OLO's Dilemma... (part 2)

Key Takeaways from follow-up work

Over the past few weeks I’ve done a handful of checks with competitors and customers in the restaurant-tech industry. It was by no means exhaustive but definitely insightful. Some were first party conversations; others came from 3^rd party expert networks, podcasts interviews (there are lots of good ones out there, by the way) and other vendor white-papers etc.

These are my key takeaways as it relates to both OLO and the industry generally.

1. This is a complex industry. Don’t be fooled by generalizations.

2. POS is at the central nervous system for any restaurant and is the single-most important piece of tech, period.

3. Feedback suggests that many OLO customers are either loosely considering getting off of OLO or ‘actively looking at alternatives’. That said, there really aren’t many alternatives and churn is low as a result.

4. Beware of tech-based promises. Some cloud platforms (including OLO, as I understand it) are virtual instances. Seamless APIs are often not so seamless, even for single-vendor ‘platforms’.

5. OLO Pay’s use-cases are unclear. Profitability is likely to be much lower than Toast. Checks suggest that whilst most POS players offer payments, take-up in middle-to-upper market has been low.

Summary

So, does OLO have a dilemma?

Well, I don’t think it has dilemma of existence. But I do think it has a growth dilemma.

OLO isn’t about to die. For many, OLO does a job and inertia is high enough that the product will be around for some time. That said, the future for OLO probably isn’t super exciting. Online ordering seems close to saturation, and its ancillary endeavors such as OLO Pay seem like more of a stretch for growth than true value-added PLG (product-led-growth). In fact, the company’s rate of product development has been particularly slow.

The age-old debate remains – use a few really great, specific point solutions and integrate them well, or use a single platform which is the jack-of-all-trades, master of none? My sense is that there is no true answer – future systems will be a mix of point solutions and native platforms, and both will probably be fine depending on the size/type of organization. OLO is a good solution for online ordering and it will continue to be so going forward. In fact, there really aren’t that many alternatives to OLO in enterprise, which is why considering leaving remains just that for most - a consideration. Even Subway, who famously (infamously?) left OLO’s rails product did so with a home-grown solution, not a competitors’ product.

It does, however, seem unlikely to me that OLO will be anything other than a niche operator of online-ordering software. I don’t buy the story of TAM or platform. I won’t re-hash the numbers from Part 1 (you can check it out here), but OLO isn’t exactly deep-value, especially considering that OLO Pay is likely to be razor-thin margin business and probably represents a lower TAM than the company would have you believe.

What does the future hold? Many investors I have spoken to on the name believe that OLO is a prime takeover target. On paper it makes perfect sense for someone like PAR or Shift4 to buy OLO, shoot 80% of the sales team and integrate it into their platform. I’m not a technologist nor a business operator so I won’t speculate on the realities of putting the two products/teams together and I will leave that to the smarter folk. I am, however, a financier, and for OLO to get a bid, I’d think that said buyer must expect a significant amount of cost to be removable from the business at or near the current price.

So, my one-liner summary is such: OLO is a nice point solution which will survive in one way shape or form. It is highly unlikely that OLO will be multi-billion dollar enterprise. As for the stock, I predict that those holding out for a return to $30 or even $20 will be disappointed. Looks to me like dead-money.

Key Takeaways

This is a complex and diverse industry

I want to make this general point first. It’s actually not really a point; more of an observation. We investors have a tendency to over-simplify complex systems and part 1 is a good example of me doing it. Restaurants are seemingly simple organizations but their tech needs are particularly diverse and surprisingly complex. It is tempting to say things like “every restaurant needs tech, they need a single type of tech, XYZ company has the best tech, and they all want it now.” It’s just not how the world works, especially not in the restaurant industry.

Not only do restaurants of different types and sizes have vastly different needs, they also have different attitudes, strategies and resources for tech. For example, for some smaller orgs, a single-throat to choke works really well – see: Toast. For larger groups, it’s generally harder to find the functionality in all modules that you need from a single provider when you do need all the bells and whistles. Even the platform players will admit that.

Also, a company which does a lot of business online will emphasize that part of the business relative to a chain which tends to be heavier on dine-in. As restaurants get bigger and more complex, their data needs also become more and more complex which requires more complex, specific and perhaps customized software. This is partly natural (hard to do a lot of things well) and partly because the legacy POS companies, as hardware companies, just don’t have the DNA to build good software products. History has shown this to be true.

It's not only size and type that matter, but people – after all, this is a people business. 20-30 years ago there was no tech in this industry. Even as recently at ~10 years ago, most restaurants had a POS system that ran on an on-premise server and that’s about it. They weren’t connected to the internet, there was little data utilization and even digital payments were the minority. This is not an industry where tech-forwardness is built into the culture. Many point to the fact that these are ‘razor-thin margin businesses who can’t afford tech’, but that’s not really true - restaurant chains can be and many are really profitable. The lack of tech-forwardness is partly cultural. There seems to be a sense of “these guys just don’t get it” from the restauranters about the tech vendors, and vice versa. Both are probably right in some cases.

The other part, which was pointed out to me by a prominent private POS vendor, is that some just don’t understand the tech well. Many by no fault of their own – they either don’t have the resources for a proper dedicated team or were sold something which wasn’t true. The promise of ‘seamless APIs’ which didn’t work so well is one example given. Another is that some pay consultants to hack together systems that don’t work as promised and have been burned by the experience. It is hard to convince customers that your tech is better than others, even if that is the case, when everyone claims to have seamless integrations and the buyers generally aren’t sophisticated enough to know the difference (especially when once bitten, twice shy). Again, some will be particularly sophisticated, some will be clueless. The point is, this is complex, and to say that “the way forward is 100% digital, everyone will have a unified cloud-POS system with micro-services for ancillaries and they will all gravitate towards X, Y, Z companies because they have the best tech and/or price” is folly, even if that probably is the best tech solution.

The last point is that there are legacy distributor/integration partnerships which have existed in the industry for many years. There’s a certain amount of ‘wining and dining’ which goes on here, making it hard to break into an NCR account for example. I’ve not been to a trade-show, but I’m told if you go, you can see this play out. It’s true of most industries, I suppose, but not something that investors generally think about when we look at the merits of a particular company’s solutions on paper.

And then I’m going to break my own rule to summarize this point with a generalization. My observation in software is that greenfield software businesses are easier to grow than replacement businesses. This industry, as it pertains to POS specifically, falls into the latter. And that brings a great deal of unforeseen complexity to it with respect to legacy relationships, portability, downtime, fibbing/discounting from incumbent competitors, etc. that you don’t really have to deal with when selling a piece of software that the customer is buying for the first time. Yes, greenfield markets have their own complexities, i.e. education, trust, etc. but this barrier makes it harder for the true POS innovators to gain share, and given that POS is at the center-of-the-universe, it makes it harder for everyone in the stack.

Toast has had a much easier time in SMB because you don’t have to deal with it so much. For starters, there’s a level of natural churn in the industry meaning you do get some greenfield. And then beyond that, most chains that only have a few units don’t have long-standing middlemen relationships. The project management of a couple of POS terminals is also much more simple than 2,000 across the country.

Anyway, the point is: this is a complex industry. There will be many modus operandi going forward. Some will be good, some will be bad. To say that everyone will have a unified cloud-system is wrong. To say that everyone will use OLO for their online ordering is also wrong. So, OLO isn’t going to become redundant overnight. But beware the perfectly logical explanations (on paper) of OLO’s huge TAM and competitive advantages.

POS is at the center of the universe for any restaurant

I already touched on this in point 1, so I will keep this brief. The POS is the centre of the universe for a restaurant, which has a few implications. It logically makes a great deal of sense to unify the data layer in a single place where all the rules etc. can be changed infinitely, and the POS would be the place to do that. It also positions the POS vendors well to cross-sell, given that it will theoretically be able to build seamless products on a micro-services basis which can pass data freely. Even in the case where external point solution modules are used, it makes sense to send the data to the POS instead of creating further silos within those point solution applications or CDPs. OLO is on the wrong side of logic for this point, and it is also probably not as well positioned to cross-sell applications beyond online-ordering as a POS system would be. That needn’t neccesarily mean that it won’t succeed.

Feedback suggests that many OLO customers are either considering getting off of OLO or ‘actively looking at alternatives’

I’ll cavaet this by saying that this feedback predominately came from software vendors who could be considered quasi-competitors of OLO. However, it was consistent feedback. Generally, OLO is viewed as rather expensive and it adds complexity to the stack. On the other hand, the sense is that there really aren’t that many great alternatives out there in the enterprise space – the POS online ordering solutions aren’t great and don’t offer the bells and whistles that OLO does.

I wouldn’t read too far into it as a trend that everyone is going to drop OLO. However, I certainly don’t get the sense that customers love OLO and are lining up to lock themselves into the OLO ecosystem.

Beware of tech-based promises. Some cloud platforms (including OLO, as I understand it) are virtual instances. Seamless APIs are often not so seamless, even for single-vendor solutions.

I already touched somewhat on this earlier, but here I want to make a slightly different point. Companies offerings often look the same on paper. Someone that is cloud native, like QU, and someone like Shift4 that has acquired a bunch of software, are not the same. I did a bunch of work on Lightspeed back in the day (very acquisitive POS company) and I know that their stack is a total mess, and that actually does matter with respect to how the software functions.

The point is that to say, like I naively did in Part 1, that “well NCR has online ordering and loyalty and payments so why even bother with OLO” misses a lot of nuance. Even the integrations between NCR or Shift4’s own products mightn’t seamlessly work together. They might claim to have a seamless system, but can one acquired piece of software built on different architecture actually integrate seamlessly? I’m not a technologist, but it’s something to think about when considering the differences between a native platform and one that is built through acquisition in this industry and then also just in a general sense.

OLO Pay’s use-cases are unclear. Profitability is likely to be much lower than Toast.

I heard from multiple sources that OLO Pay’s use case is particularly unclear; one even went as far as to call it ‘bullshit’. The idea of borderless payments makes sense on paper, but in reality it would appear from feedback that what they are trying to solve isn’t really a problem. Many pay with apple/google/whatever pay, and most have their credit card details saved on their phone. Removing the friction by saving card details on file across multiple restaurants just doesn’t seem to be that important. This is anecdotal and early, so time will tell.

On the economics point, one POS vendor suggested that they’ve stayed away from being a Payfac because it “just doesn’t add any value” and the “margin is so thin.” Payments is pretty much as commodity as it gets and as we know, scale matters. This particular POS provider plays in the mid-market and said that margins would be so thin that it almost wouldn’t be economical. Even with a robust use-case, Toast margins for OLO are probably a fever-dream.

Afterword for those who care enough to read the whole article

Apologies for the lateness on turning this around; I’m currently travelling through Asia (wrote this article on a sleeper bus in Vietnam). These next few weeks I’ll be backpacking and will have less time/access to internet. After the next few weeks I intend to settle in place, where my access to internet/time will be far more abundant. My intention is to travel/write for a while, and sustain my travels with Substack earnings (got some work to do but making progress so thanks those who have subscribed!).

I got a good new write-up coming in the next few weeks of a stock I’ve been nibbling at, and am also working on Open House p.2 and 3.

If you live in or are travelling through Asia, I would love to meet some investors whilst over here. Feel free to shoot me a DM on twitter @ guastywinds or email guastywinds@gmail.com.