Disclaimer: The research methodology of this paper adopts the theoretical framework of “growth engineering”. This research is unrelated to any third party and was completed independently by the Growthbox for industry research and academic use only.
Hey guys, I’m Mera, a new addition to the Growthbox team. When I saw that OYO Hotel, a common sight on news headlines these days, recently put up an advertisement poster in my apartment elevator, I decided that it was time for me to have a look at this unicorn that’s on an expansion fundraising spree.
What is OYO? How rapidly has it expanded? This is what the media says:
“33Billion RMB valuation in 5 years, 4600+ openings in 1 year, OYO is beating Qitian (7天), Rujia (如家) and Jinjiangzhixing (锦江之星).”
OYO is a new budget hotel chain model. It both provides operational management for individual hotels and has its own online hotel reservation platform. Unlike the high-cost franchise model of traditional budget hotels such as Rujia (如家)and Qitian (7天), OYO puts individual hotels under unified operations. That is, OYO standardizes and lightly transforms low-cost hotels, providing systematic management, operation strategies, channel promotion, management training, etc., to help hotels quickly increase their occupancy rate.
According to incomplete statistics, OYO has raised money at least 8 times in a short period of five years, with a total funding of over $1.5 billion. Li Wei, CFO of OYO China, has published OYO China’s first year operational data. The result is:
On average, OYO China opened a hotel every 3 hours.
We also reviewed the OYO China official website, which clearly shows the total number of OYO China cities, hotels and guest rooms: 292+ cities; 6700+ hotels; 310000+ guest rooms.
We’d like to point out that Rujia (如家), the largest budget hotel chain in China, needed 16 years to grow to more than 2,300 hotels with 240,000 rooms.
What’s perhaps even more unbelievable is that OYO is a startup from India and its founder is only 23-year-old.
At this point, I had two main questions about OYO:
- What are OYO’s real growth figures?
- What is the business model that supports its rapid expansion?
So, we decided to explore the truth behind OYO by:
- Scraping all available data on the hotel from OYO China app and analyzing the operations of OYO China by looking at the number of hotels, number of rooms, occupancy rate and hotel distribution.
- Collecting public information about OYO and studying OYO’s business model by analyzing its enterprise structure, development path, and expansion strategy.
Digging into OYO’s real operational data
In order to obtain enough detailed data to analyze the actual operations of OYO China, we scraped data on all available hotels from the OYO China app. The data fields include but are not limited to: number of cities, number of hotels, location of hotels, number of rooms, number of remaining rooms, opening date, etc. The time span for the data scrape from April 19, 2018 to March 17, 2019.
We summarize the app’s historical data and got the following data:
Number of cities: 285
Number of hotels: 4229
Number of rooms: 190,000+
The total number of hotels we got from the app was 4,229, which was almost 2,500 fewer than the 6,700 stated on the official website, or 37% fewer hotels. The proportion of rooms missing is similar.
Assuming OYO didn’t exaggerate their number of hotels, there may be two reasons for the lack of data: One, the hotels owned by OYO China are not all available on the app. Two, in the process of collecting the data, we found that on the app, hotels were added or removed frequently. In this case, the 6700 hotels may include that have been removed.
Although the total number we found is not quite right, 4229 hotels are enough to reflect the overall operation of OYO, so we will take this data to analyze for this article.
1. Analyzing the growth trend
By analyzing the data, we obtained the date of each hotel’s opening and plotted the geographical distribution of OYO China’s daily hotel openings. The darker the color, the more OYO hotels in the area. We can see that OYO started from the developed coastal areas such as the Yangtze River Delta and the Pearl River Delta, then began to expand inland.
(The order in which the hotels appear is the order in which they are placed on the app, approximately equal to the chronological order, the original link: maplab.amap.com/share/mapv/183b6c4e0db9b758042c31b6a3147fca)
Subsequently, we plotted the growth trend of OYO China daily franchise hotels since April 2018. We can see that the number of hotels will increase rapidly by the end of each month, this may be related to the hotel data aggregation process in their APP.
(Near the end of each month, the number of hotels in the APP will rise rapidly by a step. This may be because collection of new hotel data was concentrated at the end of the month.)
2. Encircling the Cities from the Rural Areas
OYO China’s low entry requirements and low commission membership conditions have attracted many hotels to join. Many media sources claim that OYO Hotel adopted the strategy of “Encircling the Cities from the Rural Areas”, that is, infiltrating the economic hotel chain market from the third to fifth tier cities. What kind of hotel chains would join OYO?
By analyzing the number of rooms in more than 4,000 hotels, we can see that OYO China’s franchise hotels are mainly small and medium-sized. The chart below shows the OYO hotels by number of rooms. 67% have 20 to 60 rooms.
（30-40 room hotels are the most common, the median number of rooms is 48）
We sorted the 4,000+ OYO hotels by city tiers. The results show that OYO has almost entered all emerging-first (tier 1.5), second, third and fourth tier cities. Of the actual first-tier cities OYO only entered Shenzhen and Guangzhou.
（OYO still hasn’t entered some first and fifth tier cities but has basically entered all emerging-first to fourth tier cities）
We found that although OYO has the largest number of hotels in third and fourth-tier cities, the distribution density of hotels was the highest in first and emerging first tier cities. We can see that although OYO claims to “encircle cities from rural areas”, this does not prevent OYO from infiltrating the largest cities.
（There are a lot of hotels from emerging 1st to 4th tier cities, but considering the average no. of hotels per city, there’s a considerable upwards trend from 5th to 1st tier）
Taking into consideration hotel industry research data released by MobData, the emerging first-tier cities are indeed the most demanding regions. OYO’ business development follows this rule.
The chart below shows the top 10 cities in terms of total number of hotels. It can be seen thatOYO hotels are largely concentrated in cities with high levels of tourism or commercial activity.
（Top 10 cities with OYO Hotels）
Finally, from location of the franchise hotels, OYO is mostly distributed around commercial areas and railway stations, mainly to meet the needs of business travel. The chart below shows more than 2,000 hotels based on the “Top Destinations” and “All Attractions” tabs in the OYO App. However, most of the OYO franchise hotels are in regions where urban transportation is inconvenient – only three are located near a metro station.
（2000 OYO hotels’ location distribution）
In summary, we can see that OYO China’s franchisees are indeed present in the majority of cities across the country, with the proportion of hotels in the first-tier to second-tier cities being 43%, and the proportion in third-tier and below being 57%. At the same time, the distribution density of hotels rises from the fifth-tier to first-tier cities, so it’s clear that OYO is eager to occupy big cities and moves very quickly.
At the same time, the scale of these hotels is mainly small and medium-sized, and the location of hotels is also centered around business districts, railway station, and tourist locations. We believe that this is mainly to meet the needs of business travelers and tourists. From another point of view, OYO provides low cost accommodation in first to second tier cities, which mean they are essentially making money from the lower end of the market.
3. Core indicators: Mediocre Value but high Growth
Any company’s operations will be reflected in its revenue. For the hospitality industry, the three core indicators most relevant to revenue are: OCC (Occupancy), ADR (Average Daily Rate) and RevPar (Revenue Per Available Room). Therefore, these three indicators are the key to studying the operations of OYO.
We understand that the main selling point of the OYO model is to help hotels improve their occupancy rate. From OYO’s official website to its numerous news releases, we found that “high occupancy rate” was frequently mentioned.
In 2018, OYO India disclosed that its high-end Townhouse hotel had an occupancy rate of 85%. The OYO founder also mentioned in a speech in China that “After 180 days of joining OYO, the occupancy rate of some hotels even increased from 19% to 80%.”
So, what’s the actual occupancy rate?
By analyzing the data, we calculate the total average occupancy rate of 3,588 hotels and 160,000 rooms from January 1, 2019 to March 17, 2019.
The calculation method is: the total number of rooms sold by all hotels on the same day / the total number of rooms owned by the hotel = the total occupancy rate of the day. (This method is based on data from the OYO app, for reference only)
The chart below shows the daily occupancy rate. We can see that the average occupancy rate of OYO China was about 30% between January and February of 2019. It was relatively low during the Lunar New Year period as people were going home. It grew rapidly after mid-February and reached its highest point on March 16th – 46.91%. On average, there is a small peak in occupancy rate every 7 days between Friday and Saturday. The median occupancy rate from January 1 to March 17 was 33.4%, with an average of 33.3%.
In order to verify the fact that “new OYO hotels will have a significant increase in occupancy rate within a few months”, we screened 451 new hotels that joined from December 24th to 31st, 2018. Their occupancy rate between January 1st and March 17th, 2019 was analyzed. We found that some hotels did indeed experience a significant increase in occupancy rates after joining, but others didn’t. But the overall average occupancy rate of the 451 new hotels did increase, indicating that OYO’s operations worked. However, the median occupancy rate during this period was also only 29.2%, with an average of 28.9%.
b. ADR and RevPar
According to the Softbank’s 2018 investment report, OYO has a core technology – a dynamic AI price adjustment system. With this, OYO is able to automatically price its rooms based on supply and demand, ultimately achieving growth in RevPar and total revenue.
However, no information has ever been published on the RevPar and ADR of OYO China hotels. The only clue we found is a survey of the Indian market for OYO India’s upscale hotel Townhouse: RevPar is $41 and the ADR is $46.
By analyzing the scraped data, we calculated that from January 1 to March 17, 2019, the ADR of 160,000 rooms was 145 RMB for a total of 3,588 hotels.
At the same time, we also calculated the daily RevPar for this period: from 40 RMB on January 1 to 71 RMB on March 14, with an average of 48 RMB. This can also indicate that OYO’s operations have had a positive effect.
In summary, we can see that OYO’s operations can indeed help franchisees to improve occupancy and RevPar, ultimately enabling businesses to achieve revenue growth. However, at this stage, there is still a lot of room for optimization in both occupancy and RevPar.
In comparison with the leading budget hotel chain in China Rujia (如家) (Q1 of 2018 data):
Assuming similar ADRs, the RevPar of 如家（Rujia） is three times that of the OYO! The main reason is that the occupancy rate of OYO hotels is too low. We speculate that the OYO’s low entry threshold franchise model is more attractive for stand-alone hotels with poor operations; coupled with the ultra-fast expansion rate of OYO hotels, OYO’s overall occupancy rate is initially quite low. OYO will face this problem for a long time to come.
Analysis of the business model
As mentioned above, OYO adopts the franchise model to form a unified hotel brand by “incorporating” individual hotels. So how does this seemingly ordinary business model work? How does OYO make money itself?
We began looking for clues starting with the franchise model. Below are OYO’s official franchise terms:
According to its official website, the standards for joining OYO are not high. As long as it has more than 30 rooms, a hotel can join OYO with no franchise fee or management fees. Unlike other economic hotel chains, such as Qitian (7天) and Rujia (如家)which charge hundreds of thousands in franchise fees and require months of renovation, small and medium-sized hotels can quickly join OYO at a small cost. OYO also provides very comprehensive operations management and strategies.
We found a picture of promotional material produced by a graphic designer for OYO. According to the above information, there are three types of franchise services: standard, premium, and elite. By analyzing the names of the OYO hotels, we found 113 hotels with the “elite” sign but none with the “premium” and “standard” signs. “standard” may refer to ordinary franchise members. The following picture shows the “elite” series of franchise services. Because it cannot be verified, it is for reference only:
How is OYO profitable with such a cheap franchise model? In order to gain a deeper understanding of OYO’s franchise model, we consulted the relevant parties for more detailed franchise terms. It is revealed that OYO’s franchise model is called “soft joining”, which basically means putting the OYO logo on the hotel’s door, front desk, signage, etc. In terms of services, the hotel will be equipped with an operation manager, compensated by OYO, who assists the hotel’s operations, including but not limited to: developing operational strategies, docking and managing OTA platforms, and managing travel agencies, meetings, staff training, etc.
There is no fee for become a franchise hotel, including renovation fee, but OYO charges 6% of the hotel’s revenue as commission with 1-year contracts. In addition to this, there is a special rule that an OYO franchise hotel cannot be within 500 meters of another OYO franchise hotel.
Based on the number of daily hotels and the price of each room on the same day, we have calculated that the total revenue of OYO China was about 600 million RMB from January 1st to March 17th, 2019. So, according to the 6% commission rule, the actual income of OYO is:
600 million*6%=36 million RMB
Just to double check, we also collected information about OYO India’s commission collection rules. The screenshot below is a suspected contract between OYO India and the hotel. We can see that OYO has charged 20% of the hotel revenue as a commission. At the same time, we also found out that OYO India increased the commission rate several times to 20%-30%.
From this, OYO’s business model is pretty clear: it takes in and repackages individual hotels, and helps them with the acquisition of customers, and makes money from commission.
In summary, the occupancy rate and RevPar are the core indicators of hotel operation and the key to supporting the OYO system. In order to meet the bilateral supply and demand relationship, OYO must continuously improve the occupancy rate of its hotels, to attract more hotels to join, so that the supply end is sufficient; on the other hand, a sufficient supply that can meet up customers’ needs, which directly increases the number of customers of the franchisee. With this positive supply and demand loop, hotels will earn more money, and OYO can also draw more commission.
OYO’s Growth Strategy
Next, we must address the core issue in the business model: How does OYO help franchised businesses improve occupancy and revenue?
1. Increasing traffic on the customer side
Initially, we suspect that OYO China may build a strong customer-side traffic matrix with its app, WeChat applet, public account, etc., and then direct traffic to the hotels, similar to OTA platform models like Meituan.
Therefore, we investigated traces for traffic growth in OYO China’s customer side.
a. Online Ads
Its ads are mainly placed on military, automotive, football, and live-stream platforms, so it can be speculated that the majority of its online advertising audience is male.
b. Offline Ads
Through public information, we found that OYO China’s offline ads are mainly elevator ads and the high-speed railway advertising during the Spring Festival. Elevator ads in office buildings and residential areas indicate that OYO China’s guests come from visitors. During the Spring Festival, the ads on trains were aimed at urban returnees. Ads on transportation during the Spring Festival target the audience’s demand for accommodation on returning to third and fourth-tier city hometowns. And after they returned to first to second tier cities for work, their demand for accommodation when on short-term business trips. This matches the brand position of OYO China.
c. Social Media
The OYO’s WeChat Public Account (微信公众号) is its main promotion platform; Its Weibo uses the forwarding lottery as the main means of operation. The number of fans of one of the main WeChat public numbers, “OYO Hotel (OYO酒店)”, is about 200k. On the other hand, its Weibo account fans number around 430k, but its daily interaction volume is only a few dozen. The most popular one microblog forwarding volume is only 10k.
On the search engine side, OYO China does not seem to be doing any SEO and PPC placements. Unlike OYO India, OYO China‘s website does not offer any booking function, and hotel reservations can only be made through WeChat mini app or its app.
By analyzing the above information, we can see that OYO China’s growth strategy for the customer side is more conventional, that is, it spends money on buying traffic; some popular growth hacking strategies on WeChat, such as fission, distribution, product gamification, etc., have not seen any application. Therefore, we judge that OYO did not spend too much energy on its user acquisition to the consumer side.
Sure enough, in an interview, OYO partner and CFO Li Wei confirmed our guesses: “We will maintain a certain exposure for online promotion, but these are not the most important conversion strategies.” So, what is OYO’s main growth strategy? Why do consumers buy it and how can the occupancy rate of the business be improved?
2. Growth methods beyond the customer side
We decided to reversely figure out OYO’s growth strategy beyond the customer side by looking at OYO’s employee structure and recruitment information.
By looking at the major recruitment websites, we did not find many jobs for Internet operations, but more for the operation and management of hotels. In a press release, OYO China partners mentioned that OYO has set two positions: Hotel Operating Officer (HOO) and Hotel General Manager (AGM). HOOs are responsible for assisting the hotel front desk to enhance the customer experience. AGMs are responsible for 3-5 hotels per person and for improving hotel operations and revenue. We also see a lot of these positions appear on the recruitment website.
A recruitment case of OYO caught our attention. In the Job Description of “OCCH Hotel Revenue Management Leader”, the phrases “accommodation rate score”, “individual guests”, “OTA”, “offline sales” and other keywords are mentioned.
From this we can see that OYO’s user acquisition is not only on consumer side, but it also pays great attention to the optimization and growth of the hotel distribution channel and offline traffic.
Li Wei, a partner at OYO China, said: “About 72% of customers come from offline walk ins. Bookings from online OTA platforms such as Ctrip and 飞猪（Feizhu)accounts for less than 30%.” In comparison, only 3% of OYO India’s orders are from OTAs.
Next, we will find out how OYO China helps hotels increase their traffic by focusing on the three keywords of “offline”, “distribution channel”, and “OTA”.
a. Offline traffic
We observed that OYO recruited a large number of employees with experience at firms such as Meituan, Didi, Uber, and饿了吗(Elema)to help the hotel to operate and expand. OYO attaches great importance to the growth of offline traffic, and it was confirmed in a news report that OYO is building a strong offline sales team, aimed at bringing in individual customers and build a wholesale travel agency distribution channel from the Micro Market, as well as cooperating with corporate accounts to increase offline traffic, thus rely on online OTA platforms as little as possible.
The founder also publicly stated that “OYO has also established cooperation channels with some distributors, including Daolv (道旅科技), Longteng (龙腾捷旅), Jielv (捷旅假期)etc.”
b. Business-to-business (B2B) expansion
In the 2018 annual report released by OYO India, we also noticed something interesting: OYO India claims to provide accommodation services for more than 16,000 companies. It is very obvious that another source of business for OYO Hotel is B2B sales– providing accommodation for employees on business trips. It might surprise you that the global business travel market has exceeded $1 trillion, with accommodation alone has exceeding $200 billion! In this regard, the OYO hotel is getting into a market with great potential.
Following this clue, we found a number of OYO cooperation agreements with government departments (even police departments) – which confirms its B2B model.
OYO China stressed in an interview that OTAs are still one of the main traffic channels of OYO China, and said that “OTA has never been a competitor of OYO, but a distribution channel.” What is the relationship between OYO China and OTA platforms? How is this reflected in OYO’s business model?
In order to investigate this question, we first combed through the timeline of OYO India’s development and summarized its history with OTA platforms.
It can be seen that in its early days OYO India was initially banned by many OTA platforms, but then it established a foothold and a self-operated traffic platform with its own offline expansion ability. Two years later, every major OTA platforms had to compromise, unblock, and establish a partnership with it because OYO began to take traffic from OTA platforms – continued confrontation would have been detrimental to both sides.
What about OYO China? With a little bit of research, we found a lot of news reports on OYO being blocked by various OTA platforms in China. Does this mean that OYO China is repeating the history of its Indian counterpart?
In order to further investigate the relationship between OYO China and the major platforms, we looked at all the hotels with OYO logo on the Feizhu (飞猪)and found that 91% matched the OYO official app. At the same time, the OYO logo also appears in the hotel photo. In addition, OYO has opened its own direct store on the Feizhu (飞猪)and customers can make bookings at its franchised hotels directly on Feizhu (飞猪). Alibaba’s Feizhu (飞猪) and OYO have a common investor – Softbank, so we speculate that the relationship between OYO and Feizhu (飞猪) will be relatively friendly.
On the other hand, we found that both Ctrip and Meituan had no search results for “OYO”. Therefore, we randomly sampled 100 of the OYO’s official 4229 hotels and tried to match them by name and address on the two platforms.
We found that the matching degree of Ctrip and Meituan was 90% and 83%, respectively. Interestingly, Ctrip seems to have adopted a relatively “soft banning” of OYO. Although the “OYO” keyword will not appear in the hotel name, you can still see the OYO logo in pictures of the hotel. Meituan’s ban of OYO seems to be stricter. The “OYO” keyword and logo do not appear in the search results, hotel name, or hotel images.
In this aspect, OYO China is different from India, and OTAs had adopted a more inclusive attitude towards it. (In India, the situation was that as long as a hotel joined OYO, it would not be available on the platforms.) The so-called ban in China is relatively soft.
After contacting OYO China’s official sales staff, we were able to confirm that OYO China’s other major business is to help hotel businesses to operate OTA channels, including on negotiating with the OTA platform, photo shooting, reviews management, keyword ranking and so on. The OYO regional manager can manage the OTA merchant account on his behalf, propose optimization suggestions and assist in implementation. Overall, it helps hotels get more customers from the OTA channel.
OYO’s model looks quite similar to third party operations management on Taobao: it manages “shops” and collects commissions. Why is there such a difference in the development of OYO in China and India?
At the time, the Internet penetration rate of the Indian hospitality industry was only 10%. In 2018, when OYO entered China, the Internet penetration rate of China’s hotel accommodation industry was as high as 31%.
Therefore, we speculate that if OYO China cut off OTA platforms today, it will suffer huge losses. Clearly it can’t follow its counterpart’s path of confrontation in India. Therefore, OYO China has maintained close contact with multiple OTA platforms and entered the cooperation phase in advance.
In essence, OYO helps hotels with operations and promotion work, earning commissions from them. In terms of its commercial nature, OYO is also a Business-to-business business model that sells services, consulting, and even SaaS tools to businesses. From this perspective, if OYO establishes its own traffic pool, its model would be very similar to that of the Meituan – this is probably the reason why the Meituan is tougher on banning OYO.
For the hospitality industry, listings and traffic are the two most important core factors. Simplifying OYO’s business model: it not only integrates the resources of individual hotels, but also creates an independent growth engine.
Although it looks good, the price of OYO China’s rapid expansion is a sluggish occupancy rate. With such a huge “inventory” on its hands, if it cannot sell quickly, it will inevitably lead to the lack of trust between both hotels and customers.
On the other hand, a big problem with OYO hotels is that the membership system is imperfect – it is very unfavorable towards renewals. We can see that any large hotel chain group has a strong membership system to support it – many hotels’ points are even interoperable with airline miles, covering the upstream and downstream of the travel market.
Looking back at OYO India, in the five years since its establishment, it is no longer a simple integration of individual hotels provides standardization and operation management for hotels. OYO has become the largest economic hotel chain in India. Offline, it has tens of thousands of hotels; online, it’s built its own membership system and increased its renewal rate to 29.3%, On the branding side, it also carried out layered management, and asides from the original OYO Rooms economic hotel, it also created OYO Townhouse, the millennial version, and OYO Home, the its own version of Airbnb.
The picture below shows the OYO India membership card: it only costs about 10 RMB and you can enjoy discount benefits and privileges for 6 months.
Like Uber, Airbnb, and shared bikes, OYO has many emulators in China. There are three major types of players who are trying to find new opportunities in the lower-end of the hotel market: OTAs, represented by the Meituan; hotel china, represented by Huazhu (华住)and Shoulv (首旅); and many startups that are flush with capital.
In January 2019, the Meituan established “light living”, which is similar to the OYO model, covering 65 cities in China, with a total of more than 700 hotels. Shangmei (尚美生活集团) launched the AAroom brand at the end of 2016. It was once regarded as the local version of OYO in China. Unlike the free-to-join franchise model of OYO, the initial investment fee for AArooms is about 30,000 RMB. There is also Oyu, which was just acquired by OYO, which was established at the end of 2017. It had four rounds of financing and has settled in more than ten cities. It has nearly 1,000 stores and tens of thousands of rooms in the country. In addition, there are some relatively low-key players, such as Huazhu (华住) and IDG’s JV H hotel and the non-traditional “lightweight” brands of under Botao (铂涛) that have begun to move towards the integration of low-cost small and medium-sized hotels. However, the scale of these competing products is very limited, at least in terms of momentum they’re still far behind OYO.
Foreign companies have always struggled in China, and there are few companies that are localized and can develop rapidly. Although it is an Indian company, OYO is at least temporarily integrated into the Chinese market. But recently there have been several articles with negative feedback, and we will continue to pay attention to the company. Finally, we hope that OYO China will not be distracted by vanity and remain focused on valuable growth.