Restaurants Spend Less than 0.2% on Software, So Expect Widespread RestTech Failures Shortly

If you read this title and thought “ah, yea, VC was drunk over the past few years and a reckoning is due” you’re still missing the bigger picture.

Yes, VC was drunk with money and poured it into businesses that didn’t deserve to be alive.

And yes, there will be a comeuppance for a lot of startups that just don’t deserve to be around.

But it’s 10x worse in retail.

Why?

Because retailers don’t invest in solutions.

They don’t pay for technology.

They can’t spell ROI.

All of this makes for absolutely terrible headwinds if you’re trying to sell to retail.

But investors had so much capital they deluded themselves into thinking retailers would behave rationally.

Well everyone else is buying software to get better; why not retailers?

You see, other startups have a chance of growing into their TAMs.

But not in retail.

Retailers spend mere basis points of their revenue on technology.

Look at the graphic below.

Then recognize that the 2.03% is inflated because we’d bet this is inclusive of the 1.8% of credit card interchange costs that are inappropriately categorized as “IT spend” in retail.

Not that this research report should be taken as gospel, but it says 2022’s global restaurant software market spend was $4.5B.

If we believe that the global restaurant market is $2.4T in sales (which pencils since US restaurants are about $1T), then software spend is…

… drumroll…

0.19% of revenues.

A meager 20 bps.

Bro.

Software eating the world and all you can “invest” is 20 bps?

Let’s take Brinker for an example closer to home.

For fiscal year 2023, Brinker recorded $3.6B in sales. If you throw in Maggiano’s total sales are $4.1B.

Of this we find explicit mention to software costs of $4.7M.

Enterprise system implementation costs primarily consists of software subscription fees, certain consulting fees, and contract labor associated with the ongoing enterprise system implementation that are not capitalized.

https://investors.brinker.com/node/21106/html

There are 1229 Chili’s locations and 52 Maggiano’s locations.

If you divide out the $4.7M by the total location count of Brinker, you get $3,669 in software spend per store per year.

That’s $305 per store per month, or about what we’d expect Brinker to pay for just the “necessities” as they negotiate down the costs on a per-store basis:

• POS
• Back office/inventory
• Labor
• Analytics (APT and some other small softwares)

You know what $4.7M of spend is when you take it across $4.1B or $3.6B of sales?

0.11% – 0.13%

A rounding error.

Brinker is probably paying more than this in payments margins and that’s a product that requires zero R&D spend or innovation.

Why do we point all this out?

First, because the retail industries suffer from delusions.

Here’s what Hospitality Technology believes restaurants pay for IT as a percentage of revenue:

This is off by a factor of 10.

Maybe 20.

Yet they actually believe it.

You don’t ask a fish how high the sky is just like you don’t ask a single cell organism to make capital allocation decisions for a business.

Oh.

Wait.

Stop pretending the industry cares about innovation and progress and just admit that their singular goal is to drive vendors out of business.

Get some self-awareness.

Second, because this math highlights just how brutal the tech consolidation in retail will be in post-swoon startupland.

Look at all these restaurant tech vendors.

How can they all survive if they’re fighting for the same 10-20 bps?

We’re reminded of a great quote from our esteemed friend, William Wallace:

You’re so concerned with squabbling for the scraps from Longshank’s table, that you’ve missed your God-given right to something better

Mel Gibson’s William Wallace

Founders: stop.

These people don’t appreciate you.

They will never pay what you are worth.

Most of you won’t survive, and that’s a good thing.

You now have a reason to innovate for people who do care about ROI.

That spend more than a few pennies even though they force vendors to deliver 100x that in return.

Unless you 1) intend to bilk merchants on payments, or 2) rent the merchant’s customers back to the retailer, you will never make money helping retailers.

Ever.

There are 1,000 companies fighting over $2B of US restaurant spend.

That’s $2M per company.

Stop the insanity.

The conflagration for retail tech vendors will be a panacea to innovation elsewhere as, hopefully, smart people abandon retail and extract themselves from abusive relationships.