Oyo Hotels struggles with peeved partners as losses in hospitality sector pile up

KEY HIGHLIGHTS

• Partners claim Oyo abandoned their properties when COVID-19 struck, later approached them to modify agreement terms
• Oyo claims disgruntled partners are a small proportion of overall base
• Weak occupancies, low openings since June 8 would likely trigger more legal cases against Oyo, experts say

Mumbai-based hotelier Dilip Datwani is planning to take legal action against Oyo Hotels. Hot under the collar, Datwani says that Oyo abandoned his hotel in Vile Parle East on March 24, a day before the first lockdown, sensing trouble. He tried to settle with Oyo in April, and in return, was offered a new contract term where Oyo proposed to share 10 per cent revenues with him.

Datwani says that he understands the current crisis situation in the hospitality sector but it was difficult to agree to those terms. Why? In his last contract, Datwani was getting a minimum guarantee (lease amount) of Rs 9 lakh per month from Oyo. Settling for 10 per cent would be a huge fall, he says.

But that's not his biggest grudge. He alleges that despite their obligations to pay Goods and Services Tax (GST) dues and utilities, Oyo adjusted these payments from the advance that it had given to Datwani at the time of property sign-up. For leased properties, Oyo gives advance amount to owners which are typically 40 per cent of the contract size. Datwani says that there's a long list of hotel owners around him who have got a similar treatment from Oyo.

As the damage from the pandemic begins to unfold in the hospitality sector, cases like these are rapidly growing. Just two weeks ago, Delhi-based Pearl Hospitality and Events had reportedly accused Oyo Hotels of breaching the contract, and dragged the hotel chain to Delhi High Court.

Oyo's story of taking over the global hospitality scene through its fast-paced growth strategy has been well documented. But the devastation caused by the pandemic has upended the fundamentals of the sector, including for Oyo which was valued at $10 billion last year. Occupancies are down, room rates are down, the economy is limping, and state-specific restrictions have only made it difficult for the sector to gain the confidence of travellers.

Even as hotel chains like Oyo plan to get back to normal after a hiatus of 75 days, there's more damage waiting to happen. "The continued safety concerns are expected to keep travellers away from the market until a vaccine is found. Almost all hotel owners (branded and unbranded) are operating at low occupancies that's threatening their long-term viability. While large hotel chains like Indian Hotels can still survive the onslaught, Oyo might have to go through irreparable loss in terms of business and reputation," says a hospitality consultant.

In a conversation with Business Today, Oyo's founder Ritesh Agarwal says that the problem with partner hotels is fairly small - covering just 2 per cent of its entire base of 43,000 hotels and 50,000 homes. The other 98 per cent, Agarwal claims, are franchisee partners who have no issues with fee-sharing and revenue-sharing arrangements.

Agarwal says that Oyo has been able to weather the COVID-19 storm better because of its restructuring exercise of last December that saw company exiting 200 cities (out of 600 before) and laying off 2,000 people in India alone. Though Agarwal didn't mention the retrenchment numbers in the COVID period, he says that Oyo did not do retrenchments other than geographies where they were required. "We did furloughs in India," he says.

Contrary to Agarwal's claims, another disgruntled Oyo owner says that the number of hotels under leased contract is far higher. "All of their Townhouse properties are under leased model which is a significant number. The fact that Oyo invests in them, and takes them for a longer period is essentially to control the guest experience which is not possible under the franchise model," he says.

As per consultancy firm HVS Anarock, just about 40 per cent of the branded hotels have opened up in the past 17-odd days, and their occupancy rates have been rangebound. "More hotels are reviewing the situation to determine their reopening schedules; business demand as of now remains limited and occupancies for June are expected to be between 15 and 20 per cent with a RevPAR [revenue per available room] drop of over 75 per cent as compared to last June," says Mandeep Lamba, president at HVS Anarock.

Agarwal says that the because of the most rigorous lockdown in India, his business went down to nothing. But today, Oyo is clocking occupancies of over 15 per cent, thanks to Vande Bharat flights, and its traditional customer base of SMEs (small and medium enterprises) and millennials. "There is definitely some improvement in utilisation. India is going to be a long route to a painful recovery. It's going to take a while before [situation] improves because the way cases are rising, people definitely are worried. The big corporates, their employees, and team members are the ones which are going to come slowly. We actually expect there may be some permanent loss in the business due to the video calling, etc," he says.

Amongst the number of passengers that have come back to India under Vande Bharat, a repatriation mission by Civil Aviation Ministry to bring back Indians stranded abroad, Oyo claims to have served nearly 40 per cent of the travellers. That's because of the rates at which Oyo rooms are available. For instance, there are state-wise quarantine policies for overseas passengers. For such passengers, it's economical to stay in Oyo properties for 14 days (at Rs 1,200-1,400 per night) as compared to Rs 4,000-5,000 in other branded hotels.

In March, Gurgaon-based hospitality consultancy firm Hotelivate had estimated the revenue loss for the sector at $4.7 billion in FY21 due to coronavirus outbreak. "As against the general belief that leisure segment would pick up first, the demand actually remains quite weak. Despite hotels taking top-of-the-line safety measures, the fear of getting infected discourages consumers at the moment," says a midscale hotel promoter.

Oyo's Agarwal says that as part of its effort to build deeper relationship with partners, he has taken some steps. One, the partners who have opened properties or about to open are given rebates. This Rs 24-crore rebate would go into ensuring that these hotels meet safety protocols. Then, Oyo has encouraged partners to go for one-time settlement with banks. On the back of these steps, Oyo claims to have signed up 84,000 rooms across different countries in the past two months.

The problem with partners has cropped up in properties where Oyo has evoked force majeure clause to modify the terms of agreement from minimum guarantee to revenue-sharing model. "We are actively discussing with our partners to say that in the world of COVID, nobody can guarantee that the hotels will be open all throughout... The force majeure didn't come for 98 per cent of the hotels. We have no intent, even for a small per cent of hotels, to continue arbitrating. Our genuine hope will be to work with them and come to a solution which is win-win for both," says Agarwal.

With both sides staring at huge losses, and lack of clarity on how deeper the COVID problem is; there's no reason to believe that this fight could be ending soon.

ALSO READ: Coronavirus impact: Oyo allots ESOPs worth Rs 130 crore to furloughed employees

ALSO READ: 5-star hotels turn into hospitals as Delhi braces for more coronavirus cases

ALSO READ: Coronavirus effect: Hotels may have to wait 12-18 months to return to pre-COVID business

ALSO READ: Hotels report 82% drop in occupancy; recovery unlikely before September