By all measures, Toast has built a successful business, even if it was not terribly capital efficient.
Their core POS is arguably the best SMB restaurant product on the market, their pace of execution deserving of praise, and in some respects their willingness to upend the status quo business model of overpriced hardware and redundant middlemen respectable.
It should surprise nobody that Toast counts more than 70,000 restaurant locations as customers as a result.
Where Toast has struggled is in the enterprise segment of the restaurant industry, clearly making Toast’s TAM a lot smaller than their S-1 would indicate.
Nothing is written in stone, of course, and Toast might experience a total cultural upheaval that allows them to gain momentum in enterprise, but if you analyze the Toast product you can quickly see why Toast finds itself where it does today.
The biggest fans of Toast are those who work with it in the trenches:
Servers, bartenders, busers, and managers.
As we move up a layer the excitement starts to wane.
Independent owners become upset when they discover the true cost of Toast.
But they don’t hear the noise from their employees that they used to hear with their legacy point of sale system so they live with it.
“System is down”
“Sales data doesn’t reconcile.”
“We can’t get our ordering tool to integrate to Aloha.”
For many, it’s worth an extra $5-10K in annual processing fees per location to have a system that works, even if they’re oblivious to Toast’s true cost of ownership.
At the multi-unit level things become more challenged.
For starters, the business model just doesn’t work.
“Wait, what’s my payments rate?!”
“I can’t use any other payment provider?!”
Larger merchants are smart enough to do the math and understand that Toast’s punitive integration fees matter when you have hundreds of locations. Need to use four best-of-breed tools? Toast is making enough money from those four integrations alone that it could pay the merchant’s bill for whatever fifth tool they wanted.
But instead the merchant can’t afford that fifth tool because, you know, integration fees.
Then there are shortcomings of the product architecture.
Menu data management capabilities aren’t nearly good enough. This has all sorts of ramifications on integrations, which of course larger merchants needs because Toast cannot build everything despite their claims to the contrary.
Toast has also made it impossible to get at customer data, which matters for larger merchants. They’ve made custom concessions for their largest customer, but that wasn’t extended to their other customers.
There are also legitimate concerns from larger merchants in regards to Toast owning the hardware: can Toast get new devices fast enough; are the hardware rates competitive; is the hardware as good as companies that just focus on hardware, etc.
We know Toast has pitched accounts at higher (~20%) hardware and software rates than their competitors.
Today’s version of Toast wasn’t built for the enterprise, both from a business model and product perspective. They can’t gouge larger merchants on payments, and their GTM motion has best served the SMB segment where high pressure sales tactics work great. Remember that they culled their enterprise team at the start of COVID as they found the market segment challenging.
Toast is arguably the smartest POS operator in the space, and inarguably the most well capitalized. They will need to figure this out eventually lest they want to become a dividend stock.
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