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    These online budget hotel startups swear by the full inventory model

    Synopsis

    The online budget room space, it seemed, was getting cramped, and there was no room for people like Gupta who had embraced a full inventory model.

    ET Bureau
    The timing was cruel, especially for someone who was not following the “herd”. And Sidharth Gupta knew it.

    “When we started, there was a lot of scepticism about our business model and our future,” recalls Gupta, cofounder of Treebo, a budget hotel room platform that started operations in June 2015. Last year, investors were aggressively wooing online budget room aggregators working on a partial inventory model — taking control of a few rooms in a hotel, branding them, adding some cosmetic features like Wi-Fi and free breakfast and selling them at rock-bottom tariffs — starting as low as Rs 599.

    The trick worked. Aggregators managed scale, and investors whetted their appetite. Oyo Rooms raised Rs 630 crore from Japanese telecom and internet giant SoftBank, and its smaller rival Zo — backed by Tiger Global and eventually bought by Oyo early this year — bagged Rs 192 crore last August.

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    The online budget room space, it seemed, was getting cramped, and there was no room for people like Gupta who had embraced a full inventory model.

    Cut to September 2016, and Gupta may well be having the last laugh. Reason: almost all the players, including Oyo, who started with a partial inventory model are now flirting with full inventory. And the icing on the cake, says Gupta, is that investors too are falling in love with the new business model that works on taking full control of a hotel, standardising all rooms and services, controlling the operations and, yes, sharing a hefty slice of revenue with the property owner — as high as 40%. “Have you ever seen a fast-food joint selling Subway sandwiches and Haldiram’s pav-bhaji at the same time?” asks Gupta.

    This was happening with partial inventory. The model, he contends, was born in the era of “growth at any cost” and was sold as the magic potion to investors. “Unfortunately, there is no magic potion,” he says. After burning over Rs 1,000 crore, the industry is now waking up to the reality that partial inventory was a mirage created to grow rapidly at negative gross margins and raise more capital.

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    Treebo has raised over $23 million so far — the last round of $17 million in July this year — from top investors including SAIF Partners, Matrix Partners and Bertelsmann India Investments. Gupta claims the company clocks an annualised gross booking value of $35 million, gets over 3,000 bookings every day, handles 150 properties in 30 cities and takes a revenue share of between 18% and 25% from the owner.

    Pursuing a strategy similar to Gupta’s is Vaibhav Aggarwal, whose startup works on a franchise model. When the cofounder of Gurgaon-based FabHotels started in August 2014, it was a nascent space and hardly any player had amassed huge warchests. “Even the ones in the market were faltering on consumer experience,” he recounts.

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    Aggarwal saw this as an opportunity, and decided to focus on delivering a superior experience to the customers and a better return on investment to the hotel operator. The franchise model, says Aggarwal, gives much higher control over inventory pricing, channel management and operations of the property.

    FabHotels raised $8 million in June this year, handles over 100 hotels across 15 cities and charges a flat franchise fee on overall revenue of the hotel. “Our focus from day one has been on delivering superior customer experience, generating excellent word-of-mouth publicity and high repeat rates,” he says.

    The Sustainable Model

    For neo-converts like Ankita Sheth of Vista Rooms, it was not lack of focus that led to switching to the full inventory model some three months back. “It seems like a natural progression,” says the 33-year-old cofounder of the Mumbai-based budget room operator. There is a chance of earning more revenue per hotel as well as delivering a better customer experience, she adds.

    Vista Rooms raised an undisclosed round of funding in August last year, shifted to a full inventory model three months back, handles 50 properties in India, Sri Lanka and Maldives, and works on a fixed fee plus revenue share, ranging from 20-30% of total revenues. “We have seen the occupancy at fully managed properties increasing by over 10% in the past three months,” she says, adding that she plans to have 5,000 properties across Asia by 2020.

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    Sheth points out that she makes zero upfront payment and zero minimum guarantees to hoteliers who don’t see the aggregator as a thirdparty agent but a partner who works in tandem to improve sales and customer service. “It (full inventory) is the need of the hour,” she says.

    Mohit Gupta of MakeMyTrip echoes the views of Sheth. Mere aggregation of rooms without adding any value to the customer experience was not a sustainable model, contends the chief operating officer, online, MakeMyTrip. “Just adding capacity was never going to serve any purpose.” Full inventory, he says, is a far more sustainable model. Partial inventory was the only way to open up the market with some early acquisitions (of rooms).

    For its part, MakeMyTrip does not follow the full inventory model but lets players like Treebo and FabHotels list on its platform. MakeMyTrip launched a budget hotel certification brand Value+ in November last year, after delisting Oyo and ZO Rooms from its platform. Value+ hotels receive certification of quality from MakeMyTrip without any change in their brand identity.

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    Nudged by poor consumer feedback, dismal repeat bookings and high consumer acquisition costs, a bunch of online budget aggregators is now swearing by the value of the full inventory model. As investors turn off the funding tap and look for tangible business growth, the heavily funded players are realising that the game was never going to be won by the most funded. SoftBank-backed Oyo, the biggest online budget room player, too moved to a full inventory model a few months back with Oyo Flagship. Oyo was not available for comment.

    Keshav Baljee, the 32-year-old co-promoter of listed hotel brand Royal Orchid, is another entrepreneur who was quick to figure out the virtues of the full inventory model a lot ahead of his rivals. Baljee started Zip Rooms in June last year, has signed up over 25 hotels on a 100% inventory model and is targeting to take the hotel count to over 1,000 by 2020. While admitting that some customers would try the discounted aggregators out of curiosity, the erratic service and product experience would bring the discerning ones back to his fold.

    “Product can be standardised using capital, but service is very difficult to standardise,” he says. It requires a hospitality mindset, adds Baljee who also runs a management contract business under another brand, Spree Hotels.

    But doesn’t 100% end-to-end control increase the cost of operations? Does it not add to the overheads? After all, training the staff, managing operations and running the show must have added to the cost of the players following this model.

    Gupta of Treebo believes it i s a myth that full inventory model increases the overall cost. “In fact, it’s quite the opposite.” Full inventory, he points out, entails neither ownership nor leasing of the asset. So it does not involve any capital expenditure.

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    Secondly, the model allows better amortisation of several costs that are incurred at a unit level. For instance, take the cost of the on-ground team that oversees quality and conducts staff training. Given the time involved in travelling to the property, time spent with the staff and doing sample-based inspections, it is more efficient to cover 30 rooms at one property rather than covering 10 rooms each at three different properties. Effectively where one person in a full-inventory model could cover 120-150 rooms, a part-inventory model would require three people for the same number of rooms, says Gupta. “The cost of branding is also lower for a full inventory model.”

    Inventory Control

    Investors, for their part, give a thumbs-up to this model as it has a greater chance of ensuring repeat bookings. “Hospitality is an experiential business and this determines repeat consumers,” says Amit Somani, managing partner at Prime Ventures, an early-stage VC firm. Experience, which in turn depends on the quality of rooms and services, will decide the winners, says Somani, who was chief products officer at MakeMyTrip before joining Prime Ventures. “Even a Goli Vada Pav needs to have consistent quality.”

    Another reason, points out Somani, for startups shifting to full inventory is to guarantee inventory. Unless one has full control, it would not be possible to meet the demand during several key periods in a year like Christmas, New Year, long weekends or summer vacations. “Control over inventory also gives you edge over your rivals,” he says.

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    Partial inventory model also entailed ensuring minimum guarantee of rooms. “This was flawed as it led to heavy losses,” says Somani. A revenue-share model in full inventory rules out the possibility of heavy money leak.

    “What you produce is what you share,” he says. Prafulla Mathur, founder of Gurgaon-based long-stay budget room player WudStay, would attest to the quick returns that this model offers.

    Mathur’s 160-bed property in DLF Phase 3 of Gurgaon was filled up to 95% in just 10 days. Similarly, his 150-room paying guest facility at Kota in Rajasthan was filled in under a week.

    “Every rupee invested towards owning an inventory is earned back within days,” says Mathur, who switched to the full inventory model six months ago. WudStay divides a city in clusters and sub-clusters and analyses data to gauge demand in any specific area. The idea is to take all PG inventory in the highest traffic areas, which could vary from 50 to 300 beds per property and then raising the standards, he says. “This solves both scalability and cash flow for us,” he adds. WudStay handles 15,000 beds across six cities, price of a bed ranges from Rs 5,500 to Rs 30,000 per month and the startup takes a revenue share of 30-40%.

    While online budget room startups are checking into the full inventory model to have more elbow room, what they are probably trading off is the scale and pace of growth. Another challenge is delivering consistent quality.

    Aggarwal of FabHotels is aware of the tough task. “The biggest challenge is to ensure brand consistency,” he says, adding that frequent training of hotel staff and a dedicated auditing app will help in achieving this objective.

    Others too are using technology to face the challenge. Treebo uses Bumblebee, a tablet-based property management system that helps make property operations efficient and improves guest experience. It has an app that captures quality-related information from every property, and populates central dashboards that creates full transparency and allows quick corrective actions, says Gupta.

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    The startup has also devised a crowd-sourced mystery-audit programme.

    Friends of Treebo — the audit programme — has over 2,000 members who give detailed feedback on properties based on their experience of staying there. “It’s a potent quality control tool in our arsenal,” says Gupta. Treebo has also created a virtual training academy for the staff that includes multimedia content, SMS-based learning nuggets and IVR-based assessments. “The idea is to stay ahead of the game,” he adds.

    For now, the full inventory model is the new game in town.
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