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OYO Rooms, an Indian start-up to enter Japan

  • Growth story of OYO Rooms in India
  • Business model of OYO Rooms
  • Analysis of strategy to enter Japan

 

OYO Rooms, the Indian start-up has decided to venture in Japan after its successful expansion in India. The company has also entered China, Malaysia and the United Kingdom.

OYO Rooms is an online application for booking rooms in hotels through the website and mobile application. It provides consumers with the ease of browsing hotels in any area of a city, where they wish to stay, view prices of rooms, facilities provided and pictures of a room. If they are able to find a room in their budget, which suits their requirements then they can choose to book a room through the OYO website or its mobile application by an online payment. In the present blog, Televisory has explored the OYO Rooms strategy for entry in Japan.

Growth Story of OYO Rooms

OYO Rooms was founded by the 19-year-old entrepreneur Ritesh Agarwal in 2013 from Gurgaon, India. Since its inception five years ago, it has grown massively to provide booking options on more than 125,000 rooms across 4,000 hotels spreading over 200 cities in India. The company has changed the way people travel and stay in hotels. The travellers in India no longer have to hop from hotel to hotel after reaching a destination in search of a good room within the budget as rooms are pre-booked. This has saved a lot of effort and time for travellers. The travellers who have become accustomed to the online method of booking would not want to take chances and would always prefer the ease and comfort of an online booking.

OYO has been working on an aggregator model. The hotel partners register their rooms on the OYO portal to make them available for booking by consumers. For every room booked through the OYO application or website, the company earns a commission of 18%. In 2016, the company slightly modified its business plan and started leasing hotel properties and operated them under the OYO brand. This strategy gave a good visibility to the brand and created a strong awareness among consumers on OYO Rooms. The company has now started working on a franchise model, wherein hotel operators are allowed to operate hotels under the OYO brand name in exchange for a higher commission of 22%. In just five years since its beginning, OYO is much more than just an online hotel booking portal. It is a hotel brand, wherein a customer can expect a certain minimum standard of quality and which can be trusted for any kind of customer support if required. The below chart shows that the revenue of the company increased massively from INR 5.1 million in its first year to INR 1,021.9 million in its fourth year. OYO has been successful in providing a pleasing customer experience as evident from its Net Promoter Score and the number of active advocates. The Net Promoter Score is the difference between the percentage of customers, who gave their stay a rating of 5/5 and the percentage of customers who gave their stay a rating of 1/5 or 2/5. The Net Promoter Score for OYO was just 16% in the second quarter of 2016, but increased to 42% in the second quarter of 2017. The company defines the active advocates as guests who have lived a minimum of five times in OYO Rooms in the previous six months. The company had 33.4k active advocates in June 2016 and the number of active advocates surpassed 100k in July 2017.

In January 2016, OYO entered Malaysia and also reached the mark of one million check-ins. It also entered India’s neighbour Nepal in the second quarter of 2017.

The company has been operating at a loss, owing to the heavy marketing expenses incurred to attract customers and create a brand image. However, the company improved on this front significantly in 2017. The revenue of the company increased from INR 328 million (2016) to INR 1,022 million (2017), but its operating expenses reduced from INR 3,901 million (2016) to INR 2,269 million (2017). The company is still operating at a loss, but this has reduced by 33% from 2016 to 2017. The investors are optimistic about the success and the growth prospects of the company and they also seem to have a deep faith in the management. Ritesh Agarwal was featured in the Forbes ’30 under 30 list and is regarded as one of the highly successful young entrepreneurs in India. The company received Series A funding in August 2014 and has also received three more rounds of funding till date. Its investors are Sequoia Capital, Lightspeed Venture Partners, Greenoaks Capital and SoftBank Group. OYO raised USD 260 million (INR 16 billion) in Series D funding round in 2017, which was led by SoftBank along with other previous investors and two new investors; Hero Enterprise and China Lodging Group. OYO recently entered China and it is currently offering 87,000 rooms across 171 Chinese cities. OYO has also entered the UK market with an investment of USD 53 million and a goal to offer 5,000 rooms by 2020. The latest funding (2018) of USD 1 billion, with a commitment to invest an additional USD 200 million has escalated the valuation of the company from USD 900 million to USD 5 billion. OYO Rooms is now the second most valuable start-up in India after Paytm. The company is now planning to enter Japan with the capital investment of USD 600 million out of the latest round of funding.

Analysis of the entry strategy in Japan Market

SWOT Analysis:

OYO Rooms has a proven track record of success in India. The strength of OYO Rooms is its experience curve and its learning curve. The founder has proven his ability by building the right team to taking a leap in valuation to USD 5 billion in just five years by scaling up aggressively across the country. The company has technological resources to place its business in Japan. OYO also knows how to provide a more than satisfactory customer experience. It also has a proficient and skilled workforce that can prove to be a better value addition to the company in Japan. Its weakness is that it does not possess people in the management that understand the Chinese or Japanese market. The growth strategies that worked in India may not work in China and Japan. It is also possible that just as other tech giants Amazon, Google and Uber withdrew from China, the company may also have to face tough situation in China and Japan. However, the leading investor in the company is none other than Japan-based SoftBank. OYO may get local consultants in Japan with the help of SoftBank, who may help to replicate its success in India. Japan is a developed economy and a major business centre in Asia. It has tremendous opportunities for the company in form of potential customers. The international tourist arrivals in Japan has also witnessed a steep increase in the last decade as shown in the below chart. Moreover, 2.4 million international tourists arrived in Japan in 2016. The number of domestic travellers in Japan was 641 million in 2017 (6% increase compared to 2016). The 2020 Olympic Games in Japan will create a huge surge of foreign tourists in the nation. This event will provide a good opportunity for OYO to get a foothold in the market and create a good brand recognition for itself. The ubiquitous presence of tourism all over Japan provides a conducive opportunity for the company to flourish in the country. However, the threat of competitors will be high in the Japanese market. OYO Rooms may have to squeeze its margins to give rewards and discounts in order to attract customers. This will be a new and unexplored market and if the company fails to get a competent consultant on board, it may face a rough time in Japan.

External analysis of the company in the Japanese market:

(On the scale of 1 to 5, 1 is the lowest and 5 is the highest)

  1. Power of Customers (Score: 5): The power of customers is very high in this case. In the developed economy of Japan, there is no shortage of hotels. If a customer is able to find a similar hotel of the same standard at a lower price, a customer will opt for it. OYO is not a known brand out of India. The company may not be able to attract customers using its brand name or its reputation on customer service.
  2. Power of Suppliers (Score: 4):  If the company chooses to follow an aggregator model, the existing hotels will be ready to offer their rooms to the OYO booking portal. However, the company may not be able to negotiate favourable commissions initially as there are other competing aggregators that are known to customers. If OYO chooses to follow the hotel leasing model or franchise model that it has been following in India since 2016, then also the company may require sometime to bargain favourable terms, until OYO becomes a known brand in Japan and internationally.
  3. Threat of Competitors (Score: 5): The competitors for the company are other hotels and also global online travel agents such as Airbnb, Expedia, Agoda and Booking. Agoda acts as an aggregator for other online travel agents. The same hotel room is available at different prices on Agoda and the customer will always choose the option with the lowest price. Japan has a large presence of known brands both in budget and luxury segment. The threat of competitors is very high in the market. OYO may have to resort to heavy discounts to attract customers. Any shortcoming in the customer service or a bad review posted online can make matters worse for the company.
  4. Barriers to Entry (Score: 4): The presence of competitors in form of hotels, which are known brands and aggregators of hotels makes barrier to entry high for a relatively unknown Indian brand OYO. The company requires heavy capital investment to make a headway in the developed Japanese market. The experience will definitely be tougher than what it was in the developing Indian economy.
  5. Threat of Substitutes (Score: 1): The substitutes, in this case, would be the homestays and hostels whose threat to the business of OYO is very low. These substitutes are limited in number and they have an entirely different target segment. 

Hence, from the above analysis, it can be concluded that the journey in Japan is going to be bumpy and a challenging ride. The business model and growth strategy used in the developing economies of India, Nepal and Malaysia might not succeed in the developed economy of Japan. In order to make an impact, it is important for the company to understand both the domestic customers and also the international tourists arriving in the nation. OYO has an advantage of SoftBank as a back-up. If the company is able to get good consultants with prior experience of growing hotel business in Japan, the journey will be much smoother. However, nobody can deny that OYO Rooms will require a huge capital expenditure to succeed in Japan. If required, OYO may have to participate in the price war and may have to strive to get customers through aggressive marketing. This is a service driven industry and a compromise in the customer service may not be tolerated in Japan. The timing of the entry is perfect and the 2020 Olympic Games may prove to be a turning point for OYO to make a global presence if all works well.

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