Get to know Olo – that SaaS company with eCommerce solutions for restaurants

If you haven’t heard of Olo before, but want to know about it, grab a drink and read on.

What is the company about? What does it do?

In 2005, Noah Glass founded Gomobo to let consumers order food in advance with just a text message. Apparently, he convinced an investor to shell out half a million dollars for his startup idea and relinquished his chance to get into Harvard Business School in the process. Five years later, in 2010, he took a fateful decision to pivot the business from being a forefront customer facing application to a B2B one working behind the scenes to help restaurant manage their online orders. He named the new identity Olo, which is an abbreviation of “Online Ordering”. More than a decade later, Olo went public in March 2021 at a valuation of $3.6 billion, after raising a modest $100 million from outside investors in its history.

Olo products include Ordering, Rails and Dispatch. Ordering is the company’s flagship module that enables restaurants to quickly establish its online presence, manage online orders and seamlessly handle integration with internal systems such as rewards or Point-Of-Sale (POS). If a restaurant has each of its infrastructure elements (website, mobile app, reporting tool, payment processor, rewards and POS) developed by a different vendor, it’ll be a pain to get these inconsistent fragmented systems to talk to one another. Worse, the fragmentation makes combining data to produce a holistic view of the business a time-consuming endeavor. In this day and age, operating blind without data is similar to walking in to a gun fight with a screwdriver. Ordering’s value proposition is that it can help restaurants have a single source of truth, build an integrated infrastructure and do all of the following in one simple tool: manage online orders, offer customers a nice online experience, run reports, make informed and timely decisions or manage menus.

Additionally, Rails helps restaurants manage and centralize orders as well as menus on different platforms. Restaurants partner with aggregators such as DoorDash or UberEats to leverage its marketing and delivery prowess. However, there are a couple of challenges involved in this kind of partnership. If restaurants update menus once a month, how much time is usually lost in ensuring the new changes are reflected properly on each of the aggregators’ apps? When orders from these aggregators come in, how easy is it to combine the order data with a restaurant’s own data? The idea behind Rails is that it is a one-stop shop where menus are up-to-date on all contact points and orders are centralized.

And finally Dispatch. As you can tell from the name of the module, it deals with the delivery aspect of a restaurant’s operation. This module allows restaurants to incorporate delivery into the order process right from their website or mobile app.

How does it make money? How has the company performed financially?

Olo makes money through subscriptions and transactions that it processes. Every Olo customer has to be an Ordering subscriber, paying the company a monthly fee for access to its foundational and flagship module. A typical Ordering subscription contract usually runs for 3 years, even though restaurant operators can cancel it with a 90-day notice. In addition, it’s up to restaurants to add Rails and Dispatch or not. Unlike Ordering, the other two modules are on a transaction basis, meaning that the more transactions a restaurant processes through Rails and Dispatch, the more revenue Olo makes. As the transaction volume grows, restaurants have to pay a higher Ordering subscription fee to enable the excess in transactions. Plus, aggregators have to also compensate Olo for the luxury of working with its customers.

As of December 31, 2020, Olo’s customer portfolio featured almost 400 names and more than 64,000 active locations. The company recorded $98.4 million in revenue, up from $50.7 million in 2019 and $31.8 million in 2018. Covid-19 was a big boon to Olo’s business as restaurants were forced to go online. Its gross profit ballooned from the high 60%s in 2018 and 2019 to 81% in 2020. After running in the red for the previous two years, Olo became operationally profitable in 2020 with $16 million in operating income.

Olo's Income Statement
Figure 1 – Olo’s Income Statement. Source: Olo

In its S-1, Olo offered a few data points to show the stickiness and growth of its business. For the last three years, its Net Dollar Retention Rate was higher than 120% every year. This number means that Olo extracts more revenue from existing customers from this year than the previous. In 2020, transaction revenue made up 43.3% of platform turnover, up from 6% only just two years ago. It is a reflection of the exponential growth in Gross Merchandise Value from $2 billion in 2018 to $14.6 billion in 2020. Because of that eye-popping expansion in GMV, Olo handles on average 2 million orders per day. For a company that focuses only on the US and the restaurant industry, I’ll say it’s not too shabby. While 44% of Olo’s customer base used all three modules in 2019, the figure shot up to 71% a year later. These numbers show that its ecosystem is growing and sees more buy-in from customers.

Why restaurants choose Olo?

Covid-19 made consumers more accustomed to ordering food online. Even when this pandemic blows over and diners go back to physical restaurants, the popularity as well as marketing power of apps such as DoorDash or UberEats will keep food online orders alive. Operating in an intensely competitive field, restaurants cannot afford to stay completely offline, but it can be daunting and time-consuming to set up a digital presence. Olo addresses the infrastructure pain points for operators by offering turnkey solutions that both lower the initial investments and shorten the development time.

Plus, Olo also offers values by integrating different systems into a one-stop shop. Instead of juggling from one system to the next, operators can carry out fundamental and essential tasks on one Ordering dashboard. That lowers operational stress and brings improved efficiency which, in turn, means an increase in margin. And in the cut-throat restaurant business, every percentage point in margin counts.

Another value proposition from Olo is that it allows operators to maintain direct relationship with customers. Aggregators bring visibility, sales and delivery capability to restaurants, but they also take away the direct relationship with the end users. A Doordash customer that wants to make a Five Guys order, does so from the Doordash app, not from Five Guys website or mobile app. The customer relationship here exists belongs to Doordash and in business, who owns the connection with customers wields power (just look at Amazon or Apple to understand this point).

With Olo, restaurants have a chance to own the customer relationship while still being able to work with delivery partners like Doordash or UberEats. When a restaurant uses Rails and Dispatch to handle delivery, the business process will be as follows: a customer will go to the restaurant’s branded website or mobile app to make an order. The customer will be informed of the delivery details and make a payment. In the backend, Olo collaborates with a delivery partner to work out the delivery. The merchant receives the payment, owns the relationship with the customer and only has to pay Olo for its cut. Olo, in turn, reimburses the delivery partner accordingly.

Olo's Dispatch Payment Flow
Figure 2 – Dispatch Payment Flow. Source: Olo
Figure 3 – Deliver partners own the relationship
Figure 4 – Merchants own the customer relationship

While Olo does have a lot to offer to restaurant merchants, it remains to be seen whether the actual net benefit is positive. After all said and done, do merchants benefit financially by working with Olo, net all the fees? As Olo gains more bargaining power over merchants, will they raise the subscription and transaction fees?

Moving forward, Olo has some tailwinds behind its sail. With an existing customer base of 400, there is a lot of market share out there to gain in the future. Moreover, as the company’s operation is currently in the US only, an international expansion, while having its risks, can significantly expand its TAM. It’s also worth noting that Olo has positive free cash flow and no outstanding debt; which is a good position to be in if it wishes to make hefty investments.

With that being said, Olo has some fierce competitors in Chow Now, Wix, Square, just to name a few. The likes of UberEats and Doordash are at best “frenemies”, especially the latter. As of December 31, 2020, DoorDash made up 19.3% of Olo’s total revenue and essentially made up the entire Rails segment. But the two companies were recently embroiled in a lawsuit in which Doordash accused Olo of cheating them and violating the contract. The two settled afterwards, but it goes to show the business risk of relying on one partner for 20% of revenue.

In summary, given Olo’s vertical knowledge in the industry and its value propositions, I can see growth ahead in the near future. If we consider Olo to aggregators what Shopify is to Amazon, Olo then should take a page out of Shopify’s playbook. Shopify has aggressively forged partnership with Pinterest, Facebook and Walmart to bring sales and visibility to its merchants. That’s what the likes of Amazon, Doordash and UberEats are great at. Consumers know them and they can bring a lot more eyeballs than others. Olo already has solutions to domestic pain points for merchants. Now it may need to also think about how to address the external ones, aka sales.

Uber’s change in segments’ names and profitability outlook

Uber announced their Q2 2020 earnings today. Overall, the business was significantly affected by Covid-19. Net loss to the company was $1.8 billion while total bookings were down 35% YoY, and net revenue slumped by 33%. There were on average 55 million monthly active customers, down from 99 million in Q2 2019. The number of trips was down 56% YoY as well.

Zooming in at a deeper level, there are two starkly different stories concerning their Ride and Delivery businesses. Ride gross bookings were down by 75%, contributing to the 66% drop in Ride revenue. Nonetheless. the segment was still the only profitable one at Uber with $50 million in adjusted EBITDA. To get a sense of how Covid-19 affected their Ride business, here is a chart that the company provided in their latest presentation

Figure 1 – Source: Uber

Even with the rise in Eats gross bookings which I will touch upon later, the gross bookings overall were down significantly after 9th March 2020. According to Uber CEO, the company saw recovery in Asia and Europe. Bookings in New Zealand and Hong Kong even exceeded the pre-Covid level at times. Of course, it doesn’t help that the situation in the US where several of their key markets are located is still dragging out.

Uber Eats

Gross bookings from Uber Eats grew by 106% in Q2 2020, resulting in 162% increase YoY in Eats net revenue. While the segment still recorded $232 million loss in EBITDA, it saw a 19% improvement to a year before. The segment now has over 500,000 partnered merchants on its platform. There are also more than 10,000 active merchants that offer grocery, convenience, prescriptions and pharmacy products. Uber reported 3 millions trips completed for Uber Connect since Mid April in 170 cities. Uber Connect allows consumers to send small packages.

Figure 2 – John Erlichman

Name change for segments

The company renamed their two main segments: Ride to Mobility and Eats to Delivery. The move signals a strategic shift in strategy. Mobility covers a lot more than just Ride. Uber doesn’t just want to provide a car ride to consumers. It wants to be associated with all kinds of mobility and transportation. There is already Uber helicopters. Uber has been trying to offer consumers public transportation options on their app as well.

With regard to Uber Delivery, I wrote about how Uber wants to move into the delivery service space with their acquisition of Postmates. Currently, there is also Uber Connect and a new service that allows delivery of groceries. Therefore, Delivery is a more apt name for the segment than just Eats.

If Uber’s ambition wasn’t clear before, it should be now.

Profitability

Personally, I think Uber’s struggle with their Mobility segment is just temporary. Once Covid-19 blows over or a vaccine is available, it will come back to what it was before, a revenue and profit machine for the company. Post Covid-19, as consumers are likely reluctant to use public transportation due to fear of being crammed in a closed space with strangers, there will be likely more demand for Uber’s ride hailing business. In fact, there is already some evidence to support the argument. Aggregate data from Hong Kong, New Zealand and Sweden markets showed some recovery on Mobility bookings compared to pre-Covid levels.

Figure 3 – Source: Uber

Additionally, even though Delivery has been highly unprofitable, Uber is pretty confident in its ability to achieve its long-term target. Here is what Uber CEO had to say on that:

Yes, Ross. As far as the debate goes, we stand firmly on the belief that pure-play delivery companies can and will be profitable. And we think it’s a pretty easy answer, but we don’t think that debate is worthwhile, so to speak. It’s only a question of when and it’s only a question of what question of when and it’s only a question of what those long-term margins will be. We have laid out a long-term margin profile of 15% of ANR and about 33% of EBITDA. We wouldn’t be doing it unless we felt confident there.

To be clear, Belgium is actually one of our smaller countries internationally, and we had said that we’re profitable in 2 of our top 5 international countries. And there are a number of other confident there. countries that that we are also profitable in, but we also wanted to make the point with investors that we’re profitable in countries that count. So it’s not just France and Belgium. It’s other countries.

But when we look from a structural basis or the margins of the business, you fast forward a couple of years now, we think we will be profitable in the vast majority of the countries in which we operate. If we’re not profitable, it’s specifically because we’re trying to achieve something strategically, whether it’s a growth target or we’re trying to expand the number of categories that we’re in, et cetera. So we land firmly on one side of the debate, and we have a lot of data internally and very very high confidence in the teams to win that debate.

Source: Uber Q2 2020 Earnings Call

Despite decimating Uber’s Mobility segment, Covid-19 has been a boost to its Delivery segment as it restricts trips outside of home. Driver incentives in Q2 2020 was only 27% of revenue, down significantly from 43% in Q2 2019. Furthermore, the grocery delivery space Uber is entering isn’t without fierce competitors. Behemoths like Amazon, Walmart or Target all invested in their grocery delivery services. When they announced the acquisition of Postmates, I wasn’t sold on their profitability in the short term. They proved me wrong when their net loss improved from $3 billion in Q1 2020 to $1.8 billion in Q2 2020. If and when Mobility segment returns to its full strength and if Uber can keep their momentum with Delivery, it will be even better for the company.

Bull case for Uber

Uber is now a household name. Years of hype and fast growth around the world while it was still a unicorn startup have made the brand very popular among consumers. It is a competitive advantage that poses challenges to any company that wants to enter the space. Plus, Uber’s global footprint gives it a leg up to those restricted to only one market. Even though a bigger footprint comes with a higher level of risk exposure, it does allow cross-market subsidies and more learning of consumers’ behavior. Uber has been conducting small tests in other markets before bringing new features to a bigger audience. In a business where consumer insight is so valuable, transfer of learning from one market to another is a luxury. To have the same luxury, Uber’s competitors would need to invest in multiple markets and be willing to take the same level of higher risks like Uber does.

Uber competes not only for consumers, but also for drivers. The company’s list of services available to drivers makes it a more attractive option than competitors. In my previous post, I wrote:

Furthermore, it can be a boon to drivers as well. To facilitate all the delivery services it wants, Uber needs drivers. Drivers have limited resources in the number of hours in a day and just one vehicle to drive. Hence, they will prefer working with a partner who can help them maximize revenue as much as possible. With a variety of delivery opportunities, Uber can sell drivers on that promise. In the future where Uber does indeed become an on-demand delivery platform, if a driver is without a Ride customer, he or she can either deliver food, grocery or basically an item ordered by another customer. Minimizing dead time and maximizing income can be an attractive value proposition to drivers.

To compete for drivers with Uber, any new rival would need to offer the same earning opportunities, in the form of either different services or a huge incentive. And that would require a lot of capital and years of investment.

With a variety of services thrown at consumers, Uber wants to establish a connection and relationship with users by being front and center in their lives, whether it’s ordering a ride, wanting to get some food from a restaurant, looking up a public transportation schedule, sending stuff to loved ones or fetching groceries. Once a connection is established, it will be a massive challenge for its competitors to overcome.

All Uber has been doing is to build its innovation stack. The more layers of the stack there are, the bigger their competitive moat is. However, execution is key, especially when it keeps moving the goal post in terms of profitability timeline and amid cash flow pressure.