Vaibhav Aggarwal, the founder, and CEO of FabHotels sits quietly in his cabin in Udyog Vihar, Gurugram. He has an unopened bottle of cold-pressed juice sitting on his table and an uneaten apple lies forgotten on a chair leaning against a laptop bag. His glass-walled cabin has a table and a few chairs.
Offices emptying out
There is barely anything else of note, except Aggarwal’s laptop and his phone. It is charging. His cabin looks out at the rest of his office, which is emptying out. It is past 7 pm on Tuesday. But Aggarwal won’t leave anytime soon. He likes it here. He comes to work on weekends and on public holidays. He claims he hasn’t taken a vacation for the longest time. He travels for work, if at all. Interestingly, he’s also the kind of traveler he works with.
“You know, budget hotels is a very simple space,” he says. “All that travelers need is a good experience. And that’s what you have to give them.” While Aggarwal says ‘simple’ he doesn’t mean ‘easy’.
The hotel segment is set to grow to gross bookings worth $10.9 billion (about Rs 65,000 crore) by 2020. There is a clutch of players trying to make their way in this sector. Oyo Rooms has tried it. According to Tracxn, they have raised $452 million (Rs 2,900 crore).
Aggarwal’s FabHotels has taken a crack at it. It raised $33.36 million (Rs 217 crore). Bengaluru-based Treebo has raised $56.65 million (Rs 370 crore). But there have been casualties too. High profile ones. The likes of Zo Rooms couldn’t keep pace and lost out. Stayzilla had to call it a day.
Budget hotels even triggered consolidation between MakeMyTrip (MMT) and the Ibibo group. These have been turbulent times even for perceived market leaders such as Oyo, as online travel agents (OTAs) like MMT decided to delist them.
MMT officially said it was because of bad reviews by customers. But talk to people in the company privately and they will tell you it was more to do with MMT’s foray into budget hotels, albeit in a roundabout way. Just to tap into the inherent demand in the market. The budget hotel segment has started to get hotter.
The segment, according to Tracxn, in 2017 alone, has raised $323.8 million (Rs 2,112 crore). This segment has never seen this much action. And all these players want to be the first ones to have cracked his segment. It is important to know-how.
Easier said then done
Like Aggarwal said. It is simple but it is not easy.
Treebo and FabHotels have both taken a gamble in this space. Together, they have raised $100 million (Rs 652 crore). And if the investors at these two companies need to make an exit, all staying equal, the returns will have to be close to $700 million (Rs 4,567 crore).
It is a hot space right now. Treebo and Fab collectively have 500 hotels under their management and have clocked a combined revenue of around Rs 25 crore ($3.8 million) in FY16, versus a combined loss of Rs 38 crore ($5.8 million), according to documents filed at the Ministry Of Corporate Affairs. Clearly, there is room to grow.
FabHotels, which was set up in 2015, and Treebo, which was established around the same time, have taken a slightly different route. These two ask the hotel owners to bear the cost of the upkeep and potential upgrades. Treebo and FabHotels train the staff. And the hotel is ready to be listed.
The two use travel agents, OTAs, and their own landing pages to sell these hotels, maintaining control over everything. From the resulting revenue, the budget hotels take a commission, which ranges from 15-50% depending on the level of involvement. Sometimes these aggregators employ the front desk staff on their rolls. “If we do that, the commission increases,” says Aggarwal.