COVID-19 put several businesses across verticals in a tailspin. Amongst these, the hospitality industry has been one of the worst hit, particularly at the outset of the crisis. Towards the latter half of 2020, the industry moved swiftly to mitigate the impact on business by reducing costs, pivoting to digital platforms, and overall recalibrating their business models to adapt to the current scenario. However, the impact and devastation the pandemic has left in its wake are sizeable and likely to be long lasting.
While hotels and operators are yet to make a full recovery from the plummeting economy, the pandemic’s second wave brought new challenges to the fore. For instance, OYO Hotels and Homes, which was valued at $9 billion after a fresh infusion of capital, faced a petition filed by a creditor who initiated insolvency proceedings against the organisation.
Later the Delhi High Court had ordered that issue had been resolved as the petitioner specifically stated the same and thus withdrew the petition. Such cases set poor precedence of coercing startups, regardless of whether they are unicorns or not, into paying a debt.
Now, the million-dollar question is, what is the ideal business model that industry players can adopt and what is the way forward? Before we delve into the answer, one needs to gain an understanding of the three main franchise business models present in the hospitality and real estate segments.
UNDERSTANDING THE BASICS
Company Owned Company Operated (COCO), Franchise Owned Company Operated (FOCO), and Franchise Owned Franchise Operated (FOFO) are the three main business models. In the COCO model, companies often take long-term leases of the property and operate it since purchasing is often not feasible.
When we say ownership, it can mean either a long-term lease or ownership of the land and it is entirely operated. The land is divided on two key aspects – ownership /leasing and operations/ service. In COCO, the company has maximum security and control over both aspects of the business.
The hospitality business is a capital-intensive business, and when a company follows a singular model, the scope of expansion becomes diluted. Besides, in the hotel business, there will be a substantial development cost involved, which is when businesses begin looking for investors. These investors undertake the risk by investing in the development/the property rather than the company itself and the development will be done as per the company’s specifications. Now, in the FOCO model, the real estate development cost is borne by the third-party investor while the company runs the operations.
EVOLVING BUSINESS MODELS
In OYO’s case, the company marked the second leg of its business model evolution by shifting from the COCO model to the FOCO model. For instance, OYO Townhouse operates on the COCO model while OYO Rooms follow the FOCO model of business.
Having become a brand by itself where other companies wish to partner with it, OYO’s evolving business model has reached the third phase – FOFO, where the real estate costs are borne by the third party, and the operations are also run by the third party. OYO also has a FOFO model where the third party runs the operations as well as property and OYO simply gains a share from the revenue generated since the property is run under OYO’s brand name.
As a company changes the phases of the business model, it is transferring the capital expenditure element to a third party. However, this would mean that the company loses complete control over both the real estate and the operational activities.
Typically, the aforementioned models are adopted in each stage of development of a company. The greater the resources available to the company, the closer it will hold both the operational as well as real estate aspects. It is only when the company decides to go asset-light that it dilutes and brings third parties into the picture.
Choosing the business model will largely depend on the capital available, growth trajectory and stage, and brand name. For instance, large chains of hotels often opt for the COCO model to gain maximum control over operations and the properties. The ideal phase is the FOCO model, which is the mid-point, particularly for every growth-stage startup that has completed Series C or Series D rounds of funding. It is best suited for startups as capital deployment is lesser and they can maintain their brand name due to the service to the end customers.
Besides the aforementioned, the Minimum Business Guarantee (MBG) model has emerged as a promising one since 2014-15. However, the two models are contrasting.
The leasing model is a typical COCO model where fixed rents are paid to the property owner whereas
the MBG model is a FOCO model where there is no rent or nominal rent accommodated in the payment
structure and the remainder/ majority of the fee payable to the owner is on a revenue-sharing model. As
mentioned earlier, companies adopt the models based on their capital expenditure availability, pricing models, and expansion plans.
THE WAY FORWARD
The present scenario will undoubtedly impact funding in the hospitality segment, particularly for growthstage startups. As the third-largest startup ecosystem in the world, India has a conducive and supportive governmental regime as well as a sound legal system that provides the required cushioning for the startup community and allows room for failures.
There may be a dip in venture funding, which is amongst the biggest contributors for startup funding. However, the industry is expected to restart its recovery journey soon. All in all, the pandemic has completely transformed the sector almost overnight and only constant adaptation and innovation will allow businesses to bounce back to normalcy.
