We have written much about he the changes in the restaurant and dining space in the past. This ranges from the challenges restaurants face from the major delivery apps to shifts in consumer behavior driven by the pandemic. We learned last week of another important player in this space looking to raise money in the public market.
New York City-based Olo is set to raise $100 million through a public offering. The company’s IPO memorandum offers some interesting data on the market opportunity it believes lies ahead. We should note that Olo launched 16 years ago, in 2005. They were arguably quite ahead of their time. And yet the company’s obvious patience and discipline are really quite remarkable. A company that’s raised just over $80 million over 16 years and survived and is now launching an IPO is truly impressive indeed.
Here are some of the interesting pieces of data we gleaned from the Olo document. The 16-year-old company has 64,000 restaurant locations and 400 companies on its white-label platform. That’s an average of 160 locations per customer. For instance, there are 1,500 5 Guys locations, 600 Cracker Barrel locations, and 168 Shake Shack locations using Olo. In 2020, the company processed $14.5 billion in GMV (gross merchandise value) across an estimated 650 million orders (our math based on 1.8 million daily orders). That puts the average order value at about $22.5.
A Vast Swing in Monetization
The company reported just under $100 million in topline revenue for the year ending 2020. This leads us to an ARPU of about $1,500 per location (100 million divided by 64,000). That’s just $130 per month. According to the IPO memorandum, subscription revenue has declined from about 93% of revenue at the end of 2018 to just over 55% today. Meanwhile, transaction revenue has shifted over the same period from about 7% to 43% of revenue today. That is a vast swing in monetization. We presume this trend will continue, albeit at a slower rate.
Olo divides its business model into three core offerings – Ordering, Dispatch, and Rails. Here’s how the prospectus describes each:
Ordering. A fully-integrated, white-label, on-demand commerce solution, enabling consumers to order directly from and pay restaurants via mobile, web, kiosk, voice, and other digital channels.
Dispatch. A fulfillment solution, enabling restaurants to offer, manage and expand direct delivery while optimizing price, timing, and service quality.
Rails. An aggregator and channel management solution, allowing restaurants to control and syndicate menu, pricing, location data, and availability, while directly integrating and optimizing orders from third-parties into the restaurants’ point-of-sale, or POS, systems.
So taken together you might call these three pillars the elements of Olo’s commerce flywheel.
A $7 Billion TAM
We also learn from the memorandum that the company sees a current addressable market of some $7 billion from the enterprise restaurant sector. We wonder if this isn’t a bit ambitious. Company’s like Chipolte seem to have built their own platforms. And we’d expect it will be difficult for Olo to bring in companies like McDonald’s or Subway. These chains have roughly 14,000 and 25,000 locations, respectively.
Olo does say it will consider ways to deliver its solution to independent or small business restaurant brands. Olo estimates this segment offers another $13 billion of addressable market. Add in an estimated $20 billion for international and the addressable market swells from $7 billion to $40 billion. That’s a very large opportunity indeed.
Back in September, the company launched its Serve interface. Serve is a fully responsive web experience designed to optimize the experience for guests on any device, replacing multiple iterations of Olo’s legacy UX.
Here’s what the company’s SVP of product and design said back in September. “We built Serve with the knowledge of studying how millions of people place their food orders every week . . . The prevailing consumer insight we’ve always come back to is that speed and menu navigation top the list for a successful transaction.” This is all about reducing friction for the consumer. Taking their as quickly as possible to help them achieve their objective – in this case presumably ordering food.
Nekter Juice Bar with 100 locations commented on Olo’s new Serve interface “At Nekter Juice Bar, it is crucial for us to give the best possible digital experience, regardless of device . . . This update will make it even faster and easier for our guests to get their favorite freshly-made juice, smoothie or acai bowl, wherever they are and whatever device they are using.
A Slice-Olo Mashup?
Interestingly, founder and CEO Noah Glass has been with the company since its launch. Most recently long-time local operator and investor Kenny Herman – ex of Slice — worked at Olo in partnerships and development. You may remember that Slice raised $43 million last year in a Series C round that was lead by GGV Capital.
This leads us to wonder if down the road there’s an Olo and Slice mashup that brings the two food industry upstarts together. While Olo today focuses on enterprise with aspirations to extend to the independent restaurant space, Slice focuses on the independent space and very likely has aspirations to figure out the enterprise space.
In some ways, however, those worlds do seem to be at odds. We see this all the time in the local arena. Company’s built to help the Mom and Pop small business owner seem to want to get into the multi-location sector. And rightfully so. The multi-location space offers the scale that is so vital to driving valuations. And the company’s that were built to serve the enterprise market often look to the vast numbers of small businesses as a growth engine. This is a very challenging balancing act and we’ve yet to see it executed flawlessly.