The only consistent in life is that things won’t stay the same. Even in anachronistic brick and mortar. When existing merchants and systems refuse to deliver the change the market requires, new types of merchants and systems appear to fill the void (Amazon has done both).
The free market is a beautiful thing.
So we have to wonder what becomes of POS industries in their current embodiment. Right now the payments industry is highly consumed with owning software before software owns payments. As odd as that latter statement sounds (why would any innovative company want to touch non-innovative payments?) it has major consequences on merchants and their corresponding systems.
Simply put, we don’t think payments companies have the culture to support software and the innovation requisite for software’s success. Payments is diametrically opposed to innovation; innovation in payments is nearly exclusively synonymous with novel ways to fleece merchants, not to produce ROI and keep merchants solvent longer. POS systems, meanwhile, are the most important systems a merchant could ever invest in.
If a merchant’s most important system is subsequently owned by entities that have zero desire to improve a merchant’s outcome, what then?
Well, it expedites the death of the system and, by logical corollary, the merchants themselves. Like drinking from a poisoned well, payments companies owning software companies will be the end of merchants using said software. Maybe not today, maybe not tomorrow, but over several years that’s how we’d expect it to play out.
And while we’re somewhat starting with the end in mind, we really should rank the most realistic threats to incumbent POS technologies from least likely to most. Here it goes.
4. Ghost Kitchens
We think of ghost/cloud/gray kitchens as the Amazon analogue to the food service industry. Ghost kitchens – where food is prepared in a back of house operation without the corresponding front of house operation – will grow to 10-15% of US restaurant sales by 2025. That’s based on some relative crude prognostication but we will have some articles that explain our numbers soon enough. However, 10-15% is a lot – it would be roughly $100B in sales by 2025’s revenue numbers. If we estimate that the US restaurant market would have 700,000 restaurants by then, ghost kitchens are wiping out at least 70,000 restaurants.
Whoosh.
The reasons for the rise in ghost kitchens are very logical, and ghost kitchens will come with more purpose-built POS systems.
Real estate.
Retailers fight over prime real estate. Convenience and foot traffic are king, and it’s not like they’re making more real estate. Ghost kitchens care much less about real estate and don’t need to splurge on a large footprint or fancy storefront. Because there are no dine-in customers, a ghost kitchen need only be concerned that they can operate in a reasonably central location for delivery. This cuts down on build-out costs dramatically and comes with the added benefit of lower rent every month thereafter.
Labor.
Predictive scheduling and minimum wage laws got you down? Well, fewer employees, fewer headaches! Eliminating the front of house in a ghost kitchen model cuts down on your headcount by at least half and therefore simplifies life substantially. You’re also seeing a growing use of robotics in the kitchen to combat wage pressure from your cooks.
Startup iteration.
For innovative food service operators, new menu items can be tested before significant kitchen redesigns are made or specifics labor talents are sought. Further, finding the right delivery partners can help you curate data to make informed decisions about menu pricing, dish reviews, and new possible hits. All of this can be tested quickly and cheaply just like a startup.
3. Mobile Payments
It was tough to determine if this should be higher or lower than online ordering and delivery. To put mobile payments above ordering/delivery you’d need to believe that mobile payments has the potential to get more data than online/delivery in a faster period of time. Mobile payments today (at least domestically) are pretty trivial, however.
IF mobile payments reach a critical adoption rate, they do have the potential to surpass the ordering and delivery companies quite quickly. Like ordering/delivery, mobile payments gets two pieces of data that are immensely valuable:
- Customer data (PII – personally identifiable information)
- Transaction-level data
In China SKU is inherent in the QR code a consumer scans. Alibaba then uses this data to reorder inventory for the merchant as well as help them with reporting. There’s no reason why the same information couldn’t be transmitted to a mobile wallet during a transaction. The newer payment terminals today are already surfacing SKU data via POS integration – something that will be easier and easier to do as APIs open up.
2. Online Ordering/Delivery
Ghost kitchens are still some time away. Meanwhile, online ordering and delivery services are here, and they’re growing. UberEats is doubling revenue and in over 300,000 restaurants. DoorDash, Grubhub, and Postmates simply add to this list. These parties are collecting a lot of data and they’re much, much smarter than the restaurants they’re competing with. It won’t be long until these companies figure out how to materially embed themselves deeper in the merchant stack and replace the POS companies (now owned by payments companies) that believe innovation only means finding ways to add basis points to their payments margin.
Der der der.
The online ordering and delivery companies will even accelerate the adoption of ghost kitchens in our opinion since they’ll be limited in squeezing 30% commission fees from restaurants without putting them all out of business.
Either way both of the scenarios engendered by the third party ordering companies are not in the interests of the incumbent POS providers.
1. Themselves
History lesson.
Amazon went live in 1995. The internet was founded in 1991. Even before that there was “online” retailing by way of telephone – here’s a synopsis:
Online shopping was invented and pioneered in 1979 by Michael Aldrich in the United Kingdom. He connected a modified domestic television via a telephone line to a real-time multi-user transaction processing computer. The system was marketed beginning in 1980 and offered mainly business-to-business systems that were sold in the UK, Ireland, and Spain. One the earliest consumer shopping experiences was Book Stacks Unlimited, an online bookstore created by Charles M. Stack in 1992. Stack’s store began as a dial-up bulletin board two years before Amazon was founded by Jeff Bezos.
https://www.miva.com/blog/the-history-of-ecommerce-how-did-it-all-begin/
Prior to Amazon there was nothing preventing POS companies from figuring out a way to cooperate and bring their collective retailers “online”. Even when Amazon was focused on books, there’s no reason why POS companies shouldn’t have seen the writing on the wall. “Ah shit, this Amazon thing is cornering books; let’s figure out how to sell our merchants’ wares online before it’s too late.”
But they didn’t. Because, as we’ve explained at length, POS companies have historically been low margin, were usually not founded by sophisticated engineers, and often suffered from the delusion that they could build everything. (If they could build everything there wouldn’t be this thing called Amazon, or it likely wouldn’t be as big…)
Fast forward and not much has changed with the exception of business model: payments processing is very lucrative and POS, according to payments processors, at least, is nothing if not a buttoned-up Trojan Horse to win the processing business.
As we’ve stated in the past, it’s the job of the POS company to innovate at their merchants’ behalves. But when that POS company is owned by a payments company? Eh, with the exception of a few payments companies you can go ahead and put a fork in the merchants who stay on POS systems run by payments companies. We’ll have some announcements later this year that really point out the differences between payments companies in this regard.
Thus the biggest threat to POS companies are the POS companies themselves.
They behave as benevolent dictators (though often times they’re not benevolent at all) and act as if they hold the monopoly on good ideas. They refuse to integrate with marginally competitive solutions, even if their customers and the market demands it. Once they’ve secured the merchant’s business – usually via acquisition or from some perverse marketing of “free POS” – they milk the merchant for payments revenues.
This will be the death of them. Their thinking will allow any of the above risks to develop tools and solutions that capture the merchant’s budget in those categories. The upside in the POS business? Stolen right out from under their piggy little payment snouts.
There are many parallels between the market shifts of 1995 and today (novel channels and more advanced use of data for starters), but despite the 25-year time lapse over which an astute observer could learn the lessons of history, today’s POS companies continue to make the same mistakes at their own peril.
Hubris, it would seem, is rather immutable.
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