Aside from putting at least half the SMBs out of business (we’ll see how many more quarantines governments feel necessary to uphold their chances of reelection), COVID is going to fundamentally reshape the industry landscape after it recedes. Some companies will capitalize on the changes, while others will be pushed to the brink of collapse. COVID will shape up to be a fitness test like no other the industry has ever endured.
Free POS is going to be carefully reconsidered.
Free POS is a very expensive loan. It worked wonderfully because merchants were, and probably will continue to be, too dumb to understand how math works. But those companies who offered Free POS are now having to write down tens of million in bad debt as their hosts die in the pandemic. The steps for Free POS could be written as follows:
- Convince merchant that unicorns, Santa Clause, Big Foot, and Easter Bunny are real (this is apparently very easy to do in SMB)
- Get merchant to sign long term agreement for “Free POS” where they pay nothing upfront for a new POS system, but tell them to ignore your bundled payment processing statements over the next 3+ years (which they’ll do anyway)
- Make money like gangbusters on monthly processing revenue, equating to a loan with an APR of 60% or more (your conventional SMB loan is < 15% by comparison)
But the POS company was on the hook to provide all the hardware, software, and installation for zero upfront. This was written on their balance sheet. And it takes time to pay back the loan: even though the POS company has all sorts of fantasies of charging a 100% effective rate on their processing, they can’t realistically do it.
If the POS company was chasing aggressive growth, they’re now in big trouble. Toast has been massively exposed to COVID, followed by Shift4 and then maybe Upserve and Global, the latter of whom has a rather idiotic “strategy” and sales model which has probably worked in their favor and mitigated exposure (ie sales are so tepid that they weren’t on the hook for too much free POS).
Coming out of this, investors will not want to pursue a Free POS model in an aggressive manner until consumer confidence bounces back, which will realistically only happen after we have a COVID vaccine (2 years at best case), we have herd immunity (untenable given insane government interventions thus far), or a cocktail of anti viral / malarial drugs proves to curb COVID morbidity to acceptable numbers (have to wait another 8 weeks for the test results of different trials).
SaaS will be hot.
The market was already moving to SaaS, even if some of the dumber merchants dug in their heels. The merchants who think they should own a POS simply don’t understand how software works: it has bugs, it needs to be updated, and innovation doesn’t stand still. You want an example of how bad non-SaaS POS models are? Okay, go back to the Micros and Aloha days of the late 1990’s: how much innovation was there then? None. Zip. Nada. Because without stable, recurring revenue, a POS company can’t appropriately reinvest in new developments.
After COVID, merchants will be leery about investing $10,000, $15,000, or more into a POS. In fact, we’ve heard it said that even during COVID some merchants are leaving perpetual POS systems because it’s cheaper to pay the SaaS fee for a new cloud POS than it is to pay for the support license of a perpetual POS system, especially when they have no sales.
Make no mistake: SaaS will be in higher demand after the industry rightsizing.
Cash rules all.
Unfortunately for market innovation, the larger legacy POS companies, while reeling in recent years, have balance sheets and can draw down on capital to survive. Startups have had smaller balance sheets as they aggressively pursued sales and new features; some will have enough money remaining after their last raise and upcoming layoffs to survive, but many will be forced to reconsider future plans.
This truth will slow down the rate of change in the industry, which is really going to penalize merchant as they emerge from the pandemic needing fast, seamless, and modern technologies to get them moving quickly. Some of these legacy POS companies can’t even get APIs to work, for f*ck’s sake. But hey, who needs an API when you can “own” your POS, right?
Morons.
Off-premises ordering increases, quickening chances of POS demise.
In case you’ve not been paying attention, all volume at restaurants (which by our count is 20% of what is was pre-COVID) is 100% off-premises. That’s drive through, carry out, pick up, or delivery. If people want to eat at a restaurant today, that’s how they’re doing it.
This has forced merchants to reengineer operations that prioritize the off-prem revenue center. It’s also showed consumers that dining in may deliver food quality and experience that’s good enough, and dining out might not be worth the hassle.
Post-COVID, we expect these trends to continue, and off-prem ordering will remain a significant percent of most restaurant business. Yes, some people will still dine out as part of celebrations or business gatherings, but a lot of people who heard their local restaurant say how horrible delivery would be found that same restaurant offering delivery in times of need. Was the food quality really that much worse?
All of this plays into the hands of major industry disruptors: third party delivery / online ordering, and ghost kitchens. As more orders come from off-prem sources, more data is going through the systems of UberEats, DoorDash, and Grubhub. These companies are surely using this opportunity to examine beefing up their ghost kitchen efforts. And you know what you don’t need in a ghost kitchen operation? Today’s POS. In fact ghost kitchens and heavy off-prem operations don’t need nearly as much technology.
The move to off-prem benefits a smaller number of players who are concentrating their market power – and none of them are today’s POS companies.
A smaller market with enterprise focus.
COVID is going to decimate SMB. These guys don’t have the balance sheets to survive, and we don’t care what the government thinks their limited Payroll Protection Program will do. The US economy is $22T. Half of that comes from SMB. That means SMBs will need about $1T a month to sustain pre-COVID levels. The government offered $350B for 2.5 months, and then they extended that, but how much is really ending up with the SMB?
Which means large brands on main street – especially of the QSR variety – will be the ones to survive this fallout. Not without restructuring and a lot of M&A (Cheesecake Factory is effectively bankrupt and lots of the large franchise groups levered debt to expand rapidly), but they’ll at least be extended capital from banks. That benefits more mature POS companies with robust features and enterprise sales experience.
POS companies with lots of SMB exposure, especially in table service, are going to be hit hard. OpenTable might even go under. And while it’s easier than ever to build a POS, most of the smaller POS companies aren’t going to survive the downturn, so there will be further consolidation. This benefits well-capitalized POS companies who survive.
Beneficiaries? Agilysys, Micros, NCR, PAR, Shiji, XPient.
Dealers are dead. For a while.
Dealers made most of their money on SMB clients. That’s especially true as POS companies started serving larger accounts directly. With SMB annihilation comes the annihilation of the reseller community. Most resellers were already on the ropes with the aggressive direct sales models from venture-backed POS companies. The death of their mainstay clients might be the knockout punch. A third of resellers we’ve talked with are closing up, another third don’t expect to make it through the quarantine, and another third think they’ll be okay.
Dealers will make a comeback once SMB starts opening up. Since it’s likely that nobody is funding aggressive growth until there’s high consumer sentiment, dealers will help POS companies defray direct sales costs. Unless POS companies think they can make enough money on payments revenue to justify going direct. A bit of TBD.
It will be a bloodbath out there. Good luck.
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