Hospitality startup Oyo Hotels and Homes is reportedly carrying out mass layoffs in India and China. In India, the company has let go about 1,200 employees and plans to shed a similar number in the next four months, according to media agencies.
The SoftBank backed company claimed it was weeding out poor performers and it has set up a “meritocracy-based” performance evaluation program.
This development comes in the wake of the Japanese conglomerate tightening controls over its portfolio companies. SoftBank had given Oyo a deadline of March 31, 2020, to phase out contracts or businesses, which are not EBITDA-profitable. The decision to layoff such a huge number of employees can also be attributed to the plans of Oyo to list publicly in the US within the next three years.
Oravel Stays, which owns and operates the hospitality chain, had recently reported a provisional net loss of 23.84 billion rupees (US$33.52 million) for the financial year ended March 31, 2019, a seven-fold increase from its 3.6 billion rupee loss a year earlier. The increased losses were attributed to increased operating and employee benefit expenses.
SoftBank’s Vision Fund has invested about $1.5 billion in Oyo, pushing the hospitality company’s valuation to $10 billion. The company also counts Airbnb Inc., Sequoia Capital and Lightspeed Venture Partners as backers, although the latter two have reduced their holdings. The venture capital firms, which both hold board seats at Oyo, sold $1.5 billion worth of stock — about half their stakes — to Oyo’s promoter Ritesh Agarwal, who borrowed money to buy the shares.
Founded in 2013 by Agarwal, then a 19-year-old student, Oyo set out to organize India’s budget hotels, which have traditionally been small, family-run enterprises. The company coaxes the hotels to become Oyo-branded destinations that list exclusively through its website. It then sells those rooms online and takes a cut of each booking. The start-up also runs some hotels itself.
Oyo currently works with 10,000 hotel owners in India and charges a 20% franchise fee on room revenues when hotels join its network. But lately it has been drawing flak from hotel owners who claim Oyo was taking half or more of the revenue pie through fees that were not initially disclosed. They also accuse the startup of delayed or non-payment of dues.
Recently a New York Times report quoted current and former Oyo employees who alleged the company was indulging in questionable business practices. They said the company was deliberately withholding payments from hotel owners in order to squeeze owners into renegotiating contracts it deemed unprofitable. They also accused Oyo of withholding payment in order to save money. They said the company believed most owners would not press for full payment.
Some Oyo officials told the Times that employees were under so much pressure to add new rooms that they brought hotels online that lacked air-conditioning, water heaters or electricity. They said the company briefly inserting these unavailable properties into Oyo’s listings — complete with fake photographs — to impress investors.
The hotel startup has also been accused of creating a monopoly. Federation of Hotels and Restaurant Association of India has approached the Competition Commission of India to register a complaint against the hospitality chain for allegedly levying charges without prior intimation. The Commission is also investigating the commercial agreement Oyo had with the travel portal MakeMyTrip.