Southeast Asia has always been popular with budget-conscious travellers, both for flights and accommodation. On the back of leisure and business travel boom in the region, the budget hotel sector, estimated by the industry to be worth USD 17 billion, will continue to grow, driven by the 350-million strong and growing middle class population.
This long-term outlook bodes well for the travel industry in the region. This includes hotel tech startups such as ZEN Rooms and RedDoorz, who address the market of regional budget travellers.
At the same time, the incumbents face competition from India’s hotel tech unicorn OYO, which is said to be raising funds at a USD 10 billion valuation. Backed by deep-pocketed investors like SoftBank and Airbnb, its persistently growing presence in Southeast Asia will have its impact on local players. Some analysts believe they’ll have to brace for lowering their room rates to match OYO’s.
Small hotels have a tough time in the digital era
Technology is an important aspect for the hotel sector when it comes to attracting digitally-and-mobile savvy millennial travellers, who search and plan their trips online. A 2016 survey by Topdeck Travel quoted by travel news site Tripzilla found that social media and peer-influence are top factors influencing millennials’ next travel destination.
However, many small and independent budget hotels have a harder time to cater to these tech-savvy travellers as they lack the money, brand trust, and marketing experience to stand out against larger hotel chains.
Tech startups saw this as an opportunity and searched for ways to help budget hotels survive in the digital era. One model was the so-called hotel aggregator, pioneered by OYO Rooms when it first started in 2013. The idea was to partner with small and independent hotels, provide some training for hotel staff and ensure that there is consistency in customer service, cleanliness and amenities such as fast and reliable Wi-Fi, cable TV, toiletries, bottled water amongst others, before marketing a contingency of rooms under the OYO brand on various channels online, including OYO’s own app. The idea was to improve the hotels’ occupancy rates, but otherwise not get too deeply involved in their day to day business.
Similar business models were then adapted in Southeast Asia by ZEN Rooms and RedDoorz, which both started their operations in 2015.
Over time, the model transformed from being a marketplace for small hotels and guesthouses, which simply aggregated re-branded rooms on booking platforms, to the point where the hotel tech startups took over managing entire hotels, providing the management software to do so, or even leasing and operating their own hotel buildings.
OYO is now the biggest of them all, with a franchise of over 20,000 buildings across 800 cities in 24 countries. According to Crunchbase, OYO has raised USD 1.7 billion from SoftBank Group, Sequoia Capital, Lightspeed Venture Partners, Airbnb, Grab and Didi Chuxing.
In comparison, OYO’s competitors in Southeast Asia are small. ZEN Rooms raised a total of USD 23 million while RedDoorz raised USD 69.4 million. The capital raised by ZEN Rooms and RedDoorz combined adds up to a meagre 5% of OYO’s.
OYO first entered into Southeast Asia via Malaysia in Jan 2016 and is now in 25 Malaysian cities with 250 hotels. It has since expanded to 8 cities with 52 hotels in the Philippines and 52 cities with 530 hotels Indonesia and recently made its presence in Vietnam official , with plans to be in 10 Vietnamese cities by 2020.
“Our aim is to deepen our presence in these markets while also aggressively expanding to other cities in the future,” an OYO spokesperson told KrASIA. The firm’s ambitious goal is to have 2 million rooms under management in Southeast Asia by 2025.
OYO’s shadow
However, the local hotel tech incumbents aren’t losing sleep over OYO’s presence in the region–perhaps taking note of the fact that OYO’s quick global expansion is not without its setbacks. In China, OYO is going through a rough patch as its trying to shift away from the “light franchising” model to one where it has more control over its partner hotels’ operations.
Asked about competition, founders often resort to the argument that the market is big enough for everyone.
“The opportunity in Southeast Asia’s affordable travel market is immense,” is what Amit Saberwal, the founder and CEO of RedDoorz said in response to OYO’s growing presence. Because each market is different, he believes that in the long term, Southeast Asia has enough room for more than one player. “It will be interesting to see who else will be on this journey with us,” he told KrASIA.
But it’s not only startup founders saying this. Roshan Raj Behera, business partner at consulting firm RedSeer notes that Southeast Asia has more than 120,000 budget hotels in the three-star or below segment as of 2018–more than enough supply for the region’s budget hotel tech players to partner with.
”Assuming the hotel supply grows at a modest 3% per annum, there will be 139,000 hotels by 2023. Further assuming that OYO onboards 25,000 hotels in Southeast Asia by 2023, it will have secured 18% share of the hotel supply in the region, leaving a significant 82% or 114,000 hotels for others,” he added.
Nathan Boublil, co-founder and global managing director at ZEN Rooms is also not worried about the threat that OYO presents.
“OYO has been in Southeast Asia for 3.5 years and [Zen Rooms] often competes with them in Indonesia and Malaysia. The hotel franchise, whether budget or luxury, has always been a competitive market, with several actors. And it will stay that way,” he said.
Fresh wave of investments
What’s more, incumbents say OYO’s presence in Southeast Asia could actually boost the sector, and encourage investors to make new bets.
This was the very reason that Yanolja, a Korean company, decided to make its first international USD 15 million Series B investment in ZEN Rooms in 2018, according to Boublil.
RedSeer’s Behera noted that the USD 50 million capital raised by RedDoorz in March 2019 further supported this view.
However, OYO is a force to be reckoned with, as it has the financial muscle and backing of its global investors.
The most immediate effect OYO’s presence in Southeast Asia might have is that budget hotels aggregators need to prepare for lowering their prices, according to Behera.
“OYO is known to charge 30% lower average daily rates (ADRs) as compared to its rivals in any given location,” he told KrASIA. “[Hotel] incumbents [in the region] are likely to respond to this, leading to a drop in overall ADRs.”
This pressure might “quicken the [competitors’] path to success or failure,” Behera said and pointed out that it’s the traditional budget hotels and those not affiliated to a chain who could be at the greatest risk in this scenario.
However, all sides agree that aggressive discounting should not be the only way to attract new customers and won’t be a winning strategy in the long run.
Hotels who want to stay relevant, whether as part of budget hotel aggregator or independently, could introduce loyalty programs, ensure that products are appropriately represented to highlight the added value they offer, and showcase guests’ positive reviews to differentiate themselves over competitors.
Building trust and loyalty
ZEN Rooms’ Boublil said that all hospitality franchises have to find a unique value-for-money offer that travellers buy into. The hospitality sector is a transparent business, he said, with thousands of reviews left every day by guests on hotel booking websites.
Most travellers are creatures of habit, Behera points out. Many prefer to stay at the same hotel chains once they are assured of the hotel’s quality. Therefore, budget hotel aggregators should strive to build lasting relationships with their customers, he recommends. One way to do this to provide a tailored experience and delivering communications that are personally relevant to each guest.
Southeast Asia’s budget hotel aggregators should also pursue strategic partnerships with the travel, tourism and communications industry more aggressively, said Behera, pointing to OYO’s recent tie-up with China’s largest online travel agency, Ctrip. Through this partnership, OYO is now uniquely positioned to make use of its presence in China to promote its hotel portfolio to Southeast Asia-bound travellers. The thinking here is that Chinese travellers already familiar with OYO in the domestic market might seek for the same brand when they book a trip overseas via Ctrip.
The Southeast Asia budget accommodations sector has always been a competitive market. OYO’s presence in the region will make it more competitive and likely will lead to further investment and consolidation in the future, with players forming alliances to stay in the game. “Hospitality has always been and will continue to be an acquisitive sector where scale does bring many benefits,” said ZEN Room’s Boublil. Traditional hotels who fail to adapt to this new reality face a difficult time.