CNBC’s Jim Cramer recently spent a good portion of his show analyzing Toast POS. The discussion was not limited to Toast - he mentioned a variety of players and spoke about the restaurant POS market in general.
He makes a handful of compelling statements, such as how competitive the market is for Toast and the other POS vendors, of which there are currently over 100 that serve restaurants.
The competition is only getting hotter these days because POS vendors have transformed themselves from being just a payment device, into being a technology hub. POS systems now offer a variety of technologies including employee scheduling, reservations, inventory, social media, web site creation, and more. This has sparked the largest period of acquisitions that the restaurant technology industry has ever seen. In the past 18 months, over 80 restaurant technology companies have been acquired. There are three reasons for this.
The first reason is that these POS vendors are trying to keep up with each other, while at the same time trying to outpace each other as they compete for market share. This has become particularly more urgent since today it is easier than ever before for a restaurant to switch POS vendors.
The second reason is that these POS vendors are trying to increase their revenue by offering add-on services.
The third reason is less commonly understood. These companies use their new acquisitions to increase their financial technology solution’s profits. Not revenue, PROFITS. (Financial technology solutions means collecting a portion of credit card transactions).
This third reason is where Jim Cramer didn’t see the forest from the trees. As the math demonstrates, reason number three is the key reason why companies like Toast could very viably achieve the strong growth projections they herald.
Before we talk about how they use their acquisitions to increase their profits from financial technology solutions, let’s discuss why. We will use math because numbers don’t lie, and let’s reference the recent SEC Prospectus submitted by Toast Inc.
Like the overwhelming majority of restaurant POS vendors, the overwhelming majority of their revenue comes from 4 categories:
- Subscription services
- Financial technology solutions
- Professional services
Although the numbers show that revenue is distributed amongst 4 categories, the overwhelming majority of profits come from financial technology solutions. We say overwhelming because in the 6 months ending June 30, 2021, financial technology solutions represented 74% of their total profit.
That means that nearly three-fourths of all their profits came from transaction revenues.
At first glance of the financials, it may appear that add-on solutions from acquisitions are the drivers for new revenue outside of financial transactions. However, these tools become commoditized when incorporated into bundled pricing or when used as free add-ons to close a sale. They also become easily dismissed when a third party enters the market with a new offering that focuses on that specific add-on segment as a differentiator to attract customers.
Think of it this way, as more competitors have the same types of tools, each will bundle the tools into subscriptions or give those add-ons away to help close deals with customers. Additionally, any big technology player with multiple products can tell you that when you try to be a jack of all trades, you become a master of none. So, unless the add-on acquisition includes patents that create a barrier to entry and protect them from current and future variations of that particular add-on, there’s nothing stopping a random startup company from challenging those recent acquisitions with their own version that could be better, cheaper, or free.
That being said, there is something very significant about those add-ons that circle back to increasing the financial technology solution’s profits. So now let’s talk about the how.
The core of restaurants has not changed in over 3000 years. If you visited a restaurant in Ancient Rome, you would have seen tables, a kitchen in the back, a bar, a server who takes your order, brings the order to you, and then collects payment. Nothing has really changed for restaurants in those 3000 years, yet technological innovation has completely upended every other industry. Think about it, processes in manufacturing, banking, insurance, communication, agriculture and so many more have been significantly automated. Other than QSR restaurants, what other restaurant types could significantly automate in the restaurant industry?
The reason is because you cannot fully automate table service restaurants. Restaurant guests want the human element. And restaurant employees have multiple processes that intersect and intrude on other processes of their own as well as other employees, not to mention a massive number of daily uncertainties. Many would agree that the restaurant operating environment is an element of chaos ruled by 3 determinants that, until now, technology could not ease or solve - efficiency, accountability, and communication.
Let’s use a few examples to prove that, by exploring some POS add-ons and how they affect financial technology solution profits.
The first add-on example is reservations. Most people don’t realize that reservation systems for restaurants on average setup a maximum capacity of 75% of possible reservations. Why not 100%? Because they don’t know if a reservation will cancel, they don’t know if or how many walk-ins they’ll get, they don’t know if a particular Guest will stay for 1 hour or 3 hours, and the list goes on and on. So how does a reservation technology add-on directly affect profits? It doesn’t because its effect on profits is indirect. It indirectly affects the profitability of the financial technology solution. The HOW is by affecting one of the two key elements of generating financial transactions for a restaurant.
- Getting more Guests per day – Table Turn, Attracting Guests, Keeping Guests Loyal
- Increasing sale of high profit margin items – Upselling, Preventing Lost Sales, Speed of Service
In the case of a reservation add-on, the focus is all about getting more guests per day. For example, consider this one way a reservation technology can improve that 75% capacity limit. Reservation technologies are getting smarter and smarter. With new advances in Artificial Intelligence (AI), they are getting better and better at predicting things like the likelihood of walk-ins on a specific day. They might know that a specific event is happening nearby which will bring an influx of tourists. The reservation AI can dynamically modify the number of tables blocked for reservations, allowing for the availability of more walk-in guests. The possibilities are endless, but the end goal for the reservation add-on is to increase the total number of Guests seated per day. Logically, the more tables that get turned, the more new Guests can fill those tables and generate more transactions for that restaurant.
Another example add-on is server tableside ordering. This particular example involves one of the 3 absolute determinants of increasing restaurant profits as a whole, EFFICIENCY. This add-on allows a server to input the order right at the table and send it directly to the kitchen. Without this add-on, the server would waste minutes, taking the order and then walking to the POS to enter and submit the order. Those minutes multiplied by multiple tables and multiple servers add up to hours. Those efficiency delays affect how quickly an order creation begins, which affects when an order is delivered, which affects how long that Guest stays at that table, which affects Table Turn. Remember, Table Turn is one of the two key elements in generating more financial transactions.
We could go on and on with add-on examples, but the fact is that all add-ons directly or indirectly affect the quantity and size of financial transactions. Ultimately, a restaurant is a business. So, anything that can increase their sales is something they want.
At the end of the day, all add-ons are ruled by the following 3 absolute determinants that they need to either improve or solve if they want to increase the size and quantity of their transactions.
So, as you can see, add-on acquisitions are key to increasing profits of POS vendors. This is not because add-ons act as generators of new revenue but more so because they’re increasing the financial technology solutions profits.
For the first time in 3000 years, technology is actually revolutionizing the restaurant industry. The key to this is not any particular add-on, but a combination of add-on spokes in the POS vendor’s hub.
Jim Cramer doesn’t realize that the restaurant industry is on the precipice of using AI to interconnect all those add-on spokes to directly affect the three absolute determinants that restaurants face on a daily basis. Efficiency, Accountability and Communication.
So now for restauranteurs, failure is not about having the right tools to succeed.
Failure is if those restaurants don’t implement, use correctly and enforce those tools in their restaurants today.
About the Author
With 15 years as a global leader and innovator in Near Field Communication (NFC) and Mobile Payment technologies, Einar Rosenberg is among the world’s top authorities. He is one of the original inventors of NFC mobile payment. After his prior success, he focused his ability on creating revolutionary technologies to enhance efficiency and accountability in the services industries. He holds dozens of patents in a broad array of industries.