Olo Deep Dive

By empowering restaurants to own their digital future, Olo occupies a unique position in the huge but fragmented restaurant tech landscape

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Investment Thesis

• Food delivery marketplaces charge commissions of 15%, compared to average restaurant profit margins of 3-5%; with increasing delivery adoption spurred by COVID, this value proposition is no longer tenable

• Olo enables restaurants to own their customer by building their own digital ordering experiences, aggregating third-party marketplace orders, and leveraging cheaper white-label delivery options

• Olo empowers restaurants to keep their legacy tech while adapting to constantly shifting customer demands through its 100+ technology partners

• Olo is 25% penetrated into its enterprise opportunity in the US, yet just over 1% penetrated in their transaction opportunity, creating a powerful tailwind for their usage-driven business model

• Olo enjoys a two-sided network effect as the largest scaled middleware player in the winner-take-most enterprise space where the more clients they have, the more integrations they are able to offer, leading to even more clients

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Ben Thompson from Stratechery introduced the concept of Aggregation Theory back in 2015. This framework helps explain how companies like Google, Facebook, and Airbnb became quasi-monopolies in their respective categories. Aggregators have three traits: they have a direct relationship with users, they incur zero marginal costs in serving additional users, and customer acquisition costs decrease over time as more users attract more suppliers and in turn attract even more users in a virtuous cycle. These traits create winner-take-all dynamics where once an Aggregator achieves sufficient scale, it will be increasingly difficult for competitors to offer the same value.

The reason that I discuss this is because one of the most common risks to these businesses is multi-homing. When the costs of maintaining a presence on multiple platforms is low, supply may often choose to go through as many channels as they can to maximize potential profits. Consider DoorDash, because there are low multi-homing costs, many drivers often choose to work for multiple platforms to maximize orders and earnings. This makes it difficult for DoorDash to consolidate the market as consumers will always have a viable alternative and suppliers get more bargaining power. In the streaming content business, no single player will be able to own content. $220 billion was spent last year on new content by content owners combined, of which Netflix was third with $15 billion. Although DoorDash and Netflix are two of the most successful examples, both commanding the majority share of their respective categories, the space will likely continue to be fragmented.

This opens up the opportunity for them to be disintermediated by the next generation of platforms that I like to say are “aggregating the aggregators”. This has been a common theme in my portfolio, with the most notable examples being GoodRx, aggregating PBMs that are aggregating pharmacies; Roku, aggregating streaming content owners that are aggregating content; and Olo, which is aggregating POS (point-of-sale) systems and food delivery providers which are aggregating restaurants.

Problem

Restaurants are losing control of the customer relationship to third-party aggregators like DoorDash. DoorDash charges 15% commission at minimum for delivery orders and a 6% commission for pickup. It also keeps most of the customer data, which cripples restaurants’ ability to build a loyal consumer base. UberEats plans also start at 15% while GrubHub charges a whopping 30%. Some cities like San Francisco and NYC have already capped commissions at 15% during the pandemic. With average full-service restaurant profit margins of 3-5%, food delivery apps have an unsustainable value proposition at scale. The aggregators justify their service by stating that they are bringing incremental revenues for these restaurants. Restaurants typically allocate two-thirds of revenue to labour and COGS, with the remaining dedicated to fixed overhead costs. If the revenue were truly incremental, it would come at a higher margin because those overhead costs could be spread across a greater number of orders. However, a survey by Morgan Stanley revealed that this is usually not the case, with 43% of delivery customers saying they would have placed the same order otherwise at the restaurant.

Food delivery apps are also increasingly consolidating among a few winners even before UberEats tried to buy GrubHub (which ended up being acquired by Just Eat Takeaway while they acquired Postmates in December 2020). In March 2019, Grubhub, DoorDash, Uber Eats, and Postmates accounted for 32%, 30%, 21%, and 10% of meal delivery sales respectively. As of December 2021, that has changed to 15%, 58%, 24%, and 3%. However, despite DoorDash taking the industry by storm, each has carved out their own geographic niches, with 61% of DoorDash customers using them exclusively in Q4’21 and 47% of UberEats. As of August 2021, DoorDash had 72% share in San Francisco and UberEats had 58% share in Miami, with other markets like NYC, Chicago, and Boston being more fairly split between DoorDash, Grubhub, and UberEats. Stats are from Second Measure. Keeping competition low has helped to keep restaurant fees high and driver commissions low. With third-party delivery growing from 6.5% of transactions in 2019 to 10% in 2020, restaurants realize that they are getting "Amazon-ed" by the aggregators and with Olo, they finally have their own Shopify. 

It's not just restaurants that are at odds with the aggregators, but consumers also want to order directly from restaurants. In their S-1, Olo cites that 64% of adults prefer to order directly through the restaurant for delivery, compared to only 18% who prefer to order through a third-party service. In fact, over 70% of Olo customers indicated that their primary reason to own their own branded digital storefront was to own a direct relationship with their guests. The majority of respondents have 50% or less of their online orders coming through an aggregator compared to their own channel and expect that to continue to fall in the future.

However, to date, the restaurant tech ecosystem has been incredibly fragmented with many enterprise brands using multiple point-of-sale (POS) systems, payment processors, and tablets to manage incoming orders across various aggregators and these are usually quite sticky and difficult to replace. 70% of restaurants in an Olo survey indicated they use two to four different technology providers to collect orders across various channels. Most restaurants do not have advanced IT departments that enable them to create and maintain their own best-in-class online ordering experiences much less integrate all of these disparate services.

Solution

This is where Olo comes in. Noah Glass started the company back in 2005 at the age of 22 after declining his offer to Harvard Business School before the concept of mobile ordering or even iPhones existed. At its core, its platform provides three services: enabling restaurants to build direct-to-consumer digital ordering experiences (Order), manage orders across channels (Rails), and enable delivery across their restaurant locations (Dispatch). It has a SaaS platform that integrates with over 100 technology partners including most POS systems, aggregators, DSPs, payment processors, UI and UX providers, and loyalty programs. 

They have 3 main modules:

1. Order: Helps restaurants to build a seamless white-label digital ordering interface through mobile or web applications. Olo also offers a coupon manager to enable restaurants to create and manage in-app promotions, integrations with third-party rewards programs, and order management via Expo. This is the most commoditized part of their offering but also the most popular. Clients can either pay a fixed monthly fee or a reduced fee with a fixed number of monthly orders with an additional fee per excess order.

2. Rails: Aggregates orders from all food delivery services like DoorDash, UberEats, or GrubHub into restaurants' POS systems, saving restaurants the need of having several different tablets collecting orders from these marketplaces and synchronizes menus, item availability, and prices in real-time. Also allows restaurants to prioritize orders during peak periods. Olo charges the aggregators a transaction fee for the privilege of serving an Olo client. Each order also counts towards the order limit mentioned above with the ordering module.

3. Dispatch: Aggregates couriers from all third-party food delivery services to assign delivery orders depending on whoever offers the lowest rate and fastest delivery at any given location and time, thereby making aggregators compete for Olo’s clients’ business and lowering the frictional cost of fulfilling a delivery order in the process. Olo charges both aggregators and restaurants a fee per transaction. Olo's dispatch network covers 97% of their customers’ US restaurant locations.

Olo also offers two additional products: Network, which allows restaurants to take orders from non-marketplace digital channels like Google, and Switchboard, which is a phone-in ordering platform that sends pick-up and delivery orders directly to the POS. Olo is also going to release another module, Olo Pay by 2023. This will act as a unifying layer for credit card processors, meaning that a consumer will not have to enter credit/debit card information online each time they order through a brand location with a different POS system or merchant. 

In summary, Olo acts as middleware that connects a restaurant’s custom-built systems with an increasing range of third-party applications. This is a powerful position as it gives them a unique view of every digital transaction for a brand, regardless of the channel. At the corporate level, cleints can get a high-level view into everything that is going on in their stores today, whereas previously they had to synthesize disparate POS feeds using homegrown/third-party solutions.

With Olo, brands can see everything from order history to product mix to contact information. However, until now there has been no way to leverage that to identify the top 20% of customers that represent 60% of sales and figure out how to better engage with them. In November 2021, Olo acquired Wisely, a vertical customer data platform (CDP) for $187 million in a cash/stock transaction. With first party data from clients, Olo can get insight into digital and non-digital orders, email open and click thorugh rates, reservations, etc. to form a unique profile of each customer, and help restaurants better understand customer lifetime value. Clients can then leverage that to drive higher ROI marketing campaigns, such as targeting your high value customers with more attractive coupons.

Perhaps the best example of a business built entirely on Olo is MrBeast Burgers. MrBeast is one of the most successful YouTubers in history, with almost 90 million subscribers. He was able to build up such a huge following in record time as he embodies the economies of scale shared business model by reinvesting all of his profits (sometimes even more) from his previous videos into his next video. This allows him to create videos with production values near that of Netflix shows. A recent Squid Game video alone cost over $3 million. More viewers -> more ad revenue -> better videos, repeat. However, because he has grown so large now and his incremental viewership/ad revenue is not growing as fast as it used to, he’s monetizing via other channels. The most prominent of which is MrBeast Burgers, ghost kitchens (powered by Olo) to fund ever more expensive content for his core channel which leads to more viewers at a higher LTV. In December 2020, he opened 300 locations across the US practically overnight and rapidly became the most downloaded app on the App Store and the Google Play Store. Since then, it has processed 100 million orders, all through Olo. This unprecendented rise was only made possible through the the instant scale provided by Olo’s national network of dispatch drivers.

Financials

Financials are quite strong. FCF margins of 27% last quarter (20% in 2020, and 2.1% in 2019). Revenue growth is expected to grow 51% this year to $148 million with 82% gross margins, versus revenue growth of 94% and 59% in 2020 and 2019 respectively. Off the back of a massive 2020 due to COVID, Olo has seen decelerating revenue growth in recent quarters, from 125% in Q1’21 to 48% in Q2 and 36% in Q3. It is guiding for 28% revenue growth in Q4, but its sequential growth is reaccelerating. Analysts estimate that Olo will grow 28% in 2022 to a $190 million runrate.

As of year-end 2019 and 2020, 44% and 71% of their customers used all three modules, respectively. Olo has high switching costs given the difficulty of implementation (top-down) and network effects, with 99% gross retention and >120% net retention. The implementation happens after buy-in from management, which is then implemented across 100% of restaurant locations. This results in incredible S&M efficiency, with Olo spending just 11% of TTM revenue on S&M, versus the median SaaS S&M spend of 44% of revenue and boasting a best-in-class 8-month payback period. In the future, Olo could also leverage its enterprise footprint for easier access to international markets.

Revenue comes from both the subscription and per transaction. For the years ended December 31, 2018, 2019, and 2020, 93.2%, 80.8%, and 56.7% of platform revenue was subscription revenue and 6.8%, 19.2%, and 43.3% was transaction revenue respectively. Because Olo has a usage-based model, they benefit directly from their restaurant clients’ shift to digital. Aligned incentives (you grow, I grow) also lead to happier customers that spend more and churn less. A report by Openview Partners has shown that usage-based SaaS companies grow faster at a larger scale by maintaining best-in-class net retention rates for a longer time. In fact, 7 of the top 9 IPOs with the best NRRs all had a usage-based model!

Olo’s serviceable addressable market includes 300,000 enterprise restaurants in the US which accounted for 40 billion transactions each year. Another 20 billion transactions can be attributed to 400,000 SMBs but this should remain out of reach in the near term due to the cost of Olo’s platform. 16% of those transactions were digital as of Q3’21. Takeout was 9%, delivery was 5%, and on-premise digital was 1.5%. By 2025, digital penetration as a percentage of restaurant sales is expected to reach 54% vs 19% in 2019. However, Olo’s goal is to touch every transaction, including the ones done on-premise. For example, many restaurants are now doing QR code ordering, where customers place their orders digitally by scanning a QR code at their table instead of a waiter having to enter it manually into the POS system. Today, Olo has 76,000 restaurant locations across 500 brands and over 500 million transactions. It counts over 50% of publicly-traded restaurant companies and over 50% of the top 50 fastest growing private restaurant brands such as Wingstop, Shake Shack, Five Guys, as customers. In other words, while they are 25% penetrated in their enterprise opportunity, they are just over 1% penetrated in their transaction opportunity.

Source: S-1

Olo’s dominant position and usage-based business model in an industry with strong tailwinds is reminiscent of Roku. Today, US adults spend 42% of their TV time streaming but only 22% of TV ad spend has moved to streaming. Roku is the dominant player in the US, controlling 1/3 of viewing time and 45% of CTV ad share, more than triple that of the nearest competitor, FireTV. Ultimately, the increased engagement and targetability offered by CTV made it a question of when, not if, ad spend would shift from linear. Similarly, I believe that the increased convenience, reach, and data offered by restaurant transactions moving to digital will be a strong tailwind for years to come.

Olo is currently trading at a $2.6 billion fully diluted EV on $42 million of TTM FCF, so ~62x FCF and if they grow another 30% next year then that's ~35x 2023 FCF assuming 30% FCF margins. They will have tough comps in Q1 because of the pull forward they had last year due to COVID and stimulus. However, once they lap that then I expect stronger growth as they add more restaurant brands and increase ARPU via cross-selling modules and Wisely, their new restaurant customer data platform acquisition, as well as the continued trend towards digital ordering. Although Olo is still not cheap after an over 60% drawdown, I view the current price as attractive as it has attained a surprising amount of market share relative to its size with the opportunity to grow transactions 80x. It acts as a much needed intermediary helping restaurants to navigate an increasingly fragmented and threatening competitive landscape, is led by a visionary founder who was years ahead of his time, and is postioned to capture the majority of the enterprise market as it sees increasing returns to scale with its growing integrations set.

Competition & Moat

One of the main criticisms of Olo is that digital ordering is a feature and will be commoditized. While I agree that Olo would be an unattractive investment if they were siloed to ordering, they are rapidly building a true platform on top of the penetration they were able to secure from their ordering module. Because Olo has the largest restaurant footprint (in 76,000 restaurants across 500 brands), they've become the gold standard and built a two-sided network: more integrations lead to more clients which leads to even more integrations. They already have a footprint in 50% of the top 50 fastest-growing restaurant brands. 

POS providers like Toast and NCR are moving up the stack and building an ordering solution. Restaurants typically look for a POS system like Toast first before Olo, so these POS systems can potentially take some business away, especially as they tend to be very sticky once integrated (switching out every 5-6 years). However, these high switching costs also work against these POS systems as they are not interoperable with each other and most brands give their franchisees free reign over choosing a POS system. As a neutral player, Olo has 36 POS integrations, giving restaurants the unified ordering layer they need without having to rip and replace legacy POS systems. Toast also focuses largely on SMBs, so there is minimal overlap with Olo’s enterprise restaurant base, and restaurants are typically hesitant about vendor lock-in, giving them another reason to have a separate digital ordering layer.

In the enterprise space, Olo primarily competes against legacy systems like Aloha POS by NCR, and although they have their own ordering solution, it is less robust than the ones offered by cloud POS systems like Toast. It is also much more difficult to built direct integrations with these legacy systems. However, in recent years, legacy POS systems have increasingly moved towards enabling direct integrations which poses a threat because despite Olo having the broadest range of integrations, it may not have the same depth of integration so if Aloha were to implement more robust order status tools, this would not necessarily be immediately availiable through Olo. However, I believe most restaurants would not have the technical capability nor desire to actively maintain these direct integrations. This also presents an opportunity for Olo to further seperate itself from competitors because Olo is likely the first in line to enable deeper integrations due to their enterprise penetration. Going forward, it will be important to watch POS systems’ willingness to integrate with each other.

There is also the risk of increased consolidation among food delivery services. If DoorDash dominates a market, then there is not as much incentive to use Olo’s Dispatch module versus DoorDash's white label delivery solution. Clearly, DoorDash is dominating with over 50% share but again, switching costs are low for drivers and users. This opens the door for Olo to bring down prices by enabling new entrants to gain instant scale by accessing the aggregated demand from its 76,000+ restaurant locations. The best example of this was when Lyft announced last December that they're going to partner with Olo to enter food delivery. Lyft won't be directly competing for customers with Uber Eats but rather they will be more of a white label delivery service through Olo's existing restaurant footprint. The savings that Lyft will incur as a result of cutting out expenses such as S&M can be passed back to the consumer through lower delivery costs. It's also important to remember that restaurants have a vested interest in not giving all the power to the aggregators, so they will likely prefer to use Olo whenever possible. DoorDash and other marketplaces are also incentivized to use Olo Dispatch because of a prisoner’s dilemma dynamic. Because there is little difference between a DoorDash driver fulfilling an Olo order and an UberEats driver, DoorDash must participate or risk losing the volume from the white-label apps of Olo’s restaurant base to a competitor.

The larger risk with consolidation among these delivery providers is it reduces the need for Rails. After all, if all your orders are coming from one or two providers, it’s much easier to manage than having 5 different tablets. However, there is also a large incentive for both restaurants and delivery providers to use Rails. Firstly, marketplaces incur hardware costs in purchasing, shipping, and maintaining tablets and when restaurants have to scramble to maintain 5 tablets at once, there is a higher chance for order inaccuracy which hurts both restaurants and the marketplace. Secondly, restaurants do not have to pay an incremental cost to use Rails, those orders are simply counted towards their subscription plan with the ordering module. This locks both marketplaces and restaurant owners into the Olo ecosystem, and although it is possible to link marketplace orders directly to the POS, as I mentioned before, this falls apart when POS systems aren’t interoperable with each other.

Although there are cheaper competitors such as Lunchbox or ChowNow in online ordering, Bringg in driver dispatch, Checkmate in integrating marketplace and online ordering with POS systems, and Toast that offers online ordering and driver dispatch I am not aware of any other scaled players who compete across Order, Rails, and Dispatch and offers the same breadth of integrations across POS systems and third-party marketplaces for enterprise customers. This matters because all these solutions are interdependent; an order received through a company’s website, mobile app, or a third-party marketplace must be linked to each POS system and routed to the appropriate delivery driver, with the data all being collected and analyzed at the corporate level to drive loyalty programs. Olo’s primary competition are restaurants opting to do it it themselves or link many disparate point solutions, which many other SaaS companies have proven to be a costly and ultimately less efficient endevour. In the words of Noah Glass, “We don’t have to reinvent the wheel, we can just learn from the masters of a big SaaS ecosystem [eg. Shopify and Salesforce] and ultimately keep our customer in our heart…”

Conclusion

Peter Thiel has said “The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.” With food delivery apps threatening to put their own restaurant customers out of business as more customers turn to marketplaces, the need to own your customer has never been more apparent.

Olo is well-positioned to enable this shift and through the combined bargaining power of their enterprise clients and their holistic view of a restaurant brand’s data, occupy the power position in the restaurant tech value chain. They will continue to build upon this by adding services on top (payments), expand internationally through existing partners, and could move into grocery or convenience stores in the future.

I currently have a 4% position and will look to add once we see signs of reacceleration.

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Disclosure: Richard Chu has a position in OLO, GDRX, DDOG, and ROKU. Luca Capital owns shares of OLO and GOOGL. Saga Partners owns shares of FB. Luca Capital and Saga Partners own shares of ROKU and GDRX.