Business Breakdowns
· Sean Barrett
The new offering that just came out that's super exciting is called Toast Grow, and it's within the AI offering. It's an automated marketing engine for restaurants. Restaurants spend a lot of money on marketing. Generally, a restaurant will spend $1,000 to $2,000 a month with a marketing agency for Instagram and local marketing, and they don't see a lot of uplift. They still have nights of the week that are just gonna be empty or gonna be more quiet by nature of local behaviors. What Toast Grow does is look ahead. It takes data from the past, and it takes data from restaurants around you, and it might look and say, "Okay, this next winter Tuesday in Boston historically is really, really quiet. Let's go out and do a local promo with SMS texting to people who have been here before. Let's put up deals on the website. Let's do an Instagram promotion." It does it all in real time automatically, and it does that for about $500 a month. Historically, just over the last month or two as people have started using this, they've seen an eight percent uplift in total revenue. Remember, we talked about a restaurant on average for Toast doing about $1.3 million of revenue. So this product that costs $500 a month as a SaaS module, by the way, nice uplift, could be 100% uplift to SaaS ARPU, gives you about a 20X ROI right out the gate. So that's the kind of stuff they're doing in AI. We talked about some of the internal leverage as well that they're getting with R&D, but the product roadmap is largely AI-driven. It's largely agentic-driven, and then management would tell you, as they did at a conference yesterday, that this is gonna be the next leg of their revenue opportunity as well.
· Matt Reustle
[00:00:00] S0: The eight percent, whether you measure it in 20X or just think about restaurants, the margins that they operate at, how razor-thin it can be, it is material for that customer base. On the competitive landscape, I truly failed to appreciate how much Toast was doing for customers, just in terms of how deep into the restaurant's operating activities they could be when it relates to inventory management, marketing, all of these different things. How do you define the competitive landscape? And I'm curious how many others are doing quite as much, just in terms of the breadth of different activities.
· Sean Barrett
[00:00:00] S1: The competitive landscape, I think, is a real strength of the story here. Just to start out, before we jump into specific competitors, big question is, why does Toast win? They win because they have great product that we talked about. They have happy customers. And then importantly, they have more profitable customers. A typical restaurant might have ten percent margins. It's a low-margin business, as you mentioned. A typical Toast customer from our work has something more like 15% margins, so they're taking home 50% more dollars for the restaurant owner. It also means that Toast restaurants survive more often. That leads to higher retention for Toast, and it leads to happier customers. The interesting thing about the competitive set, I would break it into legacy and modern. You've got about half of the market that's still on legacy platforms. So that's stuff like NCR Aloha, Oracle Micros. Those are companies with on-premise software, on-premise servers. Generally, as we talked about, a bad fit for a kitchen. You don't want a hot server sitting in the back of your kitchen or in a closet near your kitchen. That's what really opened up the door for Toast to be the first successful scaled cloud-based disruptor. On the more modern side, you've got Square. They have about five to ten percent of the restaurant market. They do really well in the lower end or the smaller end of the market, where it's a less advanced offering, really more just a payments dongle. Now, they are innovating, and they're innovating at a more rapid pace than they used to because I think they see the restaurant industry as actually really attractive. They aren't winning from Toast. They're mostly winning from legacy and we think from Clover. Clover has about a 15% share. That's the subsidiary of Fiserv. It's been publicly noted that Fiserv's been over-levered. They've acquired a lot. The stock has been a mess, and I think they have some real issues to deal with with regards to leverage if they wanna survive. As a result, they're not innovating, and customers have noticed, and so they've been losing share, even on the modern side. One player to watch right now is DoorDash. It's no secret DoorDash has been out piloting POS solutions with their customers, but I think maybe they did that in response to Toast, which very famously about a year ago started offering free delivery.
· Sean Barrett
That's a real innovator's dilemma for DoorDash all of a sudden. DoorDash has close to a 15% take rate for their deliveries, but all in from a customer and restaurant perspective, it can be 30% of the order that goes to fees. Toast just flipped that whole thing on its head. We think 80,000 customers, or half of the Toast restaurant base now, has signed up for the Toast ordering module, which effectively gives you free delivery in partnership with Uber Eats from the restaurant perspective. We always try to go out and do our homework on the ground, and so we ask the question of which restaurants would be likely to switch from Toast to DoorDash if DoorDash were to offer POS for free even? There are a few things worth noting. One, the unit economics of switching from Toast to DoorDash are non-rational. You're effectively saying you might save 50 bips on payments, which is not substantial, to go over to DoorDash, where you're paying 13 to 15% take rate on deliveries, and that's a really meaningful difference, that take rate. You can actually do this, Matt. So if you go to your favorite local restaurant, decent chance now that they have Toast deliveries and DoorDash deliveries enabled. Pull up the delivery on DoorDash. You can get all the way to the order page. A $40 delivery on DoorDash will usually cost you something like $30 to $35 if you continue to the delivery page on Toast. It's a really great offering. Restaurant customers love Toast. Net promoter scores of 50, customer satisfaction rates of 95-plus percent. Those customer satisfaction rates are substantially higher than what we see in our surveys on DoorDash. The third thing is we always put boots on the ground to test our hypothesis. So my colleague actually went up to San Francisco the other day, just this week, and walked into 30 or 40 restaurants that have DoorDash and Toast enabled, bought something — be a good customer — but asked them, "How likely would you be to switch from Toast to DoorDash if it was free?" We couldn't find a single customer that said they would switch if DoorDash offered free point of sale. We think both these companies can coexist and grow and be successful. Where I think DoorDash will find more success is in quick service restaurants that are delivery-first restaurants versus where Toast plays really well in the full-service neighborhood restaurant.
· Matt Reustle
[00:00:00] S0: I can speak from personal experience, the frustrations that have existed from delivery fees from restaurants over the years are quite strong, too, and vocal, and it's just not something you hear as it relates to any other part of the business. I think that's out there. I respect the channel checks 101 boots on the ground that remains alive. That's incredibly interesting information to get back. On that whole concept of switching and whether we call it churn, how much does the industry switch year to year? I'll almost put aside the fact that the restaurant industry sees a lot of turnover. We have a lot that goes out of business, a lot that comes into business. But do you have any concept on how sticky it is and just general churn?
· Sean Barrett
[00:00:00] S1: It's pretty well documented. The industry churns at something like 15% a year. And so if you think about 800,000 restaurants in the US, something like 100,000 or 120,000 of them shut down and then generally restart every year. It's a tough business. What you see is that the business is really tough the first couple years, and then restaurants that survive for the first three to five years actually tend to survive for a very, very long time. The interesting thing from a churn perspective is that it's actually a huge positive for the challenger, like Toast. There are some industries out there with 99% retention. There's no churn. And even if you have a better product, you come in with a hugely advantaged product, customers aren't gonna churn, and you're gonna get one percent of the industry, you're gonna get one percent at bats every year. You look at Toast as the challenger. Let's say 100,000 restaurants reopen or open every year. Toast is winning about 50% of those, we think, on a gross basis. They wouldn't get all those at bats if it was a higher retention industry. It's a strength of the challenger. I think the big debate or the big question is, so what happens in five years when Toast is 30, 40% of the overall market? Do they look more like the market, and does their churn go up? That's been a debate since 2020, 2019. As they get bigger, surely their churn will go up. We haven't seen noticeable changes in churn. And the reason for that, we think, when we talk to customers, their businesses are so much more profitable using Toast than they were otherwise, that they just become healthier businesses that survive more. So there's a big survivorship bias in the industry within Toast customers.