After TPG started the rollup in 2013, Marlin took over Hotschedules (technically rebranded to Fourth) in 2019.
What we said then is what we will still say now:
There is no TAM in restaurant back office worth chasing.
Everyone who will pay for a back office system is already paying for a back office system.
What you have happening in back office is simply just market share swapping: some restaurant brands go under, some restaurant brands grow, and some restaurant brands change vendors.
All in all it’s a really, really, really small market.
Why?
Restaurants aren’t the kinds of people who concern themselves with things like “returns”, “ROI”, or “profit”.
If not for taxes, these people literally wouldn’t know they were bankrupt until their bank called them.
Which is crazy when you think that even your kid has to run the math to determine if their lemonade stand makes sense to continue operating.
We recall when an executive at SYSCO Foods told us that 85% of their accounts have no idea what it costs to serve a plate of food.
We’re not talking about rocket science here: just plain old fashioned addition and subtraction.
But if restaurant operators were any good at math they wouldn’t be restaurant operators.
So you have a bunch of people working on their hobby/craft/passion and ignoring the financial aspect of what they’re doing.
Which gets us back to the TAM problem.
The majority of the market is apathetic to the notion that they should undertake any work to figure out if they’re making money.
Larger entities start caring, mostly because they have external investors, but for the majority of the market (or 85% as far as SYSCO sees it) they don’t give two f*cks.
Now the haters out there will say that food costing is a lot of work and it takes a lot of time.
Okay, so then why the hell are you in a line of business where knowing COGS is important?
If you don’t like the idea that you need to know how to calculate profit and loss then get out of the business.
Oh, wait.
That’s right.
Turns out nobody wants to hire someone that can’t accurately count their fingers.
That’s our fault, though.
All of this to say that Marlin is in a challenging position.
While it appears that they’ve cleaned up the profitably problem at Hotschedules, it doesn’t change the fact that their core customer has an IQ of 74.
Even in their own CIM Hotschedules pointed to the anemic spend on restaurant software:
And we think this is over-inflated by a factor of 10.
Ergo, Hotschedules must be viewed as a declining annuity to any potential buyer.
In fact, PAR rationalized that back office needs to be part of a platform (i.e. POS) in their acquisition of Data Central to justify the sales cycles of back office.
We don’t think back office is a strong enough offering to be that platform, and that all roads lead to the POS.
This will be clear over the next business cycle as investor dollars come out of restaurant tech and the existing vendors need to find an exit.
We don’t see any world in which SMBs will ever do inventory, even with the advancement of AI and machine vision.
If it takes effort, it just won’t happen.
So who would be dumb enough to build, service, and run the product for a restaurant for free?
Nobody with a brain.
Which is why if the solution is ever even made available it will have to be owned by someone who can recoup the costs.
Enter the payment stream: where merchant math is impossible and the ability to take price is infinite (until the merchant goes bankrupt, at least).
And you know who owns payments?
POS.
The only wrinkle is that owning payments on larger merchants – the kind that are prone to actually caring about back office tools – is harder.
You now have Crunchtime, Restaurant365, and Hotschdules that need to find exits.
None of them are large enough or durable enough to be public and stand-alone entities.
And we bet Hotschedules is packing some serious debt.
Hotschedules and Marlin are screwed.
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