18 months ago we were the canary in the coal mine. We told the POS industry that their most important asset – the item-level (SKU) transaction data on their systems – was under surreptitious assault from a bevy of third parties. More importantly that without heeding our advice the POS industries would find themselves entirely replaceable over the next decade.
To strengthen our fear mongering, see exhibit A from Forbes:
Moore’s Law was coined in 1965 by Gordon Moore and is often referenced to describe the driving force of technological and social change, productivity and growth.
According to Olo founder and CEO Noah Glass, the restaurant industry is, in a way, experiencing this theory as digital ordering and delivery barrel toward an expected $200 billion of sales throughout the next four years.
‘That’s a bigger share than drive-thru all together and it’s happening in a time period that is 10 times shorter than the history of the drive-thru,’ Glass said.
Noah is on to something, and that is the lever that is consumer demand. Like OpenTable and Groupon before them, the new-age ordering and delivery companies are using consumers as their sales channel into the restaurant and retail verticals. Undoubtedly this lowers customer acquisition costs and takes advantage of the herd mentality so often followed by brick and mortar merchants.
The problem for POS companies is that this trend is working against their best interests.
That’s because as the third party online ordering and delivery revenues grow, so too does their item-level transaction data. And unlike the POS companies that were duped into dumping customer data for PCI “compliance” purposes, the online ordering companies are keeping all the customer data. That’s because they’re true software companies, not hardware companies masquerading as software companies while trying to figure this whole “software” thing out.
So in essence you have a sleepy monster that’s collecting both item-level transaction data (Amazon, Grubhub, Uber et. al. know that you’re buying the Terryaki Chicken Wings for $7 since they have as much detail on their ordering interfaces) and personally identifiable information (these companies know it’s you because they have your name, address, email, and credit card number). When stitched together these two pieces of data are close to the holy grail of offline advertising.
But perhaps most important is that these third parties are collecting an amount of data that will make them a real player in short order.
Analysts predict that 25% of all restaurant sales – $200 billion out of the $800 billion industry – will occur through digital channels in the next five years (i.e. by 2024).
You know what happens once you reach 25% of anything in the data world? Your statistical modeling confidence goes through the roof. Once you hit 25% everyone starts believing your projections and it’s rarely worth the effort to get the other 75% (in most scenarios, at least).
That means by 2024 these third parties could cooperate, pool data, and replace the POS companies as it relates to their marketing optionality which, in our opinion, is the real upside in being a POS provider. Since marketing is so profitable – and receives a very hefty revenue multiple relative to hardware businesses (which is what legacy POS companies with significant market share like NCR and Micros really are) – these third parties could start building their own POS solutions to replace more of the merchant stack.
If this sounds far-fetched look at what Uber is already doing RE marketing:
Uber Eats has effectively invented its own native ad unit. Uber confirmed to TechCrunch that a test quietly running in markets around India allows restaurants to bundle several food items together and sell them at a discounted price in exchange for promoted placement by Uber Eats in a featured section of local “Specials”. In some cases, restaurants foot the cost of the discount, while in others Uber pays for the discounts.
In fact Uber has realized that it should become an ad company with all its data. This public announcement is certainly not a coincidence given Uber’s pending IPO and valuation multiples for adtech firms.
Uber’s senior director and head of Eats product Stephen Chau has confirmed to me the company’s intentions to become an ad company.
The POS companies that try to do everything themselves have implicitly admitted to having a shitty, unworkable strategy to counter these data trends. That none of them independently has 25% market share only further proves how ignorant they are market realities.
But for the POS companies that don’t want to be displaced, they will need to cooperate on the data front. We’ve laid out the framework before, and there are material parts of the industry moving. This has become so much more about speed than size: the small don’t lose to the big, the slow lose to the fast. Democratization of technology will do that.
Will the remaining POS companies figure it out before it’s too late?
Ask us in 2024, but it’s really hard to bet against the innovative cultures of companies like Uber. The market has already given their verdict when sizing up Square against the much larger, incumbent payments competitors.
Absent major partnerships with POS data innovators, we expect the same outcome here.
