If you believe that like leaders, entrepreneurs are either born or they are made, then Ritesh Agarwal, founder and CEO of OYO Rooms, belongs to the former.
Growing up in the second most undeveloped district of India in Rayagada, Odisha, the young Ritesh tried his hand at many businesses including selling SIM cards and various consumer products to supplement the family income.
Ritesh Agarwal: His first international flight to the Bay Area changed his life.
After Grade 12, he started the first online booking system to sell spare rooms in India. It was called Otravel Stays. He wanted to offer some form of consistency in hotel accommodation in the budget sector. The business didn’t work but it was to be the genesis of the billion dollar business he’s now running – OYO Rooms.
The idea for OYO came to him during his holidays in India. “I saw a fantastic opportunity – 90 percent of rooms in India are 100 rooms or smaller. And I wondered, why hasn’t someone else either leased or franchised these properties? There were two answers – one, many have tried and failed or two, nobody has seen this opportunity.”
“As an entrepreneur, I am wired to be optimistic and I thought, at worst, I can go back to university.”
Ritesh was then 19 years old. At that time, he says, unbranded assets were 30% cheaper than branded assets. However branded assets were running at 80% occupancy while unbranded was tailing at 35%.
“A 30% price difference was not good enough for people to move. And so what did we have to do? We improved the quality, built up the brand and we managed to increase occupancy and RevPAR. Hotels are a fixed cost business – if you increase RevPAR three times, and costs increase 10-14%, you get an increase in profit immediately. Everyone makes money.”
First flight abroad and the 18 months that changed his life
A turning point in his life came when he was selected for the “20 under 20” Thiel Fellowship in 2013. The Thiel Fellowship is a two-year programme wherein fellows receive $100,000 and mentorship from the foundation’s network of tech entrepreneurs, investors and scientists.
He was the first Asian resident in the programme, and it was his first international flight. “When I came to the Bay Area, it was a dream come true. I was among the first 40 candidates to make a pitch, and I thought I wouldn’t make the cut, that it’d be my first and last international flight.
“But I won the pitch, one of 20 people, and those 18 months changed my life.
“Growing up in a lower middle class family, my father always said, when you do a job, you try and get a good appraisal and get a good salary, and that was good enough. In the Bay Area, everyone thinks big. It made me think big.”
And think big he certainly has. In September, he pulled in US$1 billion in new funding to grow its business in China and expand into international markets. The bulk of the funding — $800 million – was led by SoftBank’sVision Fund with participation from Lightspeed, Sequoia and Greenoaks Capital. (News reports this week tips Grab as the latest investor to join the round with $100 million.)
The Softbank-led deal valued the five-year-old company at $5 billion. In total, it’s raised over $1.6 billion in 10 rounds.
The ups and downs of the last five years
In the five years, OYO has certainly seen its ups and downs. It started off aggregating budget hotels and hostels in India, ensuring that they offered minimum standards such as clean sheets, hot showers and free WiFi. It grew fast, attracting the attention of critics who said it was burning too much money in brand building on a low margin model to be a sustainable business.
The media described it as a virtual hotel chain although Ritesh said internally “we never used the term”. And reports emerged about the losses OYO was sustaining the first two years of its operations.
Ritesh says there are two parts to the OYO story. After building a strong base in India, it rolled out its South-east Asia plan. It launched in Malaysia three years ago and it had to make multiple changes to its expansion playbook over that time.
“Credit goes to Malaysia for helping us develop the playbook for how OYO International would look like, and it’s a playbook that works,” says Ritesh.
After its three-year experiment in Malaysia, it took the model to Nepal. “That worked fabulously and that’s when we felt it was time to go to a few big markets – hence China.”
Around the same time, it realized that for the scale it wishes to operate at, it had to make heavier investments and that’s when it branched out into leasing and managing hotels either through partial or full assets – it claims to have over 10,000 franchised or leased hotels in its network, which it says spans 350 cities across five countries.
It also needed to invest in training employees – it now runs 26 training institutes in India and six in China. Another big investment has been in bringing in site management inhouse – today, it hires about 1,000 civil engineers. It also employs thousands of general managers called OYO Captains.
“These investments we made in the physical aspect of the business are the biggest reason why asset owners can say OYO is headache-free for them.”
As for brand building, Ritesh says, “We haven’t done a single TV ad in the last few years. We do limited newspaper ads, we don’t spend money on advertising these days, back of the house investments is key to our growth.”
In its home market, it also ran into a battle with MakeMyTrip which removed OYO’s inventory from its platform in 2016. But in February this year, fences were mended and MakeMyTrip and OYO signed a partnership to offer OYO rooms on MMT and Goibobo.
Admitting the challenges in the early years, Ritesh says those days are behind them. “We are now not only the largest franchise of leased hotels in India but we are in the top five in China. We are the world’s fastest growing hotel chain.”
What’s next? Conquering China and the future
OYO is said to be setting aside $600 million, of the $1 billion, for investing in the Chinese market. Ritesh, who’s been travelling to China for the last few years, has picked up enough Mandarin to get around, lives in Shanghai and asserts that “we are a Chinese company operating in China, not a global company coming into China”.
“We want to operate as a Chinese company. Lots of global companies basically recruit bilingual talent, I feel we should recruit whoever is the best for execution. Of our 5,300 employees, 5,000 speak Chinese only.”
Ritesh’s vision is for OYO to be the leading supplier of lifestyle living spaces using real estate. In fact, he said that has always been the original mission. “We want to provide better living spaces, whether that’s longterm housing, OYO Living, OYO Weddings, kitchens. We love doing physical things.”
It is interesting to note that while the strategy of hotel management companies like AccorHotels is to go asset light, OYO is going the opposite direction.
“But we don’t spend time thinking about that. We spend time thinking, for every dollar we spend on asset are we getting returns? We are pursuing leasing because we can predict the yield we can make.”
In India, the split is about 15-20% lease/management contracts while the rest are management contracts.
Ritesh does not like the word “disrupting” much but agrees that “the best disruption anywhere is providing better quality products at lower price points”.
And he’s disrupting the traditional hotel management model with technology and back of house innovation, areas that are difficult for traditional hotel companies with legacy systems to tackle.
“All our leases take us 10 days to complete. We have a risk management system built into the mobile. Housekeeping staff have an app which tells them which room to clean and if they get a five star rating, they get paid higher.”
Revenue management is critical. Every hotel has a revenue manager, even if it has only 30 rooms. “We are looking at very core area of how every process can be re-engineered. Customers don’t care what technology is used,” says Ritesh.
In India, even though it has 90% direct business, he still sees value in working with third party distributors such as MakeMyTrip. “They have customers who come through them and that’s valuable.”
Looking back on the five years, Ritesh says he is thankful to every OYO entrepreneur who has helped grow the business as well as for the impact OYO has made. “It has made a real difference to people – higher yields for owners and better quality for customers. Scale is just a byproduct of that.”
Just as Ritesh, now aged 24, is a byproduct of his upbringing in Odisha. As the youngest of four children, he says, “my parents brought me up with great values and to always have humility and respect. Those are qualities I will always carry in my life”.
