Reforming Retail

Toast Launched Its Own Customer-Facing Ordering App And We Have Some Advice

In a quiet announcement Toast POS launched a consumer-facing online ordering aggregation app. Similar to GrubHub, Toast’s app (only available for iOS devices right now) lets consumers order from Toast restaurants and pick up when it’s convenient. The app does not yet offer delivery but it probably will in the near future.

According to the article above, the economics for Toast TakeOut are:

For diners, there’s no extra fee associated with using Toast TakeOut; restaurants pay a 3.5% (plus 15 cents) processing fee on orders placed through the app.

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So how does this compare to online ordering substitutes?

A merchant’s two options are a flat-fee online ordering provider (Olo at ~$100/mo/store) or a percentage fee online ordering aggregator (GrubHub or whatever at ~30% per order). The former doesn’t do demand generation while the latter does. Also, the former doesn’t include payment processing while the latter does.

A respectable restaurant shouldn’t be paying more than an effective rate of 2.2%, with many in the 2% average range. Let’s assume our sample merchant does $1M in annual processing revenues with an average check of $20, meaning they do 50,000 checks per year. If we assume 100% of their orders are to-go via Toast TakeOut (an unreasonable assumption but just follow this for demonstration purposes) the difference in cost would be $22,000 (effective rate of 2.2%) vs $42,500 (effective rate of 3.5% + $0.15 per swipe). That’s a 93% increase.

But is it cheaper than alternatives?

Well, compared with GrubHub at ~30%, Toast TakeOut is a steal. Compared with a flat-fee online ordering service like Olo, it depends on the specifics. Keep in mind that Toast TakeOut will offer some demand generation benefits. It won’t be used by nearly as many consumers as GrubHub, but by definition if it brings one user then it has more users than Olo generates as Olo relies on the merchant’s brand to do the demand generation. Either way, the below table shows the basic economics.

For an apples-to-apples comparison with Olo, we need to add the effective rate to Olo’s flat monthly fee since Toast’s fee includes both processing and their cost for TakeOut (Toast just marks up their processing fee for TakeOut orders to cover the cost of the product). What we get is a nice graph that shows us at what monthly to-go order volume Toast TakeOut becomes more expensive than Olo. (If you’re curious Toast TakeOut costs more than Olo + payment processing once you do ~$4,878 in monthly to-go orders.)

After $4,878 in monthly to-go volume a merchant will need to decide if Toast TakeOut is generating more value than a service like Olo: does the demand generation of the consumer app justify the higher price? We’d say yes, but only if you can prove that the app is creating new customers. Which coincidentally leads us to our next point.

Why would Toast build this app? Well, if we were to build it we’d do it for the customer data.

The biggest gripe with third party ordering and delivery “partners” is that they don’t prove ROI. And they can’t prove ROI until they share customer data with the merchant. If they shared customer data the merchant (through a third party partner, realistically) would be able to demonstrate IF the online ordering customer was new, and IF the customer patroned again. But GrubHub, Uber, et. al. view the consumers using their platform as their customers and that they don’t share this data to prove their worth is probably evidence enough.

No matter, Toast might have realized the opportunity here by quantifying value of their demand generation ordering platform. Since Toast is first and foremost a POS, Toast should be able to tie identifying information together to prove the ROI of their efforts. If Toast does this successfully they would be the first to pull it off, and we’d tip out hat. Actually the entire market should tip their hats to Toast because that would be awesome.

Yet the third party ordering and delivery “partners” still have much more scale. At their rate of growth they might yet steal the upside Toast’s investors have mulled over RE data optionality.

We made a point to call out the absurdity of merchants building their own apps and the same goes for POS companies: there are at least 250 POS companies in the US restaurant vertical alone. Probably 10x that many in retail. Yes, POS companies represent better points of aggregation than merchants but not by much. Think about the scenario where every POS company decides to build their own consumer-facing app. You think consumers are going to download 300 apps?

That’s patently absurd.

Toast and other POS companies should take a page from the books of other industries and seed companies that solve these problems across the brick and mortar landscape. Toast has promised such high returns to their investors that they probably need to stick to their script of “we’re going to build everything” and won’t be able to participate. But nothing’s stopping other POS companies from benefiting from this approach.

To summarize, Toast, merchants, consumers, and the overall POS industry would be better served if there were one app for online ordering… and probably one app for a lot of other features (reservations, analytics, loyalty, etc). POS companies would be able to collect more data, apply it to their respective merchant bases, realize the ARPU expansion they’re looking for, and protect themselves from the UberEats of the world.

But it’s classic prisoner’s dilemma and POS companies won’t realize they should approach the problem this way until the NCR Outcome plagues them all.

A guy can still dream though.

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