The zero-sum game: OYO wakes up to the principal-agent problem

In the startup world, the word “disruption” is a panegyric.

It is a word that startups, big and small, like to use to describe themselves. Iconoclasts reshaping the world purely by the force of their will to fit their vision of how “things can be done better”.

Take OYO for example.

There is no doubt that OYO is a disruptive startup.

Reports of the OYO

OYO claims that it is currently the world’s third-largest hotel chain with nearly 1 million rooms under management – behind only marquee hospitality brands Marriott and Hilton. Ritesh Agarwal, the founder, and CEO of OYO claims that the company will surpass its competitors and emerge as the world’s largest hotel chain by 2023. If it continues to add 20,000 rooms to its kitty on a monthly basis—as it claims to currently be doing—, this could well be possible.

It would count as a big disruption if a startup from India came out of nowhere to become the world’s biggest hotel chain in just a few years.

Of course, this disruption hasn’t been without its fair share of controversies. Several folks including The Ken have called out several inconsistencies and issues with OYO’s model.

In a recent interview, Bejul Somaia, a partner at investor Lightspeed Ventures and the first institutional investor in OYO said, “Companies that have the disruptive tag by definition are somewhat controversial. That’s part and parcel when you’re trying to take on a large established industry and do things differently.”

Fair enough

But here’s the catch. Among the folks who are calling out OYO are the owners of the very budget hotels that OYO is partnering with.

Over the past few months, several groups of hotel owners who are affiliated with OYO have protested against the company and have filed legal complaints. A hotel owner in Bengaluru has filed a police case against Agarwal, and the police have booked him for cheating and criminal breach of trust.

Other groups such as the Hotel and Restaurant Association of Western India (HRAWI), the Federation of Hotels and Restaurant Association of India (FHRAI), and the Budget Hotel Association of Mumbai have registered complaints and approached the regulator Competition Commission of India (CCI) for protection.

Pradeep Shetty, a committee member of one of these bodies, has reportedly said, “Oyo has been cheating the hotel owners by using various gimmicks and arm-twisting tactics which has resulted in huge losses for hotel owners and has disrupted the hotel industry and market”.

Again, “disruption”.

But this time, not with competitors or established players, but against the very customers that the company claims to service.

How can a company disrupt its own customers and partners?

Say hello to the “principal-agent problem”.

A problem that OYO and its hotel partners are waking up to. The company’s hyper-funded reveries harshly broken by real-world challenges.

How does this play out?

Let’s take a look.

World’s largest hotel chain

Beyond the bombast of billing itself the world’s largest hotel chain, OYO is not really a hotel chain at all in the first place. It does not own or operate the vast majority of hotels that it claims to have under its umbrella.

OYO’s original hypothesis was that nearly 80% of the budget hotels were unbranded. If the services offered by these hotels were standardized and made predictably, it would facilitate higher occupancy and higher revenue – as potential customers would be assuaged of the quality of the service they would be getting. To this end, OYO started signing up hundreds of hotels in India.

The pitch was that if these hotels improve their quality of services around a few key aspects such as having an AC and ensuring the quality of linen and toiletries, OYO would deliver customers to them, driving occupancy and revenue. These hotels would also need to slap on an OYO branding on their facade to indicate that they were up to the standards that OYO has prescribed. Even under this new arrangement, the hotel owners (and not OYO) owned the hotels and were responsible for delivering the service to customers. So they weren’t actually OYO hotels as much as they were hotels that OYO had partnered with.

 

 

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