OYO China, the China branch of Indian hotel tech unicorn OYO, received bad press lately, with reports of mass layoffs and fundraising trouble.
Since the start of June, OYO China has shifted into what it calls its “Strategy 2.0” involving “26 Iron Rules” to demand Chinese hotel owners which would like to be branded as OYO to hand over controlling rights such as pricing on rooms and operating on their own software system, which decides who can see key business data, according to a report of a sub-brand of Chinese business media outlet Caijing.
In return, the report says, OYO China promises hotel owners a baseline revenue, which will be decided based on each hotel’s previous revenue. OYO will mainly take a commission from the portion that’s above the promised revenue.
This tighter control over hotel operations under OYO’s brand is a departure from its previous model, which can be characterized as a loose franchising model. It once allowed franchisees freedom of operation, like forgoing the requirement to adopt OYO’s hotel operations software.
However, OYO China said in a written statement to KrAsia on Tuesday that “in essence, the contracts for 2.0 [the new model] are not that different to those in 1.0 [the old model].”
Whether big or small, forcing hotel operators into using an operating system is a difference that matters, as it will allow OYO much tighter control and oversight of hotel operations and valuable data to draw insights from.
While claiming that it is not allowed to discuss the details of the agreements with hotel owners, OYO China did tell KrASIA that it “need[s] to improve the contracts to better protect [itself]” because it’s giving revenue assurance, deposit, and marketing assistance to hotel owners under the 2.0 model.
After raising over USD 1 billion in venture capital from SoftBank and others OYO is flush with cash and eager to pursue its global expansion. Besides China, it has entered Japan and several Southeast Asian countries.
But its hotel franchising business model is still unproven and its quick expansion has had consequences.
OYO China was reported to have had a massive layoff wave affecting more than 1,000 employees, covering a range of departments including the business development and operation planning–a characterization which OYO China distances itself from.
Since adopting “Strategy 2.0” it needed to optimize the corporate structure, a spokesperson told KrASIA, but denied to confirm the number of those affected by the “optimization”. The spokesperson said that the company is still hiring across business development, renovation, and operations and revenue positions in more than 200 cities.
The company also refuted a TMTPost report saying that its founder was seeking USD 800 million from SoftBank via equity pledging. A spokesperson called the report “untrue” saying that the company has plenty of cash now. The spokesperson told KrAsia that OYO has been profitable on the “hotel-operation level” as gross earnings from hotels minus investments on hotels are positive, although it said that “it is too early to share the exact numbers”.
OYO China called another Chinese report which claimed that one of OYO’s early investors, Sequoia Capital, decided to stop investing in OYO’s China business “one-sided”. According to this report, the VC found that only ten out of more than 100 hotel owners in the country were willing to participate in its due diligence efforts to vet the investment potential for OYO China. Hotels claimed their partnership with OYO China did not bring them much value. OYO China told KrAsia that the company and Sequoia has been in good communication all the time and the Chinese reporter had not checked in with OYO for confirmation whether Sequoia had refrained from new investment.
36Kr once surveyed 20 OYO hotels in provinces including South China’s Guangdong, Southwest China’s Sichuan and Guizhou, North China’s Shaanxi and Central China’s Hubei. Only four hotels, accounting for 20% of the sample, reported that they were thinking about renewing their contracts, while others said they had terminated the contracts or will do so because partnering with OYO didn’t lead to additional bookings.
The strategy shift that involves tighter controls over the hotels it works with might be a way to adapt its business model to better suit the Chinese market.
36Kr is KrASIA’s parent company.
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