Why OYO’s foray into food could be an uphill task, but not an impossible one

25-year-old Ritesh Agarwal’s OYO has been growing leaps and bounds and is reported to be South Asia’s largest hotel chain with a presence in about 10 countries. Going beyond hospitality, the group has now moved into new territory — cloud kitchens. In February this year, Entrackr reported that OYO listed cloud kitchens on India’s largest food aggregators — Swiggy and Zomato.

What reportedly started off 20 cloud kitchens in Bengaluru and Gurugram has now grown, with its brands Adraq by OYO and O'Biryani by OYO being present in various locations across multiple cities. But how does entry into a highly fragmented segment with cut-throat competition augur for the hospitality major?

While OYO has actively begun operating these cloud kitchens, the company has kept mum. “As the largest hotel chain in India, operating franchised and lease assets, we do have an active play in the F&B business with an average of about 25% of our revenue coming through the kitchens we operate in some of our hotels and hence culinary design and good food experience are valuable to us. We have nothing further to announce at the moment,” the company told TNM.

On checking on both Swiggy and Zomato, TNM has found several listings of Adraq by OYO and O'Biryani by OYO in Bengaluru, Chennai, Mumbai and Hyderabad.

Listing on Zomato

Listing on Swiggy

While food is a highly competitive sector, OYO has succeeded in multiple sectors, and as opposed to many other players and has the money and infrastructure required to fight for a piece of the cloud kitchen pie — which has players such as Swiggy’s The Bowl Company, Faasos, Freshmenu, among others.

Diversification

Sanjay Jesrani, the Founder and CEO of Go North Ventures says that cloud kitchens are a logical extension to OYO’s business, and that in the budget hotel sector, it is a gap area where they would be able to earn revenue.

“What OYO is doing looks like they are acquiring cloud kitchens, where without setting up large fixed infrastructure they can actually build that access. In my view, it is a good policy. It is not necessarily a non-core diversification, but an adjacent area,” he says.

While Murali Bukkapatnam the Chairman of Volksy Technologies too agrees with the feasibility factor for OYO to diversify, he says that the food sector is still a tough nut to crack.

“People are trying to create niche cloud kitchens where they can service people of different genres and different requirements. Will Ritesh (Agarwal) have the capability and focus to serve a niche product where it can generate enough revenue which would matter for his balance sheet? That I doubt,” he says.

Business sense

OYO has seen exponential growth, and has completed 13 rounds of funding. SoftBank alone has led 4 rounds of funding. Flush with funds, OYO is continuously moving into newer markets. It is presently looking at raising $1 billion in its next funding round and is eyeing a market valuation of $10 billion.

The two cloud kitchen brands that OYO currently has are being piloted through Swiggy and Zomato. “With the amount of money OYO has, it can basically float hundreds of brands and subsequently tell Swiggy it push out others. OYO will initially use Zomato and Swiggy’s distribution to create the brand and post that, they can possibly say that ‘if you don’t push out others, I will take my brands on my own platform’,” says Madhukar Sinha, the founding partner at India Quotient.

Softbank, who has a 46% stake in OYO, is currently in talks with Swiggy for its next round of funding.

“It’s not about Softbank investing, but about how much Softbank is investing. If Softbank puts $1 billion to $1.5 billion, then Swiggy could agree and move on with Oyo’s plan but if Softbank doesn’t give a big amount of money to Swiggy, then most probably, its investors will not agree to this kind of investment,” Madhukar adds.

Uphill task

Murali says that the advantage OYO might have compared other cloud kitchen brands such as Freshmenu (who OYO was earlier in talks with to acquire) or Innerchef is its spread.

“This means that they will have to set up in those tier-2 and 3 cities as well. The moment they set up the infrastructure of the cloud kitchen in those cities, they will need to have many hotels, but again, I don’t think they will have many consumers. It is a catch-22 for Ritesh. He will have to contemplate tier-1 and 2, which means that they would have to compete with Swiggys and Zomatos of the world, because Swiggy itself has a cloud kitchen. At this particular moment of time, I don't think anyone can come closer to competing with Swiggy in the cloud kitchen space. That I’m quite certain of,” Murali says.

Sanjay agrees and says that OYO is not yet in a position to make a dent.

“I don’t think they will make a dent going necessarily the pure food way. My response is really billed towards how they are addressing the needs of the customer base they own as part of their core business. If they are addressing a large part of that customer base, I see the sense in that but if they go out into the open market to get a piece of the food market, that’s going to be a tough one,” he says.

Delivery

Murali says that OYO could capitalise on their existing customer base.

“In the mid-level and low-level hotels that OYO targets, at an average room rate that goes up to a maximum of Rs 4,000 per day, they’ve done away with room service. Anytime anyone wants to order food, they’re either going to Zomato or Swiggy, otherwise they are going to OYO because themselves have a cloud kitchen and a partnership with the delivery segment,” he says.

Madhukar says they could make considerable revenue if they catered to the customers in their hotels, but it would still be insignificant compared to Swiggy or Zomato.

“Without the support of Swiggy and Zomato, it will be a very difficult task because food is more high touch than living in a hotel. Most business travellers aren’t looking for a nuanced experience from OYO, and neither does OYO give a nuanced experience. And, food is much more fragmented than hotels because the capital expenditure required for starting a restaurant and starting a hotel is very different,” he says.

“The number of hotels which are there and the number of people who serve food in restaurants — the number is much higher for restaurants. Therefore, building a food brand is a lot more difficult than building a hotel brand because taste, preference, type, hygiene, branding — everything is involved. I’m not saying OYO cannot do that. If anyone can do, OYO can too. But it’s not that easy,” he says.  

With inputs from Shilpa S Ranipeta