Much has been written about the diffusion of innovation, and Clayton Christensen (RIP) brought its dynamics to the masses.
Below is an image popularized by Clayton (source here) that we’ll reference for this article.
Adding quantitative values to this graphic, the Innovators are 2.5%, the Early Adopters are 5%, the Early Majority are 34%, the Late Majority are 34%, and the Laggards are 16%.
Without question, retailers are at the very, very far right of the Laggard pool.
Only treading water because there’s an offchance a visitor mistakes the locale for a nude beach and the retailer glimpses side boob.
Score.
To put teeth to this argument we’re going to quantify the torpidity of retail – and in particular, restaurants – using kiosk and online ordering.
Too many newbie founders look at retail and salivate over the size of the market.
If I can only get 1% of retailers to pay for my solution I’ll be rich!
What they fail to realize is that it will take acts of God to reach 1% penetration in any meaningful amount of time, and retailers won’t pay anything worthwhile for your solution.
In fact, when you multiply the paltry amount a retailer will pay for your solution by the number of retailers that will pay in a given year, you are staring at a charity engagement:
If your time is worth more than $0 you are going to be disappointed.
It might surprise you to learn that kiosks were first used at McDonald’s in 2003. Go grok this early CNN webpage to prove it.
Grocery stores introduced self-checkout in the late 1990’s/early 2000’s (although technically Kroger offered the first self-checkout machine in Georgia in 1986), and reported great success.
From the same CNN article:
The self-checkout has reduced length of lines by a third and the time spent in lines by a third. We estimate that 30 percent of all sales are made through self-checkout at stores equipped with them.
John Simley, spokesman for Home Depot.
~25 years later, studies show that nearly half of all grocery transactions occur at self-checkout, accounting for 55% of transactions and 48% of all registers.
In fact, according to the Food Industry Association, 96% of grocery stores offer self-checkout.
But guess whatttttttt?
According to restaurant kiosk vendors, only 10% of QSR restaurants have kiosks.
Cuz, you know, why do math when you can nibble your own turds?
McDonald’s and countless other retailers proved that consumers who use kiosk spent 10-30% more.
In a 2022 earnings call, Shake Shack CFO said that kiosks are the chain’s most profitable channel, and Panera experienced an 11.5% increase in sales after implementing kiosks.
And this is our point: if your solution requires a functioning brain from your restaurant customer, you’re hosed.
They just will not – and can not – muster pre-school level thinking.
It’s hard to explain just how crazy this is.
But let us try.
If you hear a loud thud while working in your office your brain starts to rationalize something like “Oh yea, I left that book on the edge of the desk and it probably fell off. Gravity.”
A restaurant operator will hear that noise, jump up on a table, rip off their clothes, immediately shit on every possible surface, and starting gorging themselves on feces.
Why?
Who the hell knows.
The concepts that you take for granted – gravity, linearity of time, being literate enough to read this – are completely lost on retailers.
Even though retailers look like homo sapiens their cognitive abilities are those of homo ergaster.
Evolution broke and we have an entire contingent of forebears – who forked off and died because they were uncompetitive, mind you – that are somehow not only living amongst us, but actively oversee an entire industry.
To further prove our point we’ll look at online ordering via Olo.
Olo was founded in 2004 but let’s call it 2005 since that’s when they raised their first outside money. The premise was pretty obvious: as smart phones penetrate everyday life, people will want to save time and order in advance, and restaurants could do well by having a way to appropriately forecast and manage digital orders.
Today, it’s estimated that 97% of Americans own a smart phone or feature phone (i.e. mobile phone) since becoming available in the early 2000s.
See the below penetration rate from Pew Research:
Or the adoption rate from BI intelligence:
Yet as of March 2020 – the month COVID hit and accelerated Olo because a restaurant was literally disallowed from operating in-person – Olo counted 48,000 restaurants as customers.
Out of a universe of ~650,000 US restaurants, Olo had penetrated 7% of the market in 15 years.
Smartphones were used in 90% of US households at this point, undoubtedly drawing cognitive dissonance for Olo’s founder, who began when fewer than 2% of adult Americans owned a smartphone.
Of course these metrics from Olo’s 10K also give us a glimpse into how little a restaurant will pay for anything.
Despite running what amounts to 10-15% of a restaurants revenue, restaurant operators deemed Olo worth an abysmal $27.25 per store per month.
For Olo’s average client, whose store sees $1M in total sales, that’s a meager 3 bps of revenue on something managing 10-15% of their entire revenue.
Think about that asymmetry for a second.
Three. F*cking. Basis. Points.
And we don’t want to hear the trope that restaurants can’t afford it.
That’s utter nonsense.
Look at this chart of public US restaurant profitability from Aaron Allen.
Restaurants can not only afford technology, but it’s the only silver lining in a terrible business that can produce outsized returns.
Restaurants are just unable to perform basic arithmetic to prioritize capital allocation.
Which is why Olo closed 2019 with $51M in revenues: 14 years after founding, and 14 years after raising between $63 and $81M (some of their funding from Tiger Global was secondary financing).
Talk about a slog.
Meanwhile, 70% of the healthcare industry is already on cloud computing, with 90% expected to be on the cloud by 2025.
Or if you don’t like this analogy, how about 76% of hospitals using telemedicine by 2017, with current numbers estimated at 95% penetration.
In fact, telemedicine mimics almost exactly the growth rate of smart phones: 35% penetration in 2010 and > 65% penetration by 2016.
And by the way, half of US hospitals aren’t even profitable.
But that doesn’t prevent them from being good stewards of capital.
It’s almost like rational industries use and invest in things that produce positive returns…
Investors know this so they don’t back companies that sell into retail for all but the extreme situations where a company can prove how it surreptitiously steals from the retailers to make outsized returns.
Here are graphics and analysis from Kimchi Hill to show how long it takes average SaaS companies to reach $100M of ARR.
58.3% of companies achieve $100M in ARR in fewer than 11 years, and 93% of companies achieve $100M in fewer than 16 years.
Given Olo’s CAGR, Olo would not likely have reached $100M in ARR until 2022 without COVID – 17 years after founding.
And Olo is one of only about 8 technology vendors that serves the US restaurant industry ($1T of annual revenues, mind you) that has reached $100M of ARR.
COVID was a massive accelerant to Olo, and, ironically, what has neutered Olo’s TAM as every other vendor offers the same features.
To sum up, here’s what you’re dealing with when considering to sell to restaurants.
The only constant in life is that the homo ergasters tending the restaurants will continue to chow down on things that homo sapiens knew long ago to avoid.
Even dogs don’t eat shit every day.
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