While price is one key factor, it’s the quality of service that these startups are focusing on.

As budget hotel space gains traction in India Treebo and Oyo vie for a larger pieImage for representation
Atom Startups Wednesday, September 20, 2017 - 11:52

The total hospitality market in India is worth $10-12 billion dollars. Of this, 70% comprises budget hotels. A Deutsche Bank report also states that almost two-thirds of India’s rooms supply in 2020-21 will comprise budget hotels.

And with an opportunity so huge, startups such as Treebo and Oyo are aggressively expanding their presence to capture the fast growing segment. A testament to the opportunity is also the fact that investors are betting on the market and hence investing in these startups.

Treebo Hotels raised $34 million (Rs 220 crore) in its Series C funding round led by Hong Kong-based investment firms Ward Ferry Management and Karst Peak Capital with existing investors, Matrix Partners India, SAIF Partners and Bertelsmann India Investments also participating in the round.

Oyo too, raised $250 million (Rs 1600 crore) in a Series D financing round led by SoftBank through SoftBank Vision Fund and Hero Enterprise, with participation from existing investors Sequoia India, Lightspeed Venture Partners and Greenoaks Capital. It also raised $10 million from China Lodging Group Limited last week.

Oyo recognised the market potential back in 2013 and decided to enter the fray as an aggregator for hotels. It would block a part of the inventory for a particular hotel, which people could book through Oyo’s platform.

Online Travel Aggregators (OTA) such as MakeMyTrip, Yatra, Go Ibibo were doing similar things as well. But the problem that comes with aggregation is the lack of control over quality. In fact, there have been several instances where Oyo faced flak from customers in instances where the quality of the hotel wasn’t up to the mark.

Recognising problems like this, startups such as Treebo arose.

“The space was unorganised for the longest time and troubled with poor quality and unreliability. You don’t know what you're going to get for the money you pay. At Rs 2,000, you can’t expect a good quality hotel. Our model is to offer them dignity in travel even at a budget of Rs 1500-2,500,” says Sidharth Gupta, co-founder of Treebo.

It’s all about customer experience

Unlike hotel aggregators, Treebo runs on a franchise model where it licences its brand name to independent hotel operators, who run the hotel under Treebo’s brand, based on all of its specifications and requirements. This ensures that quality of stay is in the hands of the startup.

Treebo charges a commission of 20-25% of the hotel’s top-line, which is mainly for the brand name and the demand it generates, Sidharth adds.

One of Treebo's hotel rooms

The room tariff at Treebo varies from Rs 1,000-Rs 2,500.

And Sidharth believes that while the opportunity is huge in the market, there is hardly anyone solving the problem of lack of quality. “Most players are selling hotel rooms online and aren’t brands. Most of them have done a great job in bringing the market online. No one is solving guest experience by building a brand. While there is a lot of interest and activity, I don’t think there is much competition,” he adds.

Oyo isn’t far behind. It has recognised the problem after facing flak for poor quality. It is now placing its focus on its segments such as Flagship and Townhouse. After the recent fund raise, Oyo’s focus too is shifting to customer experience.

“We will further enhance customer experience by investing in resources and technology. Our mission is to bring great quality living spaces to our consumers at their choicest price and location,” Ritesh Agarwal, founder and CEO, Oyo says.

As part of its new strategy, Oyo will invest in a property along with its owner, to renovate it. And along with a focus on quality, Oyo’s pricing will also remain the lowest, Ritesh told Moneycontrol in an interview.

Ritesh Agarwal, founder and CEO, Oyo 

And it’s not just Oyo. Larger players such as MakeMyTrip are also focusing on the quality of hotel stay. It launched MMT Assured Hotels to provide consumers with hand-picked hotels giving a guarantee of quality. But then again, this isn’t in the budget segment where Treebo or Oyo are trying to make their mark.

Who will win the race?

Murali N Bukkapatnam, President of TiE Hyderabad, says that for a player looking to build a brand, premium segment is not going to work. That segment is covered by players such as Starwood, ITC and Taj.

The opportunity truly lies in the budget space where a large chunk of middle class customers are looking for quality places to stay in, at affordable prices.

While Oyo and Treebo are trying to get a pie of the budget hotel segment, Murali says that it will not be a winner takes it all market. There will be four to five players because expectations of people in a country as diverse as India, will be different.

“While Oyo is the largest player, there will be a few more players that will come into the market with a sustainable business model in place. It might be Treebo now, but there will be a few more players in the next two to three years,” he adds.

In fact, Sidharth of Treebo agrees and says, “It’s a huge market and there is always room for a handful of players. This space will see tremendous growth in the future and a large part of it will come to players like us. Treebo is poised to benefit the most from the growth.

Sidharth Gupta, co-founder, Treebo

Consistency is key, according to Murali. These players must understand that the experience provided by the brand must be consistent across every property.

However, the market is still not there as most players are focused on the game of who has how many hotels, which should not be the focus.

While Oyo’s focus is on a bunch of things, like building its mid-market brand and international expansion, Treebo’s focus is currently only on enhancing customer experience and building the brand and technology.

Oyo may have several revenue streams, but Treebo is looking to build one brand, unlike various segments that Oyo is looking to target.

Treebo has no plans of moving away from the budget hotel space and this is something Murali says could give Treebo a competitive edge over Oyo in the budget hotel space.  

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