Hotels & Hospitality

OYO-Zo merger leaves rivals underwhelmed

A competitor claims in OYO's business model both hotelier and customer are unhappy

OYO Rooms absorbing Zo, which was announced yesterday, has left the competition unimpressed. Most had seen consolidation coming for a while and instead of feeling overawed by the deal, they said it meant competition had decreased.
“We had delisted OYO and Zo because of bad customer feedback.

This just means there is one less player in the market,” said Mohit Gupta, operations head, MakeMyTrip. The ticketing portal had launched its own branded hotel chain in November called Value+. The consolidation, he said, also meant that the smaller players will hit pause before going on wild scaling sprees.

“Now is the time when transparency in what you are booking becomes even more important,” added Gupta. He explained that because the likes of Zo had gone down the race for numbers that the business model was not viable anymore. “This pre-buying inventory, selling rooms at a third of the price cannot work in the medium term,” he said.

OYO may even have to change the way it brands itself after the merger.

"OYO has rooms that go from Rs 500 to Rs 5,000, which isn’t really budget. You can’t cater to two sets of customers on the same platform,” said Gupta. He explained that OYO may have to change its standardization policy. “In luxury hotels, you go there to be pampered. In a budget hotel, you look to be out of the room most of the day. There needs to be clarity in how they want to position themselves," he explained.

Prafulla Mathur of WudStay, which started off the consolidation chain reaction last year when it bought Awesome Stays in August, said that they, too, could see the acquisition coming especially after hotels started detaching themselves from Zo Rooms and joined them.

"This will be a time when slow, measured growth will happen. There will not be a rush to scale. We are open to inorganic growth as well but only if the deal works for us like Awesome Stays did,” said Mathur. He explained that discounting heavily would eventually have to phase out and so will minimum guarantees.

Some chains, when they buy a few rooms, assure hotel owners a minimum guarantee per quarter or month depending on the deal. This guarantee assures the owners a portion of the price irrespective of the room being filled. This would entice hotel owners not to give away rooms to walk-ins and keep them faithful to the brand. The practice, however, is expensive and makes it difficult for the firm to prevent cash burn during off-season.

Analysts said that a slight pivot may ultimately happen. “The concept of buying up a few underselling rooms in hotels will stop. Primarily, because the quality cannot be guaranteed,” said a competitor who has a presence in a dozen cities in the country and plans to increase it to 15 soon.

"Let’s assume the hotelier hasn’t maintained the premises up to the mark. It means the customer is unhappy and swears off OYO Rooms and the hotel because for him this is a representative of what the brand gives him. Now, let us say the hotelier has maintained his property really well. His OYO rented rooms though have made him half of his regular rooms. His customers now know that this website gives them the same room for half the price, which means the hotelier has lost that customer. The hotelier isn’t happy,” said the competitor.

He explained that in OYO’s business model neither “party is happy”. “A business works when not only is your end customer pleased but also the one giving your customer the service. Any break in the chain, and everything can collapse,” he said.

The only way out is to take over the entire hotel. “You don’t buy three or five rooms. You take everything. You rebrand the hotel. Make it a franchise of your brand, which means you not only control quality but you get to choose what areas you want to establish your brand. And, obviously, give up the number game,” another analyst said.

Some venture capitalists believe that this may be the end of the consolidation phase in the hotel chain business. There are a few companies with common investors, which may invite a merger but an investor who was infused capital in one of the popular chains said that it was unlikely to happen.

“There won’t be any distressed companies that will be bought. Now, companies will wait for the smaller players to die and swoop to pick off their inventory. It will be cheaper that way,” said the investor.

OYO Rooms currently has presence in over 4,500 hotels across 170 cities and claims it has 150,000 check-ins a month. Zo, on the other hand, has 20,000 properties listed on its portal, some of them are in hostels and dharamshalas, which may not be absorbed into the new entity.

MakeMyTrip has presence in just 1,000 hotels while WudStay has 500 hotels and 5,000 rooms with a focus on getting to 10,000 by April, Treebo, backed by Saif Partners, on the other hand has 52 properties across 11 cities.

These numbers, analysts said, are low and there is room in this segment to grow. “The trick is if someone can find the right way to stay profitable, grow and maintain consistent customer experience,” said Harish HV, partner, Grant Thornton.

This article was published in the Business Standard, to read please click here.