Toast is fat.
But don’t be shocked: all companies get fat when they get to Toast’s size.
When you’re 30 people you can control the quality of the people you go after A players.
When you’re large you can’t, and you inevitably hire Bs (because there are only so many As by definition), and they don’t want to look bad so they hire C’s, who have a quota to hit in a short window so they hire D’s.
And before you know it you’re wondering when AI will be sophisticated enough to replace the morons you work with.
Side note/rant: most people DO NOT work. They might show up to an office 40 hours a week but their productivity is shit. If we had to guess we’d say the average “worker”, if you can even use that term, produces an output commensurate with 15 hours of weekly effort. This is higher at smaller companies, where your output cannot be hidden, and lower at larger companies, where brand inertia carries the company and the employees are apathetic.
Auren Hoffman postulated that in a company of 1,000 employees, only 6 care about the long term success of the company.
We’d agree.
Sadly, the work of a salesperson is to convince someone with a job, who probably shouldn’t even be employed, that they should DO their job.
Think about how absurd that is for a second. The reason innovation takes so long is that people by and large don’t work. Period.
Here’s a visual reminder that pretty much everyone you meet is a lazy sack of shit.
If you’re not working 80 hours a week you’re not working.
End of discussion.
Toast could cut 1,000 people and its output would be the same.
We’d put money on that.
The 550-person they cut will barely be noticed.
They could probably eliminate 2,000 roles and only see a < 10% drop in output.
Or maybe none at all.
That would get Toast closer to EBITDA since it would whack $200-$300M off their $1B in operating expenses.
But firing people is never enjoyable.
Which is why we wonder why Toast hasn’t built some obvious products that would close its profitability gap.
Here’s our ranking of solutions including our best estimates at revenue potential. Costs are entirely in Toast’s court: we don’t think it takes ~6,000 people to run Toast, so it’s not our fault they can’t deliver these products without bloated costs.
Employee Cash Advance
Toast already offers a business debit card and they launched one for restaurant employees.
But it’s not aggressive enough.
Toast is hoping to make 200 bps on the debit interchange whenever a card is used. Payday loans – which is effectively what Toast is allowing to happen – are priced at 15-30% of the loan (states have different laws on usury that cap these rates).
Let’s do some back envelope math here.
Toast represents $100B of volume. Let’s assume 30% of that is spent on labor – $30B.
Let’s assume 10% of this volume goes to a payday loan.
On a national basis, 4.4% of consumers used a payday loan in 2019, but inflation is still ripping AND Toast disproportionately serves the demographic that is likely to need a payday loan (< $30K annual income); 10% feels like a conservative number.
That’s $3B of annual loan activity.
Using the above guidelines of 15-30%, there’s $450M – $900M in free money/EBITDA.
Default rates might be as high as 55%, but this is WAY more lucrative than Toast’s current approach of ripping 200 bps on debit interchange for employees that take up the Toast Card, which is probably only generating 10s of millions in EBITDA, if that: for Toast to make $10M on debit card expenses their restaurants’ employees would need to spend $500M.
For $450M in revenue that would be $22.5B in debit card expenditures. That’s nearly the entirety of what Toast’s restaurants pay their employees.
Fundamentally the problem is that Toast is not the employees’ bank.
Which gets to the next opportunity.
Toast Bank
The restaurant industry has the highest turnover of all industries. And it’s not even close.
So many reasons here but if you’re reading this you have common sense and don’t need our explanations.
Nearly 80% of restaurant workers are under 35, with 60% younger than 24.
These people are underbanked.
Toast has a great opportunity to be the first bank account these people have.
And by serving as their bank, their default rate on payday loans would drop substantially since Toast would have a better picture of financial health.
Since these people are so dumb, Toast could pay 0% interest on deposits and rip 4% for themselves.
Assume the same penetration of $3B in deposits, and you’re looking at $120M a year in deposit interest.
Boom.
Marketing Audiences
Even though Toast refuses to share identifiable guess data with their own customers, Toast has a persistent ID (ie token) for every card that goes through their system.
Matched with SKU data, Toast can now create audiences of behavioral patterns. And because Toast has emails and phones of guests, they can monetize this pretty easily.
In fact, this is one of the awesome things about scale: Toast could really build a moat if they wanted to. But they’re too fat to care right now and have let off the accelerator.
At 100K rooftops Toast probably has data on half of all US adults.
We’d estimate that, as an audience file, this would be worth $50M-$100M annually.
They wouldn’t even need to build the marketing infrastructure around this and could license it to a credit bureau pretty easily.
Own payment rail
Toast should be connecting Toast Takeout to consumer bank accounts where possible and using RTP rails so the money settles instantly.
The costs to facilitate payments here would be way less than interchange, lowering Toast’s payout to the card schemes.
And because restaurants are so stupid, Toast wouldn’t even have to lower their rates (in fact trying to explain to restaurants why you would be lowering their rates isn’t even worth the headache because they’re all super geniuses).
In other words, a $30 transaction currently costs a Toast merchant $1. Toast keeps $0.18 (60 bps) while the rest goes to interchange.
What if Toast could lower their cost of acceptance to $0.25, still charge the restaurant that $1, and keep $0.75 for themselves?
Now Toast is making 250 bps of each transaction.
All of a sudden Toast’s potential NET payments revenue goes to $2.5B.
Clearly not all consumers would sign up for this, but given the revenue potential Toast could iterate on positioning that would entice consumers to connect an RTP-enabled bank account. Like maybe tell them there’s going to be a $5 convenience fee unless they pay by RTP.
If there’s anyone dumber than a restaurants it’s John Q Public.
Actually, we take that back: restaurants represent the distilled stupidity of the general populous.
Merchant Value Adds
This is the last category because if there’s one thing you should understand by now it’s that restaurants won’t pay for value.
It’s why you have to steal from them if you want to actually make acceptable returns.
So anything in this category is basically mental masterbation: sure, it could create value, but so would treating an ape with antibiotics, only the ape would both shit on and beat you if you tried.
In fact these solutions are probably not even worth the time we’re spending to explain them since the merchant will never pay for them, and Toast would lose money building + trying to sell the solution to the moron operator.
Menu price recommendations: combing through the menus of 100K and actual sales velocities, Toast could suggest menu items for restaurants, including pricing. Would take some work to normalize the SKU data, but LLM embeddings have surpassed Levenshtein and this isn’t as hard as it used to be. Revenue potential: -$8M (yes these are all negative revenues because Toast will lose money trying to convince a restaurant to do something sensical).
Dynamic pricing: this is a feature, not a company, and this will prove it: Toast could run some very basic algorithms to perform pricing elasticity analysis and automatically change prices for their merchants. Toast might get pinched for price fixing in an anti-trust precedent since they have so much market share, however. Revenue potential: -$4M.
Site selection analysis: using all their data, Toast could recommend where merchants should open new locations. It not directly, Toast could at least license this data to someone. Revenue potential: -$3M if they try it themselves, $10M if they license out the data to a number of different parties that are crazy enough to try to sell logic to the illogical.
Competitive performance analysis: tell restaurants how they’re performing relative to competitors and where they can improve – e.g. lunch shift, change hours of operation. etc.. Revenue potential: -$5M.
Because of Toast’s scale they stand to benefit from blue ocean product with little competition. They just need to be cognizant that they must continue stealing from their customers if they want it to be profitable, however.
As Jim Cramer said, restaurants are the worst customers in the world.
Here’s the bottom line: I like Toast the company, but… they’re dealing with the worst set of clients in the world.
https://www.cnbc.com/2021/09/22/jim-cramer-says-toast-is-a-good-company-but-its-stock-is-too-expensive-to-buy-right-now.html
PS Shoutout to our friend AO for putting some ideas in our heads.
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