Takeaways from Toast’s Investor Day (Part 1)

Toast had an investor day with a lengthy (135-slide) presentation.

Here’s the presentation for reference.

There were some big learnings in here, and we’d say the largest change to Toast’s business model also manifested itself about a third of the way in.

There’s a lot of content, so we’re breaking the analysis into two parts.

Humble beginnings

Love the reminder that Toast exists in its current form because legacy POS companies wouldn’t allow Toast to integrate its initial product – a mobile ordering app – into their legacy POS systems.

Capital was cheap, Toast’s founders were smart, timing was a huge tailwind, and execution flawless.

Toast burned these legacy ass hats to the ground (but not before the CEO of one legacy competitor plundered $82.2M from shareholders).

Good on Toast.

Toast’s TAM needs some work

We’re skeptical of Toast’s US TAM.

First, we’re not sure we agree with the location count Toast mentions (875K locations).

Even if we did, there’s a large swath of the market that isn’t relevant to Toast.

Toast isn’t competing with Clover and Square for the hotdog stand.

Neither is Toast competing for legitimate enterprise (and frankly, we’re not sure they should if they want to remain profitable).

We’re also skeptical of the market share slide; not saying Toast didn’t do some homework here, but the numbers strike us as unbelievable: we don’t think legacy POS companies Aloha and Micros have ~45% of the restaurant POS market.

Our best guess is that restaurant count should shrink from 875K to 650K doors, which would put the Micros and Aloha market shares more realistically at ~80K of the 650K, or ~15%.

Toast is moving internationally now, and has 2K live international locations.

The challenge as we see – and wrote about – is that these international merchants 1) pay much less for payments on a percentage basis, and 2) are much, much smaller than Toast’s average US restaurant customer.

In other words, Toast’s GTM model is challenged.

We do like the data asset component of this slide, and believe Toast has immense scale to do some pretty awesome stuff.

The problem, however, is that restaurants don’t give a sh*t about f*ck, and won’t ever use data to improve.

Ever.

Even if Toast spoon feeds it to them.

So long as the restaurant demographic is what it is, they will always be sub-80 IQ troglodytes who can only fog a mirror using methane from their asses.

Toast would need to run the restaurant for the restaurant in order to manifest the benefits of data/AI, at which point you’d have to wonder if there wouldn’t be a justice department inquiry into price fixing.

In other words, Toast owns so much market share – especially in certain geographies – that if Toast were running revenue optimization on behalf of their restaurants, one could reasonably argue that Toast has increased the cost of dinner by x percentage points.

Toast’s flywheel is real

We love the flywheel effect slide because it puts numbers to what we had always heard about Micros and Aloha POS systems.

Micros and Aloha fell into free sales from restaurant employees who worked at restaurants that used a Micros or Aloha system and then left for another restaurant that didn’t use Micros or Aloha (restaurants are incestuous because the people that work in the industry are generally unemployable anywhere else).

These new restaurant employees would recommend Micros or Aloha to their new owner/manager, and that became a free source of inbounds.

Just look at how this seems to be working in Austin, TX:

70% is massive.

And this is kind of our point prior: if Toast were running pricing for their Austin restaurants, you’d be hard-pressed as a DOJ employee not to consider this an anti-trust case (Toast says 0.5% of US GDP now runs through their platform as a way to buttress this position).

Toast is crushing the entire restaurant tech ecosystem

Let’s first acknowledge that the restaurant tech ecosystem is like, 100 people supporting $1T in total restaurant sales because restaurants objectively don’t spend any money on technology.

This isn’t even debatable: we’ve done the math 100 different ways and the proofs always pencil.

Toast’s product slide is a reminder that you can build everything and anything you want when you own the payments revenue, where restaurants will not and cannot do math.

We also like the quantification to Toast’s distribution of new products: they went from concept to 5K doors in ~ 24 months.

You know how many third party restaurant softwares can claim 5,000 locations as customers?

Like < 10.

And that might be overestimating substantially.

Toast is just dunking on all these solution providers.

For instance, Toast is going to put several online ordering providers and agencies out of business with this product alone:

Toast’s real product flywheel should more accurately read like this:

1. Entice restaurant to choose Toast
2. Make free money with infinite pricing power on payment processing
3. Invest some payments margin into building additional products
4. Charge third party “partners” high integration fees to make Toast’s products look more reasonable/enticing
5. Monopolize industry

We’re not saying Toast shouldn’t have the right to do this, by the way, but we need to make sure that every non-Toast restaurant vendor understands that their days are numbered.

Unless you can control the payment processing margin, you are at such an economic disadvantage that it’s only a matter of time.