Why Toast, Square, and Others Should Reconsider Moving Upmarket

There’s an odd desire for software providers in the restaurant space to want to move upmarket.

Why?

Sure, the brand logos look good, but what’s the real desire?

Is it to own the entire industry?

Is that even possible?

Seems challenging when serving one cuisine type (e.g. pizza) is enough that there are (well, were) specific POS solution sets just for that market.

If a POS is doing well in enterprise, why grab larger customers?

Sure the churn is lower, but the unit economics are terrible.

Horrible.

Even worse than that, honestly.

We can understand why an enterprise-grade solution provider would like to move downmarket: SMB merchants pay through the nose on payment processing.

Want a quick example?

Olo serves predominantly enterprise merchants. They have 82,000 locations that pay for their software per their filing in Q1 2022.

For such the pleasure they earn $160M ARR.

For the same time period, Toast’s public numbers put them at 62,000 locations.

That’s good enough for a $637M ARR (software + net payments revenue).

For that math, Olo earns $1,950 per location per year.

Toast, on the other hand, earns a handsome $10,300 per year.

(That’s a 5x multiplier and the true cost of tax on the mathematically illiterate SMB for those of us that can do math.)

So why would Toast want to support customers that require many more features, have incalculably long sales cycles, and pay almost nothing for the solution?

Keep in mind that Olo and online ordering are all but mandatory in a post-pandemic world.

Take PAR’s Brink POS line of business that focuses on enterprise quick serve restaurants.

Brink’s ARR as of Q1 2022 was $35.5M across 16,945 active sites.

Like Olo, that’s $2,100 per site per year, or about 20% of what Toast makes.

PAR is adding payments processing, as is Olo, but there will be very little money to be made.

PAR and Olo, like Toast, are payfacs. They get buy rates from processors that are nowhere near as good as the rates Toast gets since Toast comes with $66B of active volume.

Enterprise merchants don’t pay for payments; instead, they’re getting processing at-cost and either:

1. A processor has booked the account for the press (i.e. the processor spends marketing dollars to use the logo to entrap smaller merchants with processing margins)
2. A bank does the processing at-cost and vies to make money on other lending lines of business

Either way, enterprise merchants are often paying less than 10 bps for processing, which is getting really close to the bare metal costs of processing a transaction by the time you count the authorization and settlement fees.

And in some cases the large merchants just contract with the card networks directly.

Here’s our attempt at a simple graphic to lay it out on a per-store basis:

The payments opportunity in the enterprise segment is so small we couldn’t even fit the text in the box.

Payments is colored naturally red because it causes anger, frustration, and heavy rectal bleeding with zero value in exchange.

And honestly, enterprise merchants pay even less than SMBs pay for POS on a per-store basis.

Sometimes 20% as much.

We get that Toast and others need to show continued growth and paint the picture that TAM > the observable universe, but we wonder if this isn’t a massive strategic blunder.

It’s hard enough to produce a worthwhile POS, and convincing enterprise merchants to take your peripheral bolt-ons (payroll, labor, back office, marketing, etc.) just strikes us as impossible (though don’t tell that to Toast).

Moving upmarket in the restaurant vertical could be summed up like this:

Pro: lower churn.

Con: everything else.