Restaurant POS Finding It Difficult to Grow — TOAST POS

But there’s only so much upside when you serve, to quote Jim Cramer, the worst customers in the world.

That’s because restaurant operators don’t have IQs high enough to understand, and thus appreciate, value.

The same can be said for retail broadly.

This means that if a company is ever to make money serving retailers it must do one of two things:

1. Change the demographic of retailers so that they understand the concept of ROI and will pay fairly for it (you’d have better luck finding Big Foot)
2. Steal from retailers so you can grow your business

Turns out that companies waiting on number 1 don’t grow at all and are often sold for scraps.

Toast is no dummy, and now the data is becoming clear to us – and to Toast – that they’re faced with the truths that have plagued all other restaurant technology vendors.

Restaurant software TAM is an anemic 0.2% of restaurant revenue at best, and it ain’t increasing for a long time, if ever.

Because you can’t fix stupid.

In watching the moves Toast has been making in conjunction with the data they’re promulgating we think that Toast realizes they’re in big trouble.

Here’s what we mean.

International

We wrote a lengthy piece on why Toast needs to be cautious about spending resources in international markets. To summarize, the US is just about the only market in the world where payments companies can rip the types of margins they do on payment processing.

Other countries have caps on interchange costs or are altogether leapfrogging the anachronistic card scheme infrastructure and going directly to instant bank-to-bank payments (See UPI, PIX) where the costs to move money are a much more reasonable and natural cost of… $0. (If the buyer needs credit, that’s another story.)

There’s also the fundamental problem with merchant size: in most other countries the average merchant does 10-20% as much revenue as their US counterpart.

The combination of the aforementioned points implies to us that Toast’s business model is totally sideways: how can Toast directly acquire merchants if they stand to make ~5-10% as much revenue? Their CAC:LTV would be nonsensical.

This could be why Jen DiRico, Toast’s SVP and GM of International, has stepped down as of July 8 to join Commvault as CFO starting August 8.

Losing Focus

If something is going really well you want to double and triple down on it.

Toast keeps telling the market that they’ve only penetrated ~10% of their US restaurant TAM.

If that’s the case then why spend material resources chasing non-restaurant verticals?

Per their investor day updates, Toast is now pursuing liquor and convenience store verticals.

Why would you do this if growth was going so well in restaurants? If you’re truly only in a paltry 10% of the market then there shouldn’t be any justification to distract yourselves from going after the other 90% with the same product and the same sales model.

Opening up a new vertical takes material R&D, new learnings, a change in product positioning and GTM motions, etc..

You would only publicly pursue a new vertical if you weren’t doing it as a skunk works project but instead considered it a legitimate new line of business.

Which you shouldn’t if, again, you truly were only penetrated into “10%” of your beachhead market.

Serious cognitive dissonance here.

We should also note that there’s only a small payments revenue opportunity in convenience stores (cstores).

Sales at ctores are split between the forecourt (where you buy fuel) and in-store (the stuff in the store). The former is roughly 2/3rds of the $900B of US volume.

The forecourt payment contracts are controlled by the oil majors (Chevron, Exxon, et al.) who license their names to small, independent operators.

You can think of the oil major as master franchisors but with 100 IQ points on the largest chains in the restaurant industry.

If you believe the likes of Chevron are going to be swindled by over 225 bps on a corporate payments contract you should consider going back to the restaurant industry where 1 + 1 = potato is, somehow, an acceptable answer.

Back envelope math on the in-store payments opportunity, because again, retailers will never pay for software/value:

$300B of sales across 150,000 cstores = $500K on average, with SMB operators making up roughly two thirds of those locations. There’s going to be a revenue skew with larger chains (Wawa, Sheetz, Buc-ees) pulling those numbers up, so Toast would be targeting stores with ~$350K of in-store revenue.

In other words, Toast will need to charge these cstore merchants ~3x what they charge restaurants (via payments, not software because they’ll never pay for it) to get the numbers to work for their current, direct distribution model if they wanted CAC:LTV to make sense.

And they’re public, so those metrics need to make sense.

In other words, cstores on Toast would sell out a 5% effective rate for Toast to be mathematically whole.

What a deal.

Losing Partners

For years Toast held an exclusive POS referral relationship with US Foods, where the latter was referring Toast into accounts. We can’t remember where we saw the number, but if memory serves US Foods was directly responsible for adding several thousand Toast accounts annually.

Well, we’ve been told that US Foods has been less than ecstatic with the way they’ve been treated by Toast and have found other POS partners to refer in Spoton and Square.

Is this a signal that Toast has gotten too big? That they’re losing their pulse on customer support and customer satisfaction?

If US Foods was so happy with Toast, why expand partnerships?

Software Ceiling

We’ve said this before, and we’ll say it again:

Restaurants will never pay for value without a demographic overhaul.

It’s why Toast has found that no matter how much additional value they add, restaurants aren’t buying it.

Which has got to be infuriating.

The reason is simple, however: restaurants cannot understand basic math.

But it means that Toast’s organic software growth has reached its zenith. From here, the only way to get “software growth” is to miscategorize payments revenue as software revenue.

Because, as we mentioned earlier in the article, you have to steal from customers who cannot understand value.

And how do you do this to mathematically illiterate customers?

You force them to do math to determine the cost of your product.

And guess what?

They won’t!

So long as you take your fees in the payment stream, the restaurant will never know what they’re actually paying.

But the payments tactics Toast has cooked up smell more of desperation than viable solution.

Desperate Payment Tactics

Toast is incredibly creative. While other payments companies engage in the banal games of early termination fees and fabricated charges, Toast actually expends energy concocting clever ways to rake more on payments processing.

The problem has been that their strategies are too aggressive.

Which reads to us as a bad omen: things must be really bad inside Toast for them to swing this hard at the plate.

Experienced payments bros know that they must edge that fine line between meeting the quarter and bankrupting their customers hosts. Too much bloodletting and the host dies while the market becomes exuberant at your posted numbers, foisting on you expectations that you know you can’t hit because, well, you’ve killed your hosts.

For Toast to execute some tactics that are so reputationally risky really speaks to the challenges they’re seeing in their data.

The $0.99 ordering fee caught national attention and highly likely resulted in the outing of their then-CEO.

Their new surcharging position is just as hasty, making Toast look incredibly greedy and, ultimately, increasing the cost of eating at a restaurant where Toast operates.

Toast prides itself in dominating markets (their investor day presentation gloated that they win 7 of 10 new restaurant openings in Austin, TX) so this would mean that the poor denizens of Austin are paying 5% more to eat at restaurants just so Toast persists as a public company.

To us, all the aforementioned are pieces of evidence that Toast has realized the truth:

1. Restaurant software TAM is infinitesimal
2. Restaurants will not pay for value/software, at least not in the next 100 years but more likely ever
3. The only way to show revenue growth is to steal from the payment stream

Toast can be the best thing since sliced bread but at the end of the day you cannot escape that Toast is still stuck dealing with customers who don’t care about anything.