Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: When COVID happened it represented obviously an existential crisis and still does for a huge swath of the restaurants in the US. And I think one of the most interesting things that's happened with you and with Tock is how you responded and reacted to that. Now that we've laid that groundwork, just love all the lessons you've shared with us so far, talk us through that episode, which is of course ongoing, and what you did and what you've learned.
· Nick Kokonas
[00:00:00] S1: The first thing that I did was I realized ... You said it's an existential danger. You can realize that somethings an existential risk or danger at any point along the curve of it being an existential risk. The trickier part is to realizing that something could be an existential risk, has a small chance of happening, but it's nonzero. So right now it's very obvious that to the restaurant industry, to software companies that serve the hospitality industry, that COVID is an existential risk. We started talking about that February 28th. Because at the time there was evidence in Asia and Italy that this was a very, very serious potential pandemic. Then when Seattle started having some cases at senior care facilities, that's the moment, that was March 8th, where I went, "The whole industry is totally screwed if this happens. And it seems like it's going to happen." As a trader and a trader in an era where you look at other people and you can tell whether they're telling the truth in how panicked they look, every time I saw senior officials on TV saying that this is nothing to worry about I worried more and more. They wouldn't even be talking about it if it was nothing to worry about. I immediately went into like, kind of a footing of what happens if tomorrow every restaurant in America is shut? What happens if I have to shut down all of my restaurants and can't serve anybody? What happens if they just go to 50% occupancy? Or what happens if my employees begin getting sick? How do we protect ourselves? That was a moment where ... I don't want to use the word panic. I didn't panic. But I got very, very concerned and serious. And when you're the only guy in the room saying the sky is falling, or the sky's about to fall, you can look a little unhinged. I tried to explain to everyone if something has a 10% chance of happening but if it happens it wipes you out, you need to mitigate that risk. Even if you're wrong and it doesn't happen, great. But at least we were prepared. And I called some other restaurant owners and whatnot and honestly, people thought I was off my rocker a little bit. My own employees were kind of snickering behind my back because we instituted a five minute call time, meaning everyone had to come within five minutes. We instituted mandatory temperature checks and hand washing and mask-wearing.
· Nick Kokonas
And we did that two and a half weeks before Chicago was shut down and before there were any guidelines to do so. I could see on the look of some of our managers' faces the fact that the guy who sits on his computer all day is telling us to wash our hands every hour, but he has no idea that you can't run a restaurant that way. You can't run a busy restaurant where everyone stops and washes their hands every hour. Log all that, video record it to make sure people are doing it and all that. When I noticed that, in the room normally I would have a nice explanation as to why this is the case and all that. And instead I just said, "Anyone who doesn't do it is fired. And you won't have a job for two years anywhere because that's how serious this is going to be if it happens." People went from going, "Oh, he's unhinged and we're just not going to do it," to, "He's unhinged and he's going to fire us all." Which doesn't mean that they wanted to do it, but it did mean that it got the job done. And what happened was within a week it became evident that unfortunately we were correct but that also gave us the opportunity, both on the Tock side and the Alinea Group side, to pivot very, very quickly. And we talked to Canlis in Seattle and they were like, "We're going to shut the restaurant and we're going to start doing to go and we want to figure out how to do that on Tock because we love Tock and it's changed our business for the better." And we recognized that there's a way to shoehorn it in, but it wasn't that elegant. But because we're a cloud-based system, because we built our data around dynamic and variable pricing for time-slotted businesses, carryout food is also a time-slotted business, we can adapt to this very quickly. So we gathered about 20 designers and engineers. We got a week to put out a new product. The people, again, who went, "That's not possible," simply were off the team. And everyone else worked 20 hours a day to do it. We got it up and running for Canlis. Three days after Chicago shut down we started serving $35 beef wellingtons out of Alinea, which was newsworthy at the time because why would a Michelin three star serve $35 food? By the following week we were selling 1,000 a night, plus wine, plus, plus all those things I talked about where you're actually selling. We were selling books as well every night.
· Nick Kokonas
And we went from furloughing our employees to hiring everybody back in four and a half, five weeks. Everyone who wanted to come back. And on the Tock side we were able to massively undercut the third-party delivery applications. DoorDash, UberEats of the world. Until then they were supplemental income to restaurants. So they could say, "Well, I'm charging 20% to 30% because you have no service COGS. You have no extra labor. We're doing the labor by delivering it the last mile." And restaurants signed up for that. But when it became their only source of revenue, that 30% suddenly looked egregious and painful. We charged a flat 3% because we built the whole thing on the back of our events platform that charged 3%. It wasn't like some miraculous thing. Frankly, I wish I'd charged 6% or 7% or 10%. But we charged three. In the intervening since March, we've signed up over 3,000 restaurants. Our business will be at a billion-dollar GMV run rate by the end of the year. An amazing mix of revenue between elevated carryout and to go reservations as places reopen. 70% of everything on Tock is a totally free reservation. It's not a ticket. It's not a deposit. It's that bar seat at Gramercy Tavern that's totally free. But the ability to sell that tasting menu and your carryout and all these things together make for a more resilient business model. Even as we reopened in the summer our patios and Alinea did a popup on the rooftop and all that. Even though we had replaced a lot of our revenue with the patios and whatnot, I insisted that we keep the carryout going because at some point I was like, "Hey, it's going to be winter in Chicago. There's no yurt warm enough, plastic yurt, to have two sides open when 20 below tundra in January in Chicago and it's snowmaggeddon again. And then I got to carry food out to that? That's not going to work. It's obviously not going to work." I'm amazed that all these restaurants are putting those up because that is a six-week solution to a six-month problem. They just closed down dining again in Chicago and we were able to instantaneously wrap up our carryout again. And that's the goal is to have that sort of resiliency even after COVID.
· Patrick O'Shaughnessy
[00:00:00] S0: Do you think that based on that observation that there's a big risk factor for those DoorDash, Uber Eats kind of delivery, last mile services because of how restaurants will inevitably have to change and it impacts their economics so much?
· Nick Kokonas
[00:00:00] S1: Yeah. I mean, if you look, every single one of the US based delivery applications actually lost more money during COVID even though their revenue tripled. As much as they are charging the last mile delivery to a single location is a model that doesn't make money, which is why there's a lot of consolidation there. I think there are ways to have it make money. And part of the way to do that is what we've done which is give the consumer a choice between picking it up themselves at the restaurant or paying for the convenience of having it delivered and then splitting that cost with the diner. So if someone picks it up, we charge the restaurant 3% for the order and we charge the consumer the $1 for the order. That's it. If someone's delivering it, we utilize these third-party delivery, last-mile applications and we integrate with them seamlessly, but we've essentially convinced them that we're going to charge the consumer a flat $5 to $7. And if someone's selling a $50 menu and four people order it so it's a $200 carryout order, which isn't the case with casual places, why should the delivery app get $50 to take it a mile? Doesn't make any sense. I think that there are ways of changing their pricing model that doesn't impact the restaurant as much, still good for consumers and gives consumers a choice, but kind of spreads out the true cost of doing that delivery. Which is also equitable to the drivers.