago: "One is that being innovative is OK, and the second is to think big." (Photo by Akira Kodaka)

The booking software behind the website analyzes large amounts of real-time data and continually calculates the demand-supply situation. It resets room rates in a given area millions of times a day to optimize occupancy. At the same time, a few thousand sales people make bulk deals with local businesses. With that combination of technology and human power, Oyo says it is able to boost occupancy rates for new member hotels within weeks.

While small budget hotels have given him his start, Agarwal has now begun experimenting in the slightly higher value end of the hotel industry. Last year, the company launched Oyo Townhouse, whose room rates range from $30 to $70 and which targets business travelers with meeting spaces and other amenities. But instead of bringing independent middle market hotels under Oyo's umbrella, the company directly manages properties.

Indian consultancy RedSeer said in a recent report that Oyo Townhouse's room inventory growth is three times as fast as existing chains in the Indian middle-segment hotel market.

Oyo is entering the U.K. in the middle segment with the same format, too, and is aiming to convert unbranded hotels into Oyo Townhouses.

In mid-October, it announced that it was entering a full expansion phase in the UAE and Indonesia. Agarwal said he wants to have around 300 hotels in U.K. by the end of 2019, and 150 in the UAE by 2020. It has already opened 1,000 rooms at 30 hotels in Jakarta, Surabaya and Palembang and plans to expand into 35 cities in Indonesia by late 2019.

If Oyo succeeds in establishing itself in the U.K., he will think about tackling continental European markets, "one by one."

Oyo's efforts to penetrate richer markets and higher value segments have already begun. Japan could even be next. "Japan is a market which I am personally very passionate about, as every hotel is sold out all the time," he said. "So we will bring our product hopefully very soon." Oyo may not yet be big enough to present a threat to the world's major hotel chains. But they will almost certainly be watching the boy who was born to disrupt.

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