Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: On the broader perspective of competitive advantage moats, we talked a little bit about hardware, software, logistics. I guess just how would you frame it to the extent that we have mentioned a lot of varying things, but how would you package that together and just talk about their moat?
· Sean Barrett
[00:00:00] S1: There's been so much negative news on software in the last six months. We really wanted to simplify it, and we always come back to what we call the laws of physics here at Counter Global. Charlie Munger used to call them his mental models, but these are rules that have been durable for investing for decades, and they hold true. And so we rely on those superpowers, we rely on those laws of physics. Toast is a mission-critical operating system. They have strong network effects. The industry is standardizing on this platform. They have huge data advantages. They have domain expertise. Speaking of Charlie Munger and his mental models, one of his actual mental models that he used to talk about a lot was that in any capitalist system, the specialist wins the outsize share of the economics. He famously quoted that in a lot of his speeches. We believe in these laws of physics, these mental models, and the interesting thing for Toast is that it really checks all the boxes. The two structural moats that I think people don't talk about enough are hardware and how complicated it is for Toast to deliver this great hardware, and then the distribution advantages they have. Starting with hardware, it took them many years to build purpose-built hardware for the restaurant industry. But it's not just about the design, it's about the supply chain, the chips, making sure you have the right amount of inventory for your share gains. It's very, very complicated. And then the distribution is also really complicated. Toast has feet on the street in every major city in America, and those advocates walk into restaurants all day long, talk to owners, make sure they're being served properly by Toast. It's a huge part of the story that's really hard to replicate. I would just give you an example. A year or two ago, a high-profile startup launched. It's supposed to be AI native, serving the restaurant space. And I think they thought probably with AI coding and all the advances going on with AI, that they could copy Toast product and have something up and running pretty quickly. Fast-forward to today, we aren't seeing them at all in the market. Last I heard, they extended their roadmap. They think it's gonna be at least another two years before they have something that looks like Toast.
· Sean Barrett, Matt Reustle
And then at that point, good luck building the supply chain, good luck building the hardware, and then you've gotta get feet on the street in every major city in America and abroad. I think it's just way harder to disrupt this space because the moats are so powerful. [00:00:00] S0: We haven't talked about the management team or just culture within the business. Tell me a little bit about who's behind it and anything that's unique about the culture to the extent there is something unique.