Southern Methodist University ZO Rooms Case Analysis Use the five forces model of competition to analyze the industry environment in which ZO Rooms was ope

Southern Methodist University ZO Rooms Case Analysis Use the five forces model of competition to analyze the industry environment in which ZO Rooms was operating. (Max. 3 Paragraphs) Explain ZO’s business model. How did the firm create, deliver, and capture value for both budget-minded travelers and unbranded hotels? (Max. 3 Paragraphs) In December 2015, OYO made an offer to acquire the struggling ZO Rooms. Why? What type of acquisition was this? What were the intended benefits for both parties? (Max. 4 Paragraphs) Why do you think ZO Rooms failed? Support your answer with specific details. (Max. 2 Paragraphs) Some specifications:. Submit a Word document file. Maximum 3 pages . Font size: 12 & . 1.5 space 1
The Rise and Fall of ZO Rooms
Case Introduction
Founded in 2014, ZO Rooms had entered the budget hotel space in India with lofty ambitions. Its seven
founders who had formed Zostel Hospitality Pvt. Ltd., India’s first backpacking hotel chain the previous
year with the motto “Changing the way India travels,” were confident and optimistic. They believed that
despite entering a year later than OYO rooms, the pioneer in the space, ZO’s lean and scalable business
model would lead to explosive growth. Their confidence was indeed borne out over the next year, as the
company signed up hundreds of hotels and thousands of rooms under its banner. ZO had also raised as
much as $47 million from globally reputed investors such as Tiger Global and Orios Venture Partners
($15 million in July 2015 and $32 million in September 2015), suggesting a high degree of confidence in
the prospects of the sector as well as ZO’s business model.
By late 2015 however, a perfect storm had hit the online budget hotel aggregation (OBA) sector in
general and ZO in particular. The company (and its close peers) had been blocked from listing its hotels
on their websites by online travel agents (OTAs) such as (an aggregator similar
to; several competitors with similar (or slightly different) business models had jumped
into the fray increasing the level of competition and putting pressure on prices (see Exhibit 1); and the
company was finding it difficult to raise further capital to finance its ambitious expansion. Buffeted by
these adverse events, ZO agreed to be acquired by OYO, its bigger and better-funded rival, in an
arrangement under which ZO’s shareholders would get a small stake in the combined company. Clearly,
something had gone very wrong for this early-mover (though not first mover) in the rapidly growing
Exhibit 1Characteristics of ZO Rooms and a Few Key Rivals
Funded by
$125 million
SoftBank, Sequoia Capital,
Lightspeed Venture
$ 47 million
Tiger Global and Orios Venture
$ 20 million
IAN, Matrix, Nexus
$ 6 million
Matrix Partners
Fab Hotels
$ 5 million
Accel Partners
$ 3 million
Mangrove Capital
Source: Shweta Saxena, “Challenges in Room Aggregation Business in India’, December 9,
2015,, accessed on August 16, 2017.
Seven co-founders, all recent graduates of leading educational institutes in India, established Zostel
Hospitality Pvt. Ltd. in August 2013 with their own savings but were also able to raise funding from
angel investors such as Bangalore-based Presha Paragash. The founders believed that unbranded budget
hotels in India offered an uncertain experience to their customers including wrong images, fake reviews,
uncertain booking statuses, poor amenities, and unhygienic ambiance. Their vision was “to clean this
space and provide a suave, tech-savvy option of accommodation to today’s youth.”
Industry Economics
The travel and tourism industry in India had witnessed strong growth especially since the year 2000,
concurrently with growth in the general economy. The emergence of a large middle class that had higher
disposable income and appetite for travel was a key driver for this growth. According to Vikas Saxena,
CEO of messaging company Nimbuzz and an investor in Wudstay, an OBA, the size of the Indian travel
market was as much as US$70 billion. According to a report by HVS and The World Travel and Tourism
Council, the travel industry in India was expected to reach 1,747 million travelers by 2021, which would
require 188,500 additional hotel rooms.
Mid-range and budget hotels accounted for a significant proportion of the Indian lodging market with
some estimates placing the size of the budget hotel business at US$20 billion in 2015. A room in a budget
hotel would be priced anywhere between INR 1000 and INR 2500 per night (approximately US$15 to
US$35), depending on the location and amenities. Mid-range hotels would generally be priced below INR
5,000 per night. According to Paavan Nanda, a co-founder of Zostel and ZO, there was a gap in demand
versus supply for budget rooms. He estimated the supply of budget rooms in 2015 at two million, mostly
from non-chain hotels. These figures were similar to consulting firms HVS’ estimates of 1.8 million
unbranded rooms and 112,000 branded rooms. Another source estimated that India was short of 150,000
budget hotel rooms in 2015. Nanda further estimated that while the demand for budget rooms was
growing at 35 percent, the supply was only growing at 15 percent and hence the demand–supply gap
would widen over time.
The strong expected growth of budget hotels could be attributed to a couple of reasons: first, the
purchasing power of leisure travelers (and even some business travelers) was limited and they could
rarely afford luxury (or even mid-range) hotels; second, unlike the luxury and mid-range hotel segments
which focused on very large cities such as Mumbai, Delhi and Bangalore (called Tier I cities), budget
hotels could be found in more diverse locations including smaller cities (also called Tier II and III cities),
industrial towns, pilgrim destinations and leisure destinations, implying greater market potential; third,
building budget hotels was attractive for hotel owners, primarily because they could be built faster and
more cost-effectively, an important criterion in a country where access to capital was not easy.
The budget hotels industry had many different types of players. Other than large chains (e.g.,
domestically-owned chains such as Ginger Hotels by the Tata group, a large conglomerate), the majority
of hotels suffered from lack of awareness among target customers (lack of discovery) and, as a
consequence, unsold inventory. These issues could be directly attributed to two factors: lack of marketing
and/or technological skills, and resistance to the adoption of latest (and cost-effective) technological tools
such as online marketing through own websites or apps, and inventory and property management
software. The latter was partly attributable to the unfamiliarity with how technology might help but also
because of resource (specifically funds) scarcity. In fact, even many chains which typically owned less
than 50 hotels, didn’t have sufficient knowledge and clarity on the essential requirements and demands of
the tech-savvy budget traveler, an increasingly important segment. In this regard, a comment by Pranav
Maheshwari, a co-founder of Vista Rooms, another OBA, was instructive: “Most hoteliers don’t
understand how to digitally enable their business. They struggle with online bookings, automated check
in and checkout never mind the situation around managing reviews. We talk with our partners on a
constant basis and believe we can make a difference.”
The lack of technological sophistication of a typical budget hotel player had created opportunities for new
entrants to innovate with their superior technological skills and asset light models. These included OBAs
that had entered recently such as OYO Rooms and ZO Rooms, as well as the more established OTAs who
marketed a broader range services including airline tickets, hotel rooms and rental cars on behalf of the
owners. The OBAs’ business models varied but they generally involved many of the following: raising
venture capital; developing a website and a smartphone app; signing up hotels as partners (with or without
prepayment for inventory and on a partial or full inventory basis); getting the hotel owners to provide a
standardized offering (including renovations of physical facilities as needed); and aggressively trying to
market the rooms on behalf of the hoteliers mostly through online channels and sometimes through
significant price discounts. Both the OBAs and OTAs could offer consumers tremendous choices
compared to standalone hotels or even chains, a key advantage of the aggregation strategy. For instance,
in August 2015,, a leading OTA, claimed that it had the biggest selection of budget
properties with more than 40,000 three-star and below properties on its books.
ZO’s Business Model
ZO’s primary focus was on two segments: leisure travelers and corporate travelers on a budget who were
likely to choose a reliable brand of budget hotels that was available in every locality within a city. There
were several cornerstones of ZO’s strategy.
Like other OBAs (and OTAs), ZO did not own any of the hotels but approached the hotel owners to brand
their inventory (typically partial inventory) as ZO Rooms. The hotel owner had to make changes, at its
own costs, in the room (e.g., renovations) according to ZO’s standard, with ZO acting as a consultant to
the owner. Dharamveer Chouhan, a co-founder of ZO’s parent company Zostel, said that ZO had a
thorough checklist before it took a hotel on board. “We have an Audit app which has a 200-point
checklist on which each hotel is tested— parameters like size of the hotel, linen quality, staff
qualification. Once the hotel goes through the audit and the report is generated, we evaluate on which
points the hotel needs to work on. Our back-end team helps the hotel owner with the costing of how much
they have to invest in the property to become a ZO Rooms partner.”
Hotel owners who signed up with ZO could expect improved occupancy since the hotel would be featured
on ZO’s website. Unlike OTAs (or marketplaces), where the hotel owners could list on multiple
platforms, ZO required exclusivity from the owners. Chouhan further clarified the differences between
OTAs and ZO: “Unlike a marketplace approach where the hotel once listed remains as is, we work with
our hotel partners. We contribute marketing, technology, analysis of data and ensure that the hospitality
service is of top-notch standard. A marketplace will never be able to invest in the technological solution
when it comes to hospitality partners. Getting hotels online and ensuring online booking is a straightforward mechanism.” ZO also installed tablets at the hotel reception, which helped it manage inventory
and also facilitate a quick check-in. In fact, it claimed to be the first chain of hotels to install mobile
tablets at the properties’ reception areas. The technology helped ZO to manage live inventory (through
tracking of available inventory) and ensured a one-touch check-in.
ZO had a dedicated revenue maximization team that took cues from existing occupancy levels and
historic data trends to come up with dynamic pricing, including last minute deals. According to Nanda,
ZO worked on achieving high occupancy levels, exceeding 85%, versus the 50 to 55% achieved by many
unbranded hotels.
ZO charged hotels under its banner around 15% of sales that were generated through ZO’s platform,
similar to the percentage charged by OTAs. The company believed that despite paying these charges the
partner hotels were better off because of the help it offered them in a variety of areas. In contrast to some
of its competitors, ZO’s business model did not include pre-buying inventory from the hotel owners and
then selling it at discounted rates, which was identified a key cause of cash burn by one of the participants
in the industry. Nanda said: “We like to keep it sustainable and capital-efficient.”
ZO’s top management believed that it was hyper-local and hence improved accessibility of budget
accommodation for customers. In every city served by ZO, there would be multiple affiliated hotels
spread throughout the city. ZO’s app geo-detected a customer’s location and booked a customer into the
nearest room available with a single touch.
Partnerships were another key element of the business model, though this aspect of the strategy was
somewhat under-developed because of the young age of the company. In May 2015, after building a
presence in thirteen cities, ZO formed a partnership with Uber and food delivery startup Foodpanda, to
provide a seamless experience for travelers to travel, eat, and stay. The alliance would provide free Uber
rides, 50% off coupons on Foodpanda orders and cashback, after checking into any of the 150+ listed
properties on the ZO platform at the time. Additionally, the company also offered promotions with a
narrower scope, such as cashback when a customer paid with Olamoney (Ola was India’s leading online
transportation network company).
The company also offered cash back to first-time users in addition to location-specific promotions (e.g.,
on hotels in Goa) as well as time-specific promotions (e.g., around the time of major festivals).
Rapid expansion within and across categories was another key aspect of strategy. ZO had rapidly
expanded the number of hotels and the number of rooms under its platform (discussed under the next
heading, Performance). Additionally, in September 2015, ZO launched ZO Prime, a premium offering in
the category of three-star hotels across India, which would help customers with all the amenities and
luxuries as per three-star standards. ZO Rooms launched this offering with 500 ZO Prime rooms across
large cities such as Mumbai and Delhi. The price of ZO Prime started at INR 2,000 which included a
number of services to its customers including complimentary Wi-Fi, breakfast, and air-conditioned
rooms, among others. At the time, ZO also planned to launch other premium offerings like ZOApartments, ZO-Homes, and ZO-Star.
ZO’s Performance
The initial customer response to ZO’s launch was quite encouraging. Its asset-light model enabled quick
scaling up and by April 2015, the four-month-old ZO had signed up 100 hotels across 10 cities and was
signing up new hotel partners at the rate of two hotels a day. The company’s co-founder noted that ZO
had “experienced a very welcoming response across online as well as offline channels” and was renting
15,000 room nights a month. He expected this number to go up post the company’s launch on social
media and its mobile app. He also noted that ZO had signed up with more than 20 multinational
companies to be their accommodation partner. The company planned to have more than 1000 hotels
across 50 cities in India on its platform by the end of the calendar year.
By August 2015, ZO had scaled its presence up to 600 hotels and 6,000 rooms priced between INR 1,000
and INR 3,000 across 35 cities. The rapid scaling up was useful in building buzz and awareness among
customers as well as for signing more hotel partners. According to the company, it was renting 4,000
room nights a day, across the country at an average rate of INR 1,800 for a room night.
By October 2015, ZO could boast of having 11,000 rooms across 1000 hotels and 50 cities on its
platform. Despite this impressive growth, it lagged the market leader OYO which had 30,000 rooms
across 3,000 properties and 135 destinations.
In November 2015, ZO had 300 employees, with 3-member teams to handle each of the cities. The
company claimed that it was running a very lean model and its competitors employed twice as many staff
per city served.
Customer opinions about ZO’s offering remained variable. On the Google Playstore, the app which had
between 10,000 and 500,000 downloads, earned a rating of 3.8/5.0. Some customers had noted positive
comments especially about the money saved by booking through ZO’s platform, but some customers
reported that it was difficult to use the app (unable to open, not detecting network, crashing) while some
other customers accused the company of listing hotels falsely on its site, cancelling bookings at the last
minute and not having as a good policy as close competitors about cancellations and refunds. On the
company’s Facebook page also, some unhappy customers had noted negative comments about the
The company’s claims of not discounting rooms also seemed to be inaccurate, possibly because its
competitors (at least some of whom were buying inventory from hotel owners and thus sunk costs) were
aggressively offering discounts. On its Facebook page, ZO offered steep discounts, sometimes offering
rooms for as little as INR 99 (albeit with terms and conditions). It offered discounts of as much as 50%
even in popular tourist destinations like Goa
The Perfect Storm for ZO and other OBAs
In April 2015, the Delhi High Court granted a stay order to OYO Rooms against ZO Rooms, ordering the
latter to stop using confidential information and software of OYO. In its lawsuit, OYO had alleged that
the new room booking platform implemented by ZO was copied from OYO. To support its claim, OYO
submitted emails and CCTV footage in which ex-employees of OYO stole proprietary software from the
company, and left to join Zostel. ZO’s co-founder Nanda vehemently denied any wrongdoing: “No
illegality has been committed by us. We are in possession of the material that would demonstrate how a
false and fabricated story has been created by OYO only out of business rivalry, just to kill any
The competition was also getting more intense. According to one estimate (startup data-tracker Tracxn),
by November 2015, there were over 180 startups in the online travel and destination discovery space,
among which 40 had raised around $300 million of funding. The number of OBAs itself was estimated at
around 30, with the pioneer and frontrunner OYO enjoying the benefits of a large capital base (including
a $100 million round of capital raising in August 2015) and the backing of Softbank, the well-known
Japanese venture capital firm.
As the upstart OBAs such as ZO and OYO chipped away at their market share for hotel bookings, OTAs
such as Goibibo, Yatra, and MakeMyTrip saw few benefits in providing a distribution channel to the
OBAs. Rajesh Magow, CEO of MakeMyTrip, said that the new competitors had a very similar business
model as their own, and that it didn’t make long-term strategic sense to let them grow (see Exhibit
2). Blockage by the OTAs would affect the OBAs adversely—for ZO Rooms, 10% of the business was
contributed by the OTAs and for OYO, the percentage was between 10 and 15%. Nanda put on a brave
face about the OTAs’ aggressive move and said: “There will be a small dip in bookings, but our growth
from our app and other associations will more than make up for it. This transition is not a shock for us.
Our growth is mostly driven by our app and website.”
Exhibit 2 – OTA’s Launch of Budget Brands to Compete with OBAs
Year of
Own budget hotel
Number of
Number of
Value + (2015)
IPO/Stock (went public
in 2010)
TG Rooms and Stays
Funding received-$105
GoStays (2015)
Subsidiary of Ibibo
Source: Shweta Saxena, “Challenges in Room Aggregation Business in India’, December 9,
2015,, accessed on August 16, 2017.
By November 2015, the OTAs had scaled up their aggressive response by venturing into the budget
accommodation space themselves to exploit the growth opportunity. Goibibo launched GoStays and Yatra
launched its TG Rooms, TG Stays in over 60 cities to cater to budget travelers providing both hotel &
guest house options. Yatra also launched Homestay to enhance its accommodation marketplace.
MakeMyTrip too had launched Value+43. Generally, hotels provided a good return on investment if high
occupancy levels could be achieved and since the OTAs were extremely strong in distribution (of hotel
rooms as well as other services) with strong awareness among customers, they were confident of
profitable entry i…
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