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Start-ups try an OTA in budget hotels.

Sudhir Pujari, a businessman from Jabalpur, often travels on work. A pain point for him used to be to find a clean room in a budget hotel. He could find and book hotels on websites of online travel agents (OTAs) like MakeMyTrip, Yatra or Stayzilla but he was never sure about the quality of the room he's booking through these.

Now, however, Pujari no longer loses sleep in trying to find a clean hotel room. He simply logs on to one of the several new budget hotel chains that have sprung up, such as Oyo Rooms, ZO Rooms or Trebo Hotels, and books a room. They promise him basic amenities like a clean room and washrooms, Wi-­-Fi, and breakfast included in the rate.

"Standardisation of service levels is a big problem in the budget hotel category and this is the basic problem the new players are trying to solve in the two-­-star and below (Rs 1,000-­- 2,000, higher in metros) category," says Tarun Davda, partner at Matrix Partners, which has invested in Trebo Hotels.

"The OTAs solved the discovery problem but people still don't have the confidence to book online," observes Keshav Baljee, chief executive officer, ZiP Rooms, another entity in the market. Only 29 per cent of users book hotels online, estimated Google India in a report in April. OTAs estimate only 10 per cent of hotel rooms are booked online.

Backed by marquee investors like SoftBank (Oyo Rooms) and Tiger Global (ZO Rooms), start-­-ups are trying to do to budget hotels what Ola did to cabs. Namely, aggregate the supply, brand these, deliver a certain product promise, improve customer experience, build loyalty and grow rapidly. "Unlike a Uber, which is unbranded, Ola bought branding to cabs, put a sticker, which helped assure customers that it was verified and trustworthy; helped in building trust," says Baljee. Investors are bullish on budget hotel chains. In China, two or three players such as China Lodging and 7days Inn have aggregated this market and created $4-­-5 billion companies each.

"Investors look for a product-­-market fit. Here, the beauty is, it is already there. There's a crying need for budget hotels. The business model is very clear. It's a pure execution game," says Davda of Matrix Partners, which has also backed Stayzilla, an OTA for hotel bookings that has managed to get 32,000 hotels online in 4,200 towns. "If a player can provide quality experience without increasing prices, it is possible to capture demand," says Sidharth Gupta, co-­-founder, Trebo Hotels.

Chinese players Home.in, 7Days Inn and China Lodging were able to increase occupancy at branded hotels to 70-­-75 per cent from 40-­-45 per cent before they stepped in.

The opportunity

The opportunity is huge. There are an estimated one million hotel rooms in India; TripAdvisor has 0.6 mn of these, while MakeMyTrip, the largest OTA, has 0.4 mn. Assuming an average rate of Rs 1,000 for 0.6 mn rooms, the market is worth Rs 21,600 crore annually, and Rs 48,000 crore for a million rooms.

Google estimates the online hotel booking market in India will be $1.8 billion by 2016, up from $0.8 bn in 2014. Nearly 49 per cent of bookings are for budget hotels. "We expect the market to grow rapidly to $8-­-10 bn in the next three years as the smartphone base increases from 160 mn to 500 mn," says Baljee.

He says many look online (86 per cent) but much fewer (30 per cent) book online. This is likely to substantially increase as more entities start aggregating hotels and change the consumer experience. èxperts also say the market is not accurately estimated, as many hotels don't get counted and others don't share data. The real issue, says Stayzilla founder Yogendra Vasupal, is undersupply of rooms. "There are fewer number of star category rooms in India (400,000) than in Singapore (500,000). We are trying to open more rooms with service apartments, homestays, and families, if they have a room to spare," he says. Travel as a category was the first to take to e-­-commerce. In recent years, it has been overlooked. Now, the success of Chinese budget hotels has caught the imagination of entrepreneurs here.

Interestingly, the biggest hotel chains in India have been occupied with the three-­-star and above category, except for the Ginger experiment. Accor, a global chain, brought budget hotel brand Ibis; Formula 1 and Keys also entered India but their definition of budget (Rs 3,000-­-3,500) is not considered so in India.

Business model

It is an asset-­-light business model, wherein the chain franchisees the hotel or a portion of it. The owner continues to run the hotel. In the US, the Gujarati community is one of the largest owners of franchised hotels; they run large hotels with a lean set-­-up, while a chain lends the brand and sales and marketing expertise.

The revenue model is similar to OTAs; these chains will take 25-­-30 per cent of room revenues. Start-­-ups are willing to initially forgo this to prove the concept. Promoters need to upgrade the rooms and hotels once they sign up; they are not averse to spending if it means higher occupancies. Owners are buying in as they fear if they don't, they might be left behind with unsold inventories; also they have seen what Ola has done to cabs.

While some like Treebo and ZIP are taking the entire inventory in a hotel, OYO and ZO are not averse to taking 10-­-15 rooms in a hotel and focusing on quickly expanding into more towns.

Investors are keen as it is an asset-­-light model, it is a large market, and there's scope for achieving economies of scale-­-once a traveller uses a brand, it could be self-­-enforcing. ''It's not an entirely aggregator model; we are definitely building a brand. It's not only about getting a large supply but also about quality," says Treebo's Gupta, who along with co-­- founder Rahul Chaudhary worked at Mckinsey and Myntra before this.

Investors are betting on start-­-ups which can scale quickly. Yet, it won't be a winners-­-take-­- all market. There's scope for two or three players. ''The biggest challenge is standardisation," says Pavan Nanda, CEO, ZO Rooms. "Hotels are not easy to standardise; there are lots of moving parts. It's not a product, but there's also service," adds another founder. But, if they can crack it, they could potentially create billion dollar companies.