When Vaibhav Aggarwal went to Bangalore for a friend’s wedding seven years ago, he wasn’t too pleased with his accommodations.
He had paid around US$50 for a room at a hotel that promised a fancy lobby and restaurant. But three booking changes later, he had to settle for a room that “worked,” Aggarwal tells Tech in Asia. That experience planted the seed for Casa2 Stays, a budget hotel aggregator that he co-founded with Adarsh Manpuria in 2014. The company runs and operates the FabHotels website and brand.
The six-year old startup is rapidly emerging as a worthy competitor to market leader Oyo Hotels and Homes. This comes as negative news about the Masayoshi Son-backed hotel room aggregator shows no signs of abating. Earlier this month, Bloomberg reported that Oyo is culling its global staff by about 5,000 to 25,000 people. Oyo is downsizing its operations following years of rapid expansion as it focuses on profitability in 2020. The steepest cut would be in China, where the Covid-19 pandemic has triggered a slump, the company said.
In comparison, FabHotels is under no such pressure, contends Aggarwal.
“Our mantra has always been sustainable growth rather than growth at any cost,” says the Wharton-educated entrepreneur, who got a master’s degree in business from the University of Pennsylvania’s Wharton School. “The average hotel owner, who is anywhere between 40 to 60 years old, doesn’t fully grasp the intricacies of managing a hotel,” he says, adding that they mostly sell rooms online or to corporations.
Right from the start, FabHotels focused on hospitality because it yielded a high return on investment as well as offered a promising profile of customers and “good” operational support, says Aggarwal. The average daily rate per night of about 1,900 rupees (US$25.61) is double that of Oyo’s 950 rupees (US$12.80), the co-founder claims. This translates into higher returns for our hotel partners, he says. Oyo uses dynamic prices across its multiple brands, a person familiar with the company’s thinking said.
Discovering a niche
Looking back at the Bangalore snafu, Aggarwal says he realized there was untapped potential in a market crowded with online travel and hotel aggregators.
Another friend who attended the 2013 wedding had booked a room for about US$20 a night. “While this small hotel lacked a lobby and a restaurant, the room was spick and span for an overnight stay,” Aggarwal recalls. “I wondered why such properties were not more easily discoverable.”
He and Manpuria decided to start FabHotels the following year after speaking to fellow travelers and corporate administrators who handle business trips. A common complaint was the lack of budget hotels for corporate travelers, shares Aggarwal.
When FabHotels began operations, it was bootstrapped with about US$100,000 and listed only four properties over 12 months. At the end of July 2015, Accel Partners and Qualcomm Ventures led the seed investment round with around US$2.3 million in total.
Today, the startup has about 11,000 rooms, and two-thirds are in India’s top eight cities and biggest business centers, says Aggarwal. More than 40% of FabHotels’ business comes from direct tie-ups with corporates, with 90% driven by business travelers, he says. FabHotels aims to have about 22,000 rooms in its inventory in the next 18 months.
The company has also benefited from hiring staff who understand the business. At present , around 175 out of its 800 employees have a hospitality background.
We don’t know yet if the situation has bottomed out or things are going to get worse from here.
However, Aggarwal doesn’t dismiss the challenges that come with being in an emerging market such as India. Oyo’s troubles have had a domino effect on the industry, with many hotel owners and customers hesitating to partner with online startups.
“Any high-growth company goes through growth pains,” he says in reference to Oyo. “I do think the overall ecosystem is resilient enough to withstand minor issues.”
As if that weren’t enough, the Covid-19 pandemic has disrupted an already uncertain business environment.
“We are seeing a 20% to 25% decline in business travel,” notes Aggarwal. “We don’t know yet if the situation has bottomed out or things are going to get worse from here.” FabHotels is on wait-and-see mode to assess the pandemic’s full impact before making adjustments to its business, he says.
Profitability over growth
Aggarwal hopes that FabHotels’ operating metrics will help in raising funds despite the tepid climate for Indian startups.
FabHotels has a gross margin of over 20%, and it hopes to break even in the next four quarters. “Our monthly cash requirements have been reduced by more than half over the last six months,” he says.
That helped put the company’s valuation at US$100 million when it secured US$25 million in series B funding in 2019. Its series A round in 2016 valued the company at US$20 million.
FabHotels aims to raise further capital this year to invest in expansion and technology as well as online and offline distribution, says Aggarwal. “Our capital requirements have been minimal compared to competitors,” he adds.
The company is also focused on improving its Net Promoter Score (NPS), an industry management metric that measures customer experience. The NPS ranges from -100 to 100 and assesses a customer’s willingness to recommend a company’s products or services to others.
FabHotels has an NPS of 77% on the customer side, according to Aggarwal.
“If you are not able to keep your stakeholders (hotel partners and guests) happy, then you will not survive in this industry,” Aggarwal says.