Oyo’s China challenges

This is an adapted translation of this article by Su Qi and originally published by Sina Tech/Ran Cai Jing.

China’s first Jinjiang Inn hotel opened in 1997.

Twenty-two years later, the chain has more than 7,000 locations across the nation.

It’s an impressive story of expansion, until you hear the story of Oyo: India’s hotel startup went from zero to more than 7,000 locations in China alone in just 16 months.

Photo credit: Pixabay

Oyo entered China in November 2017: a fledgling hotel chain whose principal selling point was that it doesn’t collect franchise fees. It began by aiming at smaller cities and then expanding rapidly.

As of this writing, its website lists more than 7,400 locations in China.

In India, Oyo’s native market, people have sometimes compared it to Uber, but in China its rapid expansion has been more reminiscent of Luckin Coffee, the domestic startup Starbucks competitor that just filed for IPO in the US. Indeed, Oyo has drawn some fire for the same strategy that lifted Luckin to its current lofty height.

Similar strokes

The biggest thing the two companies share in common is speed.

Luckin was established in October 2017. It raised money very quickly, and then expanded with the same speed thanks to “buy two, get one free” promotions.

According to its IPO prospectus, it now has 2,370 locations in China, whereas Starbucks – which has been working on the Chinese market for 20 years – has just over 3,600.

Oyo arrived in China just a month after Luckin formed, building its first hotel in Shenzhen.

Behind both companies’ quick expansions is a large, burning pile of investor cash. The costs of Luckin’s expansion are evident in its IPO paperwork: in 2018, it reported revenue of US$124 million and a net loss of US$240 million. High costs are the primary reason: in the first quarter of 2019, Luckin’s costs already exceeded US$148 million.

Oyo has been burning money, too. Unlike Chinese chains like Ru Jia and 7 Days, it doesn’t charge any kind of franchise fee – instead extracting a commission from each hotel transaction. It provides free decoration, linens, and other amenities to all of its member hotels.

Sweeteners

Burning money with subsidies