Budget hotel aggregator OYO Rooms says it has hit a $200 million revenue run rate. And in May this year, the firm also announced that it has "hit unit profitability at an aggregate level across its cities". What it means is that the company makes a profit on every room sold, on an average. CEO and founder Ritesh Agarwal spoke to Business Today about the company's secret sauce.
What do you think makes OYO cool?
Oyo was never the idea where you knew what the solution is going to be. You always knew what the problem was. The problem was that finding predictable experiences at the right price point was almost unheard of in this country. We wanted to fix it. What makes us cool specifically is that we, as a company, is an original innovation out of India. We have solved a problem which existed without emulating how an European or a North American company would be solving it.
How is the company an "original" innovation?
There were either hotel chains who used to be franchisees. On the other side, there were distributors who were offline. Our belief is that great brands will become their own distributors. Uber doesn't sell somebody else's brand. They can charge a premium for the brand but not rely on a third party to distribute, which means their marketing expenses are zilch. OYO is that value proposition. Not only am I the Bestwestern and Holiday Inn of the hotel owner, I am also the largest distributor of demand to that hotel. What that does is on one side, you become the leader in terms of the number of customers, and hence do a lot of things in terms of technology, processes, network effects, demand and so on. At the same time, you can build loyalty as a hotel brand. People say they "stayed at an Oyo" and an "Oyo person came and helped me with the experience". Which means if anything went wrong, you don't think the hotel owner did anything wrong. His loyalty is to OYO as a brand, not to the hotel. If his loyalty was to the hotel, he would buy it from one of the channels. The channel's value is like a commodity. If you have to become the brand, you have to become one level above the commodity. You have to play the experience game. This is a unique model, tough to execute. But it has huge value impact. Brands always have a much higher multiple. What was the tipping point for the business?
I think last year was the tipping point. In the first year, we brought together a team which was very strong. By the end of 2014, we were very clear that this would work. 2015 was the year of massive growth in terms of the number of supplies and cities. OYO's brand visibility and understanding to the last mile user phenomenally increased. In 2015, we grew more than 100 times - in supply, demand, room nights.
How could you add supply so fast?
It was because during our first year, we fixed everything. We have a supply playbook. The playbook would have the detail to the level of saying what are the 20 things that make an ideal OYO. Without that I wouldn't even sign the hotel. Once you sign a hotel, how do you standardise it in seven days? We have a large offline operations process as well - auditing the hotel and standardising it. We figured such things out in the first year. We made documents, the supply play book, the demand playbook, our operations playbook, our audit playbook. It was learning and documenting of all of these, with great leadership and engineering. In half year 2013 and the entire 2014 we just operated in Gurgaon. We said we will just build one city and a defensible business. We had 40 hotels in Gurgaon by 2014. Today, Gurgaon would have more than 350.
Is ensuring supply your primary challenge?
We operate in a model where demand is infinite and supply is limited. Which means, there are markets where we are running out of supply. Over the next two years, a big focus area is working with entrepreneurs to help them open new supply. Second, is the quality of experience we deliver. We have done a huge jump. But the problem in our kind of services business is getting better every day. You need to keep your head down, and make sure you do the same thing over and over again. A lot of times, the secret is not doing new things but doing the regular ones very well, every day.
Have you slowed down growth to focus on experience?
First two months of the year - January and February - yes, we did. We weeded out 51 hotels. We did a huge customer experience exercise. We think of ourselves as a consumer brand more and less like an Internet brand. It is incumbent on us to be a better consumer brand. We made some huge investments there.
What role has discounting played in the growth story thus far?
At any point in time, OYO will enable you the best quality of experience in any segment for a price that is at least 30 per cent cheaper than other platforms available, net of discounts. So if a competitor sells for X price, we will always be 30 per cent cheaper. The question after that is how do you reach them? There are multiple ways. One of the big ways is what Uber has proven globally - efficiency. A car is empty for 60 per cent of the time. If you increase that, your fixed cost will remain static or grow incrementally but revenue will increase significantly. That delta will enable you to pass part of the benefit to your guest. That's the ideal way we are enabling benefits to our guests. But at the same time, in the newer markets where we are trying to enable habit of the customer, we incentivise either the customer or the owner. In markets such as Shimla on the weekends, the problem is that the merchant won't give you a room. So for the first two months, I incentivise them.
Will OYO expand into newer segments beyond short-stay?
We would want to focus on one thing and do that very well. But over the long-term, we would like to be leaders in everything that is connected to real estate. That's a 30-40 year pipeline.