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Watch out for these tech disruptors in India’s travel sector

November 10, 2017

The total number of branded hotel rooms in India is roughly equal to the rooms available in Singapore and Hong Kong combined. Estimates vary due to the vast amount of ‘dark supply’ in the Indian market, but sources indicate that India faces a shortage of up to 200,000 rooms.

India’s travel sector is forecasted to grow at 11% annually, boasting the second-highest growth rate in the world. And while traditional regional and international players are expanding to meet this demand, it’s the newer tech upstarts that are really making waves in the industry. Here are the ones to watch:

1. Online Travel Aggregators (OTAs)

OTAs are currently the biggest tech players in India’s travel economy, enabling easy and transparent online travel bookings. Although they have been around for decades, it is only in recent years with the explosion of mobile that we’re seeing OTAs emerge as a major customer acquisition channel. India is now the world’s third largest smart phone market with over 278 million users, and as more Indians go mobile we expect that OTAs will soon become the number one source for travel bookings.

But this growth isn’t without its challenges. OTAs are fiercely competitive, as they compete by offering the lowest prices on bookings. This results in industry-wide price pressure and narrow profit margins. As a result, some OTAs, like MakeMyTrip and Ibibo, have had to merge in recent years to keep ahead of the competition.

Things will be even more interesting as OTAs look for additional pockets of value to supplement their online booking revenues. We foresee OTAs venturing further up the value chain, possibly by offering their own travel product and services. Since OTAs are often the first customer touch point , they have the unique advantage of influencing customer choice. We may soon see OTAs offering their own travel insurance, tour packages, and even stays on their proprietary platforms, ensuring that they get a bigger slice of the online travel pie.

2. Tech-Enabled Hotel Franchising

Tech-enabled hotel franchising is a new business model that is quite unique to the Indian market, and also an area where we see a lot of promise in coming years. Companies like Treebo Hotels and FabHotels are building entirely new brands in the budget hotel sector, almost overnight, by entering into franchise agreements with independently-owned hotels and guesthouses. These companies leverage technology to tightly manage their franchisees’ pricing and distribution, guest interactions, and property upkeep. The result is consistent, quality stays at affordable prices for travellers, and improved occupancy for the hotels that operate under the franchised brand. The model is also one that enables rapid scale. For instance in just two years Treebo Hotels has grown to over 2,500 rooms nationwide.

While competition in this space is starting to heat up — OYO Rooms has already raised a whopping $450M thus far, and Treebo recently raised a $34M Series C — we think there can be multiple winners in this space. Just look to the history of similar markets for proof. In China, for example, budget hotel franchises China Lodging, Home Inn, and 7 Days Inn each grew into billion-dollar valuations on a more traditional, capex-heavy model.

However, there is some uncertainty around the depth of supply to support the franchise model. Start-ups like Treebo are tapping into the estimated 30,000 unbranded and independent guesthouses and hotels to convert into branded properties. But at some point this available supply will near depletion. And as it does the remaining properties available will need increasing amounts of capital investment to meet quality standards, or new properties will need to be built outright. This may have negative implications for the profitability and growth trajectory of the asset-light franchise model as the market matures.

3. Home Stays

Homestays are also poised to disrupt the hospitality sector in India, as we’ve seen AirBnB accomplish on a global scale. But as of today, the homestay model in India has had limited success. Stayzilla, the largest domestic homestay start-up, shuttered earlier this year after citing issues with supply creation and customer adoption.

Meanwhile, AirBnB has achieved limited traction despite investing heavily in India. The global homestay unicorn has inked partnerships with several Indian state governments to offer hospitality training for hosts, and subsidizes furniture rentals to make properties suitable for listing. However Indian hosts remain wary about welcoming strangers into their homes, and travellers tend to expect hotel-style services and amenities even when staying in a homestay.

We expect to see a whole new class of homestay management start-ups emerge to address the issues of trust and lack of services that are currently plaguing the segment. An example is Pillow in the USA, which offers a concierge service that takes care of all the check-in, cleaning, and customer service responsibilities for Airbnb hosts. As these companies start filling in the gaps in supply and demand, expect homestays to emerge as yet another strong contender in the race to disrupt India’s travel sector.

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