Skift: Why OYO and Rivals May Not Be the Answer for Unchained Hotels in Southeast Asia

Independent hotels in Asia far outnumber chain hotels but lag sorely behind when it comes to booking numbers.

Still, alternative technologies serving these smaller hotels are rising, with the likes of Zuzu Hospitality Solutions leading the tech movement in Asia.

Those with an e-commerce answer for unchained hotels are looking at more than $7 billion in market opportunity, based on Zuzu’s estimates. In Southeast Asia, there are 57,000 unchained hotels, led by Thailand with 15,700, based on online travel agency data alone.

Enter fast-growing budget hotel chain Oyo, which seems to be on a conquest of this massive but fragmented low-cost independent hotel sector. It’s looking to round up unchained hotels with its proposition of management or franchising — complete with the full technology stack needed to get guests through their doors.

Competitors are not far behind, intent on following Oyo’s path.

Lvyue Hotel Company just bagged several hundred millions in series A funding led by Chinese tech giant Tencent, attracting investors like Goldman Sachs. Like Oyo, Lvyue offers the full tech stack, from property management systems to revenue management, while operating and distributing hotels under seven of its brands. And like Oyo, Lyvue has ambitions in multiple big markets, starting out in China and recently entering India.

SUSTAINABILITY IN QUESTION

These budget hotel chains talk a sweet deal. So what can go wrong? Based on the flurry of scathing press peppering Oyo’s meteoric rise — plenty.

Aiming to exploit some of those potential risks are former Expedia executives Dan Lynn and Vikram Malhi, co-founders of Zuzu. They say Oyo and its rivals are likely to be around in the next 10 years, but the big question is whether penetration can keep up with their valuations.

Considering the billions it raised from investors, Oyo is doing just $60 million in revenue, compared to Marriott’s $20 billion, Lynn pointed out. “How does Oyo keep on raising ever greater valuation to get to Marriott revenue numbers?”

“Their current valuation takes into account they can get to a large part of the 660,000–700,000 global independent hotel market. Based on what we see so far, a large part of that segment doesn’t want to give away their brand,” Malhi added.

Malhi acknowledged that Oyo has been “somewhat successful in India” when it comes to getting direct traffic. But to replicate that in every market it enters will be expensive and time-consuming. The branding and customer acquisition cost in each market is high, and closing a deal with each hotel can take two to six months, he argued, although Oyo has claimed it can onboard a hotel within three to 14 days.

Still, there is the big task of brand upkeep. “The challenge is if you set yourself up as a brand, you have to own the in-hotel experience,” said Lynn. “There’s a reason why Marriott has grown at a certain pace. To deliver consistent operational and brand excellence is expensive and takes a long time.”

An Oyo spokesperson for Southeast Asia, however, maintains it is delivering consistent operational and brand excellence. “Globally we are above 4/5 in our hotel ratings on third-party travel sites. In Southeast Asia, we are above 8/10 on Booking.com,” said the spokesperson, when contacted by Skift. “Every night, when we go to sleep, more than 600,000 people are resting their heads on an OYO pillow.

“We focus not on growth, but high-quality growth, where customer service and mutually beneficial financials go hand-in-hand. Our revenue management teams also play with our variables globally tens of million times a day to optimize revenue for our partners.

“We have invested in tech talent and currently house over 2,100 data scientists globally. We are committed to investing in e-enabling the hospitality industry through continued investments in technology products, processes and people.”

MEANING IN THE MADNESS

To some, maybe Oyo has bitten off more than it can chew. As Lynn and Malhi pointed out, hotel operation is an arduous task — let alone on the scale Oyo is working with, and with the added burden of technological development.

But why even shoot for the impossible, when many independent hotels do not even want to relinquish operations and brand in the first place?

“Most hotels are not going for Oyo because it is an amazing brand. They’re doing it for the distribution and revenue management — which they can achieve without giving up operations and brand. At scale, it is impossible to deliver consistent experiences across the chain,” remarked Malhi.

Moreover, chain brand value is declining as consumers increasingly develop a taste for smaller brands, they asserted. Just look at the writing on the wall, from Accor’s acquisition spree counting Fairmont/ Raffles, to Best Western buying independent hotel representation company WordHotels. This is true even of the budget sector.

“There’s less value in chain brands now than 10 years ago. Chain brands came with the Holiday Inn in the 50s. Driving down the highway, travelers see properties on either sides of the road, not knowing if they’ll be checking into a crack den or walking into a flea infestation. Holiday Inn came about [with the promise of] clean and comfortable rooms.

“But today, you can go on any OTA to read reviews and [get the same information]. The opacity that used to exist about the hotel experience has been dramatically reduced. There is less need now to slap a unifying brand on properties. Independent hotels have just enough ability to compete with a chain because of transparency [in the form of online photos and review].”

Consumers are also seeing greater value in independent brands, associating them with something “more interesting and local,” Lynn added.

The return on investment of joining a chain brand is not what it used to be. Simultaneously, the ROI of getting pricing and distribution right is increasing.

The message is clear: The small independent hotels sector is crying out for a solution that decouples technology solutions from joining a chain.

IF NOT OYO, THEN WHAT?

Online booking platforms, while swaying consumers toward independent brands, are also the reason smaller hotels have a hard time standing out. “Travelers suddenly realize there are 2,000 hotel options in Jakarta,” Lynn remarked.

“Discoverability is one of the biggest issues for independent hotels. They’re not found because they’re tucked away on page 25 of OTA search results. We make sure hotels have the right pricing and content to get up there with the chains,” Malhi said.

Independent hotel general managers tend to be “operational wizards” juggling all aspects of guest experience but not so much when it comes to revenue management and distribution, Lynn added. Big chains, on the other hand, have those functions centralized. “Chains’ dedicated revenue management and e-commerce distribution team get really good at this, and small hotels without the same resources will suffer.”

The demand for outsourced revenue management and distribution expertise is evident in Asia. Zuzu said it has grown to 1,400 live hotel clients today, more than double the 600 it had at the start of 2019. Most of these hotels are in Indonesia, followed in order by Thailand, Malaysia, Taiwan, Australia, and Singapore. The company most recently entered the Philippines and Vietnam.

Zuzu, established in 2016, said it’s one of the rare few in Asia offering outsourced technology solutions specifically for small independent hotels. It landed $3.7 million in Series A funding in March this year. About two-thirds of the funds have gone into expanding sales operation, and the remainder into building more sophisticated data science models for hotels and automating its own back office.

But there are already online travel agencies and SaaS (software-as-a-service ) companies that help hotels with the technology side of sales and marketing.

According to Zuzu, pure SaaS doesn’t cut it for smaller independent hotels in Asia. “Too many SaaS companies come out of the U.S., where the market is more skewed toward chains and big hotels. These hotels can afford [well-trained] in-house revenue managers or directors of sales or e-commerce. The Asian market is filled with smaller properties that need expert help. It is natural that our alternative model is [emerging] here and not the U.S.”

When pure SaaS providers go to hotels with under 50 rooms, nobody there can effectively wield the tools, Lynn argued.

Zuzu has 200 employees, many of whom are revenue managers. “We don’t just give you a software and say call us with any bugs. That’s why we’re getting penetration. SaaS products have no penetration in the segment of smaller hotels,” he added.

When asked about the scalability of its personalized solutions, Lynn said: “We do incur more people cost. That’s why we invest not only in hotel tech but also tech needed to make our people internally as efficient as possible.”

Malhi added: “Take our revenue less the cost of all our people delivering the service, and we are still profitable. We’ve managed to become more profitable as we scale by continuing to invest in more efficient tech.”

And what about dynamic pricing solutions offered by online travel agencies? The Expedia Group, for example, offers the revenue management tool Rev+ free of charge.

In response, Lynn, previously CEO of Expedia-AirAsia joint venture, said: “Why would you as a hotel trust Expedia to set your price? As a hotel, maximizing revenue means sometimes putting prices up, sometimes down. OTAs want you to price low.”

Tellingly, Booking.com attempted to offer its own revenue management tool, only to drop it not long after rollout.

LONG ROAD AHEAD IN ASIA

On the changes ahead of independent hotels in the next decade, Lynn said: “Our space is going to get more competitive because of alternative accommodation. Airbnb-type inventory is becoming increasingly intermingled (with) the hotel industry. As Airbnb owners become more mature about dynamic pricing, hotels’ pricing approach will require greater sophistication.

“We’ll see a lot more of that being driven by central machine learning or AI-based algorithms. There will be much less ability for hotels to do pricing with a person,” he predicted.

But even before then, Asia’s unchained hotels sector has a long road ahead in technology adoption.

Even at the most basic level of using a property management system, “a large majority of hotels in developing markets don’t use that,” according to Malhi. Many are still manually printing out booking confirmations and searching through folders “as opposed to having a piece of technology to find reservation.” And there’s still housekeeping and other functions that can be automated.

“We are thinking of eventually adding these pieces to offer our [small hotel clients] everything they need in one place.”

Image: Dan Lynn and Vikram Malhi, co-founders, Zuzu Hospitality Solutions