In 1925 Arthur Heineman spotted a market niche: a new type of hotel with garage parking. In the town of San Luis Obispo he opened what he termed as the first ‘motel’ to cater to people driving between San Francisco and Los Angeles.
Motels became a byword for cheap and clean accommodation, helping travellers on long drives across America’s interstate highway network. Arguably they planted the seeds for a new wave of entrepreneurs to launch budget hotels in bigger cities too.
An Indian start-up called OYO is now having a huge impact on the budget hotel sector in China, becoming one of the country’s largest hotel chains in not much more than a year and a half of operations. It now boasts 450,000 rooms in 10,000 hotels in 320 Chinese cities – a much larger inventory than in its home market in India. OYO says that it is registering a new Chinese hotel on its platform every 1.4 hours.
OYO Jiudian – the Chinese subsidiary – targets small or unbranded hotels, which it estimates to account for as many as 35 million rooms in China’s hospitality sector. Once a hotel (typically less than 80 rooms) signs up, an OYO team gives it a makeover, aiming to provide clean rooms, breakfast, free Wi-Fi and a 24-hour front desk – with guests paying between Rmb69 and Rmb199 a night (about $10-29).
The company’s view is that the basics of its business model – onboarding and transforming buildings that other hotel brands have overlooked – can be applied in China just as they have in its home market of India, and that its involvement helps owners to boost their occupancy rates by as much as 65% within three months.
In return, OYO gets a franchise fee or shares the revenue with owners.
Until recently most of OYO’s bookings have come through its app and web platform, with less dependence on online travel agencies. It was harder going in China, however, where a greater share of the bookings were coming through walk-ins and call centres. In response, OYO has started to partner with some of China’s biggest brands in a bid to extend its reach. It is already working with Ant Financial on a travel programme in Alipay, the ubiquitous digital payment tool, and in another announcement last month it said it will be working with Ctrip in distribution and brand promotion too.
Ctrip’s domestic travel business focuses on secondary or smaller cities, which is where OYO has most of its rooms. OYO says that it wants to target China’s outbound travel market as well, capturing more of the visitors to places like India and Southeast Asia, where it is growing fast too.
The tie-up comes at a time when Ctrip has been extending its own reach into the Indian market, increasing its holding to just under half of India’s largest online travel firm MakeMyTrip, after buying a 42.5% stake from South Africa’s Naspers in April. Ctrip executives have been looking for ways to boost sales growth outside of China (it controls at least half of online travel bookings in the country, if you include its 45%-owned partner Qunar).
OYO has already proven a hit with investors, with its valuation shooting up from $1 billion to $5 billion in not much more than a year. Its most recent $1.14 billion fundraising closed in April, netting investment from Sequoia, GrabTaxi, Airbnb and Didi Chuxing, according to S&P Global Market Intelligence. At this level, it is worth about half the valuation of Nasdaq-listed Huazhu Group (another early investor in OYO), which managed about 4,400 hotels and 439,614 rooms in China at the end of the first quarter. About a fifth of Huazhu’s portfolio is comprised of budget rooms.
Much of OYO’s current valuation stems from expectations of consolidation in the budget hotel sector: Its own estimate is that only 6% of hotel rooms in China belong to a chain, for instance, and it has earmarked $600 million to broaden its presence there. But it now has to prove that it can grow its business into a profitable brand that delivers consistent standards of service across such a vast market. If it can do that and emerge as a major player in China, it will be achieving something that has eluded foreign giants like Amazon and Google.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.