{"id":5190,"date":"2019-08-22T06:50:52","date_gmt":"2019-08-22T11:50:52","guid":{"rendered":"https:\/\/reformingretail.com\/?p=5190"},"modified":"2019-08-22T06:51:02","modified_gmt":"2019-08-22T11:51:02","slug":"us-pos-market-dangerously-unsustainable-free-pos-providers-likely-implosion-catalyst","status":"publish","type":"post","link":"https:\/\/reformingretail.com\/index.php\/2019\/08\/22\/us-pos-market-dangerously-unsustainable-free-pos-providers-likely-implosion-catalyst\/","title":{"rendered":"US POS Market Dangerously Unsustainable, “Free” POS Providers Likely Implosion Catalyst"},"content":{"rendered":"\n

We work with POS companies across the globe. On a recent catch up with one such international partner, they mentioned that the customer acquisition cost (CAC) in America was exorbitant relative to what it was elsewhere. In a sort of back-of-the-envelope way, they calculated CAC rates here to be 3x what they are in even the UK.<\/p>\n\n\n\n

Back on home turf the Washington Post shares thoughts<\/a> on the matter for Kevin Alexander’s new book, Burn the Ice: The American Culinary Revolution and Its End<\/em>. \u201cThere are too many restaurants,\u201d Alexander said. \u201cThere hasn\u2019t been a recession since 2008, and a recession gets the people who aren\u2019t serious out of the way. Austerity breeds creativity.\u201d<\/p>\n\n\n\n

Echoing those thoughts in the Post’s article was Technomic’s David Henkes, who covers food service. David said that for a number of years, the rate of restaurant growth has exceeded population growth.<\/p>\n\n\n\n

At a meeting with investment bankers two weeks ago they all shared that they’re seeing a proliferation of SMB loan companies. It was a similar trend they’ve witnessed at the tops of past cycles…<\/p>\n\n\n\n

What do these observations have in common?<\/p>\n\n\n\n

The US restaurant market is overbuilt.<\/strong> And like constructing a home on fault lines, it only takes one small slip to destroy what you’ve erected.<\/p>\n\n\n\n

POS market dynamics in the US are entirely perverted. Whether it’s a merchant acquirer convincing merchants a POS is “free” by writing the cost on their balance sheet<\/a>, or a venture-funded POS company doing the same, merchants honestly believe POS has no value and should be gratis<\/em>.<\/p>\n\n\n\n

And in some ways this tactic is genius. Merchants are too dumb to do math, and certainly don’t scrutinize their processing statements, which are intentionally opaque. Only many months after the fact, when some competitor points out how much a merchant is actually paying in payment processing fees, does the merchant realize they’ve been bamboozled by that “free” POS.<\/p>\n\n\n\n

What should really worry POS companies using these “free” POS tactics – and the merchants dumb enough to believe their POS was “free” – is what happens when the market corrects. If we hit a recession, what then?<\/p>\n\n\n\n

Well, many folks smarter than us think the restaurant market is about 10% oversaturated. And when a downturn happens merchants will stop buying new POS systems as their revenue numbers slide. So the financial models these POS companies were built upon (acquiring merchants in staggering numbers with a “free” POS and then recouping those costs over 2-3 years with aggressive payments processing rates) falls apart really quickly.<\/p>\n\n\n\n

When this happens, the merchants who go under first may the lucky ones.<\/p>\n\n\n\n

The merchants who are unfortunate enough to be customers of these “free” POS companies will surely be left to feel the pain of an imploding financial model. It makes sense that these merchants will see their effective rates quickly climb as their POS providers struggle to make numbers. Remember, these POS companies will have tens of millions of dollars of accounts receivables on their balance sheets in upfront hardware that could quickly become bad debt. As sales reps stop making quotas and existing customers churn, remaining merchants will likely experience the turning of the payments crank; if the economy didn’t put them out of business their POS “partner” certainly might.<\/p>\n\n\n\n

We’ll show you what we mean.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Here’s the statement for a 3-terminal restaurant using Toast (who has since switched to a different POS provider). This merchant does $220K in monthly payments volume, or $2.6M a year. With cash and check let’s call it $3M. Merchants of this size should be paying effective rates around 2.1%. <\/p>\n\n\n\n

This merchant, however, is paying an effective rate of 2.79%. The difference – 0.69% – equates to $18,295 dollars annually. <\/p>\n\n\n\n

Over 3 years, assuming<\/em> payments rates don’t go up (which might be a big assumption), that’s nearly $54,885 for a cloud POS system that they could have purchased for ~$12,500, including monthly software subscription fees.<\/h4>\n\n\n\n

Here’s that math.<\/p>\n\n\n\n