The Restaurant Reservations Game is About To (Finally) Get Wild

Real talk, real numbers, logical speculation about the newly competitive restaurant reservations space.

Every business sector goes through cycles of innovation, adoption, maturation, and stagnation — followed by disruption. Incumbents sometimes get wealthy, fat, and lazy. In other industries monopolies or near monopolies form, customer service declines, and clients suffer but have little choice but to pay up. Does anyone love Comcast?

For years I’ve been beating up on OpenTable for both of those reasons. I have spoken to thousands of restaurants over the past decade about how to improve restaurant reservations and hospitality and I’ve only heard one owner say that they really love OpenTable. I remember it vividly because he was such an outlier.

Now it seems that OpenTable’s owner, Booking.com, has come to the same conclusion as the rest of the industry — OT is a stale product that faces new competition and needs to change in order to survive. A few months ago they fired the majority of the OT executive team. A few weeks ago the CEO ‘resigned’, no doubt with an attractive parachute.

And this week Resy announced that it is acquiring Reserve. Reality check (with more below): Resy does not have 10,000 client restaurants like some articles this week are reporting, not even close. It’s not terribly difficult to fact check in this industry… just go to their website and count the restaurants. The competition is just getting started — no one is “in the lead.”

Here are a few predictions, some based on known, public information from primary sources, some based on my personal analysis and experience in the industry, and most based on research done by my co-workers at Tock.

The reservation system landscape is rapidly changing, finally, and that’s going to be a good thing for restaurant owners and diners in the long run.

Here we go.

OpenTable

Here’s my best guess for the OpenTable 2019 roadmap.

OpenTable will change their pricing plans before they actually attempt to improve their product. That pricing change will be spun to look ‘cheaper’ but will actually cost restaurants more. They will work to shift OT to a reservations aggregator and advertising-based business.

  1. OT will discontinue legacy products and attempt to move all restaurants to a single platform in 2019. Right now OT has GuestBridge, the ERB, and GuestCenter. For years their own salespeople were encouraged to sell only the ERB and GuestCenter was the discount product for small restaurants. No more. They’re going to bet their farm that they can move everyone to GuestCenter as the ERB is hopelessly outdated technologically and costs a ton to support. The problem for OT is that if restaurants are forced to switch, they will look at all competitors, not just OT. So OT will offer ‘incentives’ to make the switch. They’ve already tipped their hand by announcing that as of January, 2019 they will no longer develop or offer support for GuestBridge. The ERB is next and that will cause a shitstorm as the user base is the vast majority of their current installs. OT has begun to notify some enterprise-level clients that they will have to move by April. Those clients have already started reaching out to Tock.
  2. In order to spin the rip & replace hassle that restaurants will face in pulling out the ERB, OT will simultaneously announce that they are going to get rid of the $1 per cover charges to restaurants. This is the ‘incentive’ part of the equation. They’ve known for a long time what we at Tock have been saying for years — the OT network is old, literally and figuratively, and Google and Social Media drive restaurant discovery. So they will attempt to pull the rug out from under Tock and other competitors by saying — we’ll only charge for those diners who we can prove came because of our advertising network (note the word change to ‘advertising’). But, for those ‘provable’ incremental diners they will seek to charge 15% of gross receipts or more. OT sees GrubHub and Caviar doing that on the delivery side, and thinks that this will be more palatable to restaurants as ‘incremental revenue’ can be charged at a higher rate. This will result in OT being more expensive to restaurants, but OT thinks this will feel like a justifiable expense.
  3. OpenTable will seek to integrate with other booking systems, both restaurant reservation focused competitors like Tock, but also Toast and Upserve (POS systems generally) and others that are within the hospitality industry, like hotel bookings. Steve Hafner is now running OT. He built Orbitz, then Kayak. Both companies’ strategy is to be an information aggregator but not hold any inventory… they are B2C. They force businesses to list on their site to “remain competitive” (that’s the sales pitch) and get in front of consumers. OT will be pushing to downsize their restaurant sales and support departments and piggy back on those new reservation systems that are actually operating within the four walls of the restaurant, including newer POS systems. OT will offer a revenue share deal with Tock and other systems, and may even offer to carve out certain feature developments to create individual moats. They might be content, for example, to let Tock own the worldwide high-end restaurants, but try to siphon revenue from Tock in the process.
  4. OpenTable will start charging restaurants for advertising and placement within their network. Of course, they already do charge for placement with various OT points listings and such, but this will switch to an auction style market with preference given for enterprise level clients such as large multi-unit restaurant groups and hotels. The big guys will get discounts for placement and benefits like geofencing notifications, the independents will have to pay up by accepting a percentage of gross that’s higher for ‘incremental diners’. Both will put the squeeze on already tight restaurant margins.

It is easier to build innovative software with 30 engineers and designers than it is with 300, especially when you have a large installed user base and a mountain of tech debt. OT has its hands tied from a development perspective. In 2019 OpenTable will attempt to finally shut down the ERB and admit what I’ve been saying all along. But GuestCenter has its own significant limitations and Booking.com is a giant company that expects a B as in Billions of Dollars in the annual revenue line. They’ve already written down $900M of their ~$2.4B purchase of OT. They might as well take a shot and see what happens if they turn OpenTable into “Kayak for Restaurants.”

Restaurants are not hotel rooms. Nor are dining establishments the same as QSR carry-out. I expect that restaurant owners, especially independents, will wholly reject the new pricing strategies. Charging a percentage of gross works for sending a burger out the back door of the kitchen, but it won’t work in the dining room. And restaurants will figure out that the OT network is just search and social after all, SEO and ad-buys to arbitrage their clients’ traffic.

Hafner says in the article linked above that he wouldn’t sell the company for $4B. Don’t worry Steve, you won’t get the chance to be proven wrong on that. No one wants to buy OT… not even within Booking.com… and that’s why they’re letting you take a flyer on a strategy like the one above. They have nothing to lose at this point, and OT cannot move the needle at Booking.com without drastic change.

Resy and Reserve

Here’s is my assessment of the business end of the Resy/Reserve merger.

Resy will burn through cash trying to shut down Reserve and their own product and customer service will suffer. They will continue to pursue the strategy of building and promoting a ‘large enough’ network, buying customers through discounts or acquisitions if needed. They will position Resy as the next OT, but end up looking exactly like OpenTable, but with a shinier front-end. Their massive fundraising history and cap-table will hinder their ability to service the industry properly.

A little history and perspective on the deal:

  1. Resy started out as an iOS app with a similar pricing strategy to the OpenTable “future strategy” I outlined above. It was a light-weight app and simply wanted to offer a way for popular restaurants to charge surge pricing for tables, while paying Resy a fee to do so. Read this NY Times article announcing Resy in 2014 and then let me know if you’ve used Zurvu, Shout, or Killer Rezzy lately. Me neither. To their credit Resy quickly figured out that this was a losing strategy and pivoted to simply copy OpenTable functionality and undercut their pricing. (note that this model-failure was predictable and actually one of the reasons I started Tock in 2014).
  2. Reserve began with a similar strategy and way back in 2015 had already raised $17.3 million. Craziness! The difference was that Reserve was going to charge diners to make reservations. That too was quickly abandoned and they reverted to the same strategy as Resy… copy OT basic functionality, throw it on an iPad, and give it away to restaurants for free or nearly free to build the elusive ‘network’. With that bit of ‘strategy’ they were able to raise another $10M! Beyond craziness. So that’s nearly $28M in publicly announced fundraising.
  3. Resy raised $15M across two rounds of early funding, and confirmed another $25M in July of 2018, for $40M in total funding. Unless their investors were willing to quietly infuse cash into this deal, that tells us that it’s likely a stock-swap merger. Given Reserve’s aggressive fundraising, giant cap table, and the fact that the deal is being called an ‘acquisition’, we can conclude that Reserve shareholders likely got a minority percentage of the combined companies, with perhaps a bit of cash.
  4. What exactly did Resy get in this deal? Well, surprisingly little despite what has been reported and what they are trying to spin. When we spoke with Reserve a few months ago we did our own deep dive into researching their company. All of the data below we pulled ourselves by analyzing their own website and app and building a program to cross reference that customer list with publicly available information about each restaurant. Here’s what our research found, which is very different than their press release and spin:
  • Reserve had, as of two months ago, 730 restaurant clients, far fewer than are being reported in the press.
  • 315 of those restaurants were concentrated in 7 cities. No other city has more than 20 clients, and the vast majority have fewer than 10.
  • Only 17 customers were in the $$$$ category, 192 in the $$$ range. Every other restaurant has a low check average and can be considered fast casual or near fast casual.
  • 44 of the 730 restaurants actually use OpenTable for the majority of their reservations.
  • Numbers for Resy: 1965 restaurant clients / 12 cities with more than 20 clients / 47 $$$$ restaurants, 267 $$$ restaurants, the rest $$ or lower.

It’s fairly astonishing to me that not one article written about the merger bothered to fact check these numbers and simply printed their press release of 4,000 clients and ‘working with’ (whatever that means) 10,000 worldwide.

This data is very important in order to see what it will take to truly beat OT and for an upstart to exist as a profitable business. Charging a fixed SaaS fee of roundly $200 per month to mid-tiered restaurants cannot make enough money to justify purchasing Reserve or for it to exist in the long run. That’s only $100k of MRR across 521 clients. In fact, Reserve took in far less revenue on those clients as many of their better clients were given long-term deals of as low as $89 per month (or free in some cases) in order to attract them to the platform. We know this because we spoke to many of their clients in assessing our desire to buy Reserve.

Doing the basic math, Reserve got to around $1M in annual revenue by burning through nearly $30M of capital. Combined, Resy and Reserve have raised around $68M. The urgency to produce a return for investors will severely constrain their ability to choose a long-term strategy that is good for the restaurant owners. They will be forced to charge more through new pricing schemes in order to stay afloat, or they in turn will be bought at a subsequent fire-sale.

Here’s the key takeaway from the deal: Resy’s strategy is simply to ‘fake it until you make it’. Think I’m wrong? Watch this video from their co-founder, Gary Vaynerchuk. That works just fine as a life strategy (I guess) if you have no self confidence to try something new, but when you have clients whose restaurants depend on your software, doing your best to fuck things up at the start has consequences for those businesses. Resy is chasing a strategy that worked during the internet land-grab years: Put your SaaS company in the middle of a B2B / B2C play, having both businesses and end-consumers as your client. Of course, that’s the unicorn dream for many, but it’s also a good way to go broke quickly.

Overall, the Resy / Reserve merger reminds me of this business advice I once heard:

“If you’re running a marathon, and the second and third place runners tie their legs together, it’s not going to help them win.”

Yelp!

While OpenTable might well be the Comcast of the restaurant industry, Yelp! is running a close second near the top of the restaurant industry hate list. The idea of Yelp is not a bad one — peer reviews of restaurants instead of critic reviews makes sense in the age of social media. But finding a way to monetize those reviews has caused them no shortage of problems.

There’s been an entire documentary called Billion Dollar Bully made about the company, and the irony is that now customers do the same thing to restaurants. If you run a restaurant, a few times per week you’ll get an email from a diner saying that they had a bad experience at your restaurant, they’d like a refund and to ‘give you another try’, and if you don’t play ball they’ll write a bad review on Yelp. When both Yelp and their members are trying to squeeze dollars out of your restaurant you quickly grow fatigued of that game.

Yelp must recognize this and so they thought they’d get into the reservations business and drive customers to restaurants by buying SeatMe for $12.7M. SeatMe was trying hard, but was very limited in functionality and pretty small at the time. Nonetheless, for a company the size of Yelp it was a logical, small bet. However, they then went on to buy the NoWait App for $40M. Ok… that’s lunacy. NoWait is a feature of a larger reservation system, not an end in itself.

All of this has been rebranded as Yelp Reservations. In speaking to thousands of restaurants about Tock, Yelp Reservations never comes up. The Yelp baggage with the industry is so weighty that when a restaurant decides to switch from OT, Yelp is rarely a consideration. I also don’t get the feeling that they are putting any significant investment behind the product which remains very basic. Even the export of data is nearly impossible to do in any modern way. We’ve moved a few restaurants off of Yelp and they consider it a day of liberation.

The World is a Big Place and the Internet is Everywhere

Quandoo, BookaTable, Eveve, TableAgent, Dimmi and a dozen other systems you’ve never heard of…

Once OpenTable was successful in the early 2000’s there were a bunch of global copy-cats that could easily hire out a contracted engineering team from a far off land to copy the basic feature-set. Google up restaurant reservations systems + [any country] and you’ll see a slew of options that look more or less like OpenTable circa 2005 (or I suppose, 2018 since OT’s ERB still looks the same).

There’s no need to go through the details on each of these systems, though we do review as many as possible. Some have decent market share within their locality. But eventually a new system will be compelling enough to be truly global. Google, Facebook, and Instagram are more or less everywhere. Salesforce operates in 16 different languages. On and on. Good software can work everywhere.

Restaurants operate the same in Hong Kong as they do in Minneapolis — Tock has clients in both cities and their templates and operations are remarkably identical. There are certainly cultural differences in booking practices, but transparent information for both restaurants and their diners is key.

Serving that up on a cloud based platform is absolutely necessary. Offering robust digital connections to social media, search, and payments unlocks the real network of diners — it doesn’t need to be built or rebranded, it already exists. Restaurants need tools that are as flexible and powerful as the emotional connections to the world of cuisine they provide.

The Hard Thing About Doing Something New — Tock’s 2019 & Beyond Roadmap

Of course, I know and wrote all of this because I live in this world every day as the founder and CEO of Tock. I’m writing about our competitors and you’d fully expect that I would be critical of their software or game-plans. You’re right to be skeptical. So I’ll start with my biggest mistake in building Tock. The word “tickets”.

Back in 2010 when I began building my own system for Next Restaurant I figured that every other form of entertainment sells tickets, so we should too. That was just controversial enough to get a lot of press and help promote the launch of the restaurant, and compelling enough that 18 restaurants around the country tested the home-brew software. But most consumers when asked if they’d rather pay before a meal would say, “Hell no,” — and I would too if given the choice. Most restaurants are fearful of the idea, and rightly so on most nights. That said, they happily use Eventbrite or Ticketfly to sell tickets to their New Years Eve party or Mother’s Day Brunch. Even so, our competitors brand Tock as a ‘great ticketing company,’ knowing full well that for most restaurants that sounds scary. I definitely regret the day I ever used the word Tickets in my 2014 blog post, not because they don’t work but because they only tell a small part of the story.

Reservations volume by type of booking on Tock since launch

By 2017 ordinary, free reservations outpace deposits or pre-paid reservations. Approachable, mid price point restaurants don’t get as much press as The French Laundry or Eleven Madison Park, but they make up the majority of our clients. For them, 98% of their bookings will be ‘free’. But it’s that other 2% where everyone wins: the restaurant, diners, and Tock.

Charging $199 per month, or even $699 per month, is simply not enough to sustain and grow a complex software company. Reserve’s fate is the end-path of that strategy that proves it doesn’t work. No matter how big you grow that network, unless you monetize it you cannot survive on the price-cutting SaaS fees alone. And charging $1 per cover… or 15%… is just not viable. Giving restaurants the ability to run payments through Tock, even occasionally, keeps costs low for them, provides a solid ROI, and allows Tock to make enough revenue to grow, innovate, and provide hospitality to our clients.

Tock’s strategy has been clear from the beginning, transparent to our customers and our competition, and we’ve stuck to these core ideas and built the entire system to support them:

  • When supply exceeds demand, reservations should be free. When demand exceeds supply, restaurants should require a small deposit to reduce no-shows and food waste. When demand is insane (rare), restaurants should require prepayment to completely eliminate no-shows and further improve operations. We built Tock to be the only system to offer all three reservations types side-by-side while treating every day of the year as a unique opportunity to get this mix correct.
  • Restaurant pricing is too rigid. Pricing should move in two directions (not solely upward as Resy and Reserve first envisioned) and pricing mechanisms should be developed to both increase and smooth demand.
  • Every aspect of the reservations system must work to improve hospitality for the guest. This means that a robust customer relationship management (CRM) system is core to the product and that information is surfaced clearly and in multiple usable formats.
  • The consumer networks of search, social media, and payments already exist and they’re huge — much bigger than OT or any other reservation system. Restaurants should be seamlessly tied into these and should be able to control and leverage those relationships directly, but measure their success through Tock. Tock supports Google Analytics, Facebook Pixel ID, and has a multi-year exclusive partnership with Chase Pay, allowing diners to pay with nearly $100 billion worth of Ultimate Rewards Points.
  • Tock should create and support a robust diner network, but should never sell a restaurant’s excess demand to a competitor. The only other restaurants you’ll see on a Tock restaurant’s site are their partner restaurants, not the competitor down the street.
  • Culinary experiences like pop-ups and wineries should be given equal weight to more traditional dining. Some of the best food experiences can often take place outside of a restaurant’s four walls. They deserve the same tools and attention.
  • The entire system must be accessible from any modern browser, anytime, not just an iPad that the system provides. Tock has had 99.99% uptime utilizing Google Cloud and is nearly infinitely scalable.
  • POS information should not only be integrated, it should be intelligently analyzed.
  • The entire system should work to eliminate other systems that currently exist and cost money in a restaurant. The NoWait app mentioned in the Yelp section is a perfect example of a small feature embedded within Tock.

In the next year you’ll see Tock launch:

  • Machine learning tools to analyze demand and sales history to suggest either a slot-based booking template or an intelligent flexible table system — both on an experience by experience basis. A chef’s counter can be offered prepaid and fixed, while a large main dining room can have free reservations and be flexed. This optimizes both potential and realized revenue.
  • 5 minute self-onboarding for new clients to offer individual experiences, special events, pop-ups, or even a single day of the year on Tock.
  • Special events and unique experiences offered in association with Chase to nearly 62 million cardholders.
  • Unique integrations with social media to measure the ROI of posts and advertisements.
  • Diner generated profiles to improve hospitality for the guests and reduce labor and tracking costs for the restaurant
  • Enterprise level clients joining Tock with enterprise level integrations
  • … much more, a few things need to be kept secret until they’re out of beta

Innovation is not about obfuscating your fees or buying clients or press releases that inflate your numbers. It’s about providing a real ROI to clients that they cannot find anywhere else.

2019 is going to be really, really interesting. And restaurants and diners will eventually be the real winners.