The atmosphere in the OYO Hotels & Homes office in Gurugram, Haryana, was somewhat tense when Fortune India visited on March 16. This was a week before Prime Minister Narendra Modi announced a 21-day national lockdown to contain the spread of Covid-19 (novel Coronavirus) in India. Mask-wearing employees could be seen sanitising their hands as the first casualty related to the pandemic had already been reported in the country—a 76-year-old man who had returned from Saudi Arabia. The confirmed case count by March 15 had crossed 100. And, while domestic travel was still on, foreign travel had plunged after restrictions were imposed by most countries.

However, amidst the brewing chaos, Ritesh Agarwal, founder and CEO, OYO Hotels & Homes, appeared relatively calm. The company had made cancellations easy for its customers, he said. Alternatively, OYO was giving travellers credits that could be used to rebook later. “Fundamentally, we can use this time to build technologies and automation in a manner which ensures that when the world comes back, we are at the leading edge of scaling in the market,” Agarwal told Fortune India. Having expanded significantly last year, he and his team were monitoring the situation in 80 countries including India, the U.S., Japan and those in Europe, the U.K., West Asia, and Southeast Asia, across which OYO runs over 43,000 hotels with more than a million rooms. This is apart from the 130,000 homes it has around the world under its OYO Home, Belvilla, Danland, DanCenter, and Germanybased Traum-Ferienwohnungen brands.

A few weeks later, there was little likelihood of calm for either Agarwal or OYO. Things had escalated after the lockdown was announced in India on March 24. The number of cases in the country was shooting up rapidly (over 23,077 as of April 24 with more than 700 deaths). State borders were closed, travel via flights, trains, and buses was halted, implying that hotels across the country would suffer. Globally, too, the number of cases was closing in on the two-million mark (the number stands at about 2.7 million cases as of April 24 with 190,890 deaths) as governments and the scientific and medical community scrambled for solutions.

A sombre-looking Agarwal had to announce, via a video message to his employees on April 8, that OYO was registering almost 50%-60% lower revenue and occupancy rates. He had to place a large number of workers across the world on temporary leave or furloughs of a minimum of 60-90 days. “The company’s balance sheet runway has come under severe stress; [this means that we have] to ensure that we immediately look at every controllable cost and reduce them,” he said. He would forego his own salary for a year, while the leadership team would be taking pay cuts of 25% and, in some cases, even 50% voluntarily.

OYO, which is present across 80 countries, runs over 43,000 hotels with more than a million rooms. 

Like many peers, the 26-year-old Agarwal finds himself in the most difficult and unique challenge in his company’s seven-year history. For one, he has to plan for OYO’s survival in an unprecedented situation. For the other, he has to ensure it retains its credibility with key stakeholders, most significant among whom is Japan’s SoftBank. For SoftBank chief Masayoshi Son Agarwal has been a blue-eyed boy (more on that later).

Last year, three Japanese financial groups including Mizuho and Nomura Holdings financed Agarwal’s buyback of shares worth $1.5 billion from early investors like Sequoia Capital and Lightspeed Venture Partners. Agarwal also invested half a billion into the company. The loans were personally guaranteed by Son. Given that OYO’s revenues are under pressure, its valuation may take a beating, putting SoftBank (and Son) in a particularly difficult situation.

Son will hope that Agarwal will show the same tenacity that helped him build OYO into an investor favourite. Because navigating the business through the current crisis will demand no less. Especially given the existing problems of scale that Agarwal had already been grappling with.

Even around a month ago, every day for an hour or so, Agarwal found himself responding to hundreds of WhatsApp messages, some comforting and some quite unpleasant. These were from 600 hotel owners in India and 1,200 in China. Their grouse with India’s and South Asia’s largest hotel chain: delay and a cut in payments as well as a communication gap.

“We forgot that with scale, your responsibility also increases. It is our responsibility to make them happy… In the last five months I have spent a lot of time with the 1% [hotel owners] who were not happy,” says Agarwal, who was a teenager when he started a hotel listings portal, akin to Airbnb, in 2012. A year later, at 19, he set up OYO and, around the same time, received $100,000 as part of the Thiel Fellowship, a programme launched by PayPal co-founder Peter Thiel to back young tech entrepreneurs. “Most of the unhappy owners were not concerned about the new fines or penalties that we have introduced for [not providing good] customer service but that the company didn’t talk to them before introducing them.”

The scale Agarwal speaks of was achieved last year when OYO evolved from being a primarily two-country (India and China) company into a global firm, expanding into newer markets such as Europe, the U.S., Latin America, Southeast Asia, and West Asia. As the company was ramping up its presence across geographies, many roles within the organisation were rapidly replaced by technology. Early this year, as a part of its restructuring exercise, the company had to cut about 15%-20% of its overall consolidated workforce in India (about 12,000 people); in China 30% of the 10,000 employees were downsized. It also reduced its non-discretionary staff of 6,000 by 50% in China. In April, OYO announced a 25% pay cut for its workforce in India, while it placed some employees on voluntary leave with limited benefits.

The company reported a revenue of $951 million in FY19, four times over FY18. International markets generated 36.5% (33% from China alone) or $348 million, while revenue from India nearly tripled to $604 million even though it was down in proportion (to 66% from 99% in FY18). The fact that China accounted for 60% of the losses, says Agarwal, is explained by the fact that in any new country, the revenue starts kicking in from the second year onwards, making up for the costs incurred in the first year of operations.

Apart from the cost element, OYO has reportedly had trouble with hotel owners and workers in global markets such as Japan and China. They accused the online hotel aggregator of not fulfilling contracts and not compensating them for lost income. This lapse is also a function of the speed of OYO’s geographic expansion. “We should have focussed on lesser cities. We got certain markets wrong when we chose a location in the past. In every country, there are cities where the returns on investment are disproportionately lower than the rest. So we decided not to do any growth investments in those markets,” he says, accepting the missteps. “There were things last year that we did not do well… but this company is the kind which will acknowledge the problem and fix it.” In the past couple of months, Agarwal has been course-correcting and restructuring to rectify the impact of these lapses on the brand, its valuation, and future expansion plans.

One of the prominent niggles that OYO needs to fix is in India, where hotel owners have reported various issues with the company; some have even left the brand, while others have complained that it doesn’t live up to its promises. A hotel owner in Lucknow, Uttar Pradesh, who has been associated with the company for about a year and a half, speaks of various payment issues. “Big promises are made, but when it comes to movement of money from their end they are not prompt and the business guy from their side responds to only harsh words for regular payments to us,” he tells Fortune India, on the condition of anonymity, adding that the rating system was erratic and one-sided.

When asked about the issues raised by hotel owners, Agarwal says OYO is willing to take ownership of what went wrong and fix it. For instance, OYO claims to train its business development officers in accounting and financial matters, besides the usual sales training. “We have also done code of conduct-, soft-skills-, and behavioural training for staff across departments,” says Agarwal.

The company has introduced a programme called OYO Connect/OYO Direct/OYO Sambandh, globally, to better its relationship with customers as well as asset owners. Senior leaders and executives even met asset owners who, since then, have increased their engagement with OYO, he says, and listed more properties with the company. It has also launched a co-OYO app to help hotel owners keep a tab on the bookings and entries made at the hotel reception. As of now, OYO has six brands in India— OYO Rooms, Townhouse, Capital O, Collection O, corporate and executive hotel brand SilverKey, and Palette Resorts. Last year it acquired Gurugram-based co-working space provider Innov8 for an estimated ₹180 crore to ₹200 crore. The company also operates OYO Life, a long-term, co-living, fully managed, rental housing targeting millennials and those in their first jobs—experts feel there are strong synergies between co-living and co-working models.

Meanwhile, it has made prominent management changes as well to fuel growth across key geographies. Over the last eight months, Agarwal has handpicked people from diverse backgrounds such as consulting giant McKinsey, Internet and media behemoth Naspers, and India.

Agarwal will not disagree that the big-ticket hires and the expansion into even developed countries by OYO, with its $10-billion valuation, have been possible also due to the backing of SoftBank and its billionaire CEO Son, who has invested about $1.5 billion in the company so far. According to analysts, SoftBank has given the right signals in the last few quarters about its commitment to OYO. The fact that the Japanese technology and investment giant helped OYO with the launch in key markets such as the U.S., China, Japan, and Europe is a testimony of SoftBank’s confidence in the company.

After the debacle with shared office space provider WeWork and its co-founder and former CEO Adam Neumann (last year, The We Company, WeWork’s parent organisation, shelved its much-hyped IPO because of low investor interest while Neumann had to step down as CEO amid concerns over his financial dealings and governance practices), SoftBank has been counting on OYO meeting its promise.

Experts say venture capital funds are always looking for a company like Google in every category, and OYO presents a great opportunity in its sector; SoftBank reportedly wants it to become the largest hospitality group by overtaking the 93-year-old Marriott International. Recently, media reports suggested that SoftBank would be concerned about OYO “freezing operations”. When contacted, Fortune India was directed to a comment Agarwal made on networking platform LinkedIn, where he called the allegation an “untrue” and “infactual” statement.

What he does, in some measure, agree with is one of the biggest criticisms that has come OYO’s way: That it has grown too big too fast which, in the post-Covid-19 world, may have significant repercussions. “Did we grow quick? Maybe we did. But only after executing could I know what is the right pace of growth. We learnt from 2019 and now we are on the path of making sure that we temper it,” he says.

Ritesh Malik, founder and chief executive officer, Innov8 Coworking (now part of OYO), says while it is true that the company grew too fast, it is now important to focus on sustainable growth. “This is a very good reality check which makes the company stronger. And accepting this fact today is very important which the management has done,” he says. “Also we need to understand that this is such a difficult business model in a sector like hospitality.”

Fortunately, unlike most startups whose major concern in a depressed economy is fundraising, OYO doesn’t have that predicament. Today, its key investors include SoftBank, Lightspeed Venture Partners, Sequoia Capital, and Airbnb, while its smaller shareholders are Didi Chuxing, Grab, and Sunil Kant Munjal, chairman, Hero Enterprise.

Instead of finances then, as the organisation is resolving partner issues and fighting the Coronavirus, its focus is going to be on accretive growth, says Agarwal. And when it signs on new hotels, they should lead to good gross margins. In March, he said that the company’s gross margins/gross profits had started to fall in the range of 15%-plus worldwide, while new hotels were in the 20%-plus range.

But a lot has changed since then and OYO isn’t the only business to be impacted; companies globally are facing a sharp decline in revenue and even customer sentiment. “The entire hospitality industry is going through a major stretch right now. OYO’s drop in revenue by 50%-60% is still on the lower side compared to five-star hotel chains which have witnessed a 90%-95% decline in revenue. What’s happening right now is an industry-wide phenomenon and not specific to OYO,” says Sanchit Vir Gogia, founder and CEO, Greyhound Research.

“OYO’s drop in revenue by 50%-60%is still on the lower side compared to five-star hotel chains which have witnessed a 90%-95% decline in revenue.”
Sanchit Vir Gogia, founder and CEO, Greyhound Research.

That said, Gogia points out that OYO’s asset-light model (it doesn’t own its properties) and lean operations expenses (unlike hotels it doesn’t invest in front office, housekeeping, and F&B staff) will help it survive this crisis. (How it works: OYO provides capital and training to hotel owners to rebrand the property according to its specifications. The partner hotels list their properties on its platform to maximise revenue, and OYO takes a cut of that revenue.)

However, Piyush Sharma, executive in residence at the Indian School of Business (ISB), says things will get tougher for the company in the post-Covid-19 world. “The hospitality industry is going to be one of the most distressed ones. They will also experience the longest recovery cycle curve. With the path to profitability pushed farther, maintaining growth will be a pipe dream.”

Gogia, though, feels it could be a reverse for OYO in markets like China and India once the economy is fully back on track. “The current signals show that China is making a very strong comeback. We must use reverse psychology here. Once you let millions of people out of their homes after months of lockdown, they will go out in hordes and enjoy themselves,” he says. “Hospitality will come back but in a measured way with fewer and cost-sensitive travels.”

Keeping that mind, in his video message, Agarwal cited cost-cutting measures as “every forward-looking capex, M&As, or even something as little as every non-essential travel which was paused a little over a month back.” At the same time, he also announced that since OYO had a sizeable restructuring in January, “we intend to do no or negligible layoffs at a part of cost restructuring across the world”.

Even so, numerous obstacles pave OYO’s way. Consider the geographic spread it has to manage, more than any other Indian startup. Paytm launched with considerable success in Japan last year; it is yet to break into the U.S. and European markets. Ride-hailing company Ola has operations in the U.K., Australia, and New Zealand apart from India. Home services marketplace Urban Company has launched in Australia, Singapore, and the U.A.E. But none of these matches the scale of OYO. In that context, Agarwal will have to be in consolidation mode for a while. Because OYO cannot grow at the same breakneck speed anymore, and that is probably a good thing.

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