Fast-expanding OYO faces financing impasse and distrust in China

Its cachet hasn’t quite translated in the country.

By

Fast-expanding OYO faces financing impasse and distrust in China

Indian hotel chain startup OYO’s China business has been seeking its first round of equity financing for some time.

Though the company’s executives said that fresh funds would be injected by early July, it still seems to be a long way from securing that cash, according to an unnamed source in OYO’s regional headquarters in Shanghai that is familiar with the deal and spoke to 36Kr.

Speaking separately, a former OYO China executive said that the possibility for bagging this investment was so low that it would make securing funds in the future even more difficult.

The former executive pointed out that investors may put in place certain requirements, like requiring OYO China to double the number of low-cost rooms on its listings from 500,000 to one million. Failing to do so might indicate a “systematic collapse” for OYO China, subjecting it to a final acquisition from an established player in the hospitality sector.

OYO China’s recent massive layoff, which affected more than 1,000 employees, also speaks to the company’s difficult times in the country.

Since OYO entered China in November 2017, it has signed up more than 10,000 hotels as franchisees. It has promised to waive franchising fees and allow franchisees freedom of operation, like forgoing the requirement to adopt its hotel operational system, PMS. OYO China collects transaction commission that falls between 2% and 8%. Franchisees can start with a one-year contract.

36Kr 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.

Another former executive of OYO China and one current employee told 36Kr that only 40% of franchisees who had signed on are still collaborating with the company. That number is a far cry from the company’s proclaimed 97% renewal rate in May this year.

The discrepancy may be rooted in OYO China’s interpretation of contract renewal. As a contract nears its termination date, OYO China simply sends an email to the franchisee to seek permanent renewal. If there is no response within seven days, the company assumes that the franchisee decided to stay on board.

However, OYO China’s recent partnership with Meituan and Ctrip might help channel online traffic to its platform and even generate new bookings.

36Kr is the parent company of KrAsia