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.

Weekly reading – 12th December 2020

What I wrote last week

How much money could you save from drinking coffee at home?

Business

The economics of the $2B+ Christmas tree industry

Bloomberg’s profile on OnlyFans, a potential major social media on the horizon

Uber sold its autonomous vehicle arm to Aurora. This move isn’t a surprise given that Uber has been trying to offload cash-intensive and loss-making businesses in order to focus on the ones that do make money. Though there is a big write-down from $7.5 billion to $4 billion, investors may find this deal good news

CNBC has a good article on AT&T, HBO and their effort to compete with Netflix and other streamers

Inside Google’s deal with French Media

Many Google employees came out with their version of the story involved Timnit Gebru, contradicting what the company publicly said

WSJ’s profile on a few men that helped build Microsoft’s gaming business today

Online grocery slowed down in the last few months compared to the height in the summer. The basket size continued to be relatively big, compared to the same period last year and pre-Covid months.

https://www.brickmeetsclick.com/stuff/contentmgr/files/1/495948404a0913f7ced51b6524a17539/files/bmc_scorecard_nov_2020_sm.png
Source: Brickmeetsclick

Clover, which belongs to Fiserv and sells hardware & software payment solutions to small businesses, a competitor of Square, seems to have a higher GPV as well as a higher percentage of sellers with $125k in annual GPV. As Clover has more than 90% of its sellers above the $125,000 GPV threshold, the figure is far smaller for Square.

Source: Fiserv

Technology

John Gruber’s review of Apple’s latest product: AirPods Max

What I found interesting

A story on a small coffee business in Vietnam that prioritizes sustainability

Benefits of walking

The US Department of Health and Human Services published a presentation on how unhealthy Americans’ diet is. The information is informative and use, but the presentation is hilariously terrible.

The old Americans get, the more they spend time alone

Weekly readings – 14th November 2020

What I wrote

My reaction to Biden’s win

My thoughts on DoorDash’s S-1 filing

Business

Loup Ventures on Apple Pay

CBInsights has a long helpful piece on ByteDance, the owner of TikTok

Is advertising a new source of revenue and profit for big box retailers?

Apple’s transparency report which includes data on how often it complied with requests from authority

Technology

A couple of reviews of Homepod Mini by The Verge and WSJ

Apple executives talked to The Independent about the new chip M1 and how they were surprised at their breakthrough. Safe to say, there won’t be Macs with touchscreens any time soon.

Autonomous vehicles are hard. Really hard. Uber now wants to offload its autonomous vehicle arm to Aurora.

What I found interesting

The EU is about to relax regulations on encryption, a move that can threaten user privacy

Why Democrats lost Latinos in South Texas

Less screen time and more sleep critical for preventing depression

DoorDash picked the perfect time to go public as the business has grown amid Covid-19

DoorDash is a food delivery service which, after receiving an order, will deliver the order to the customer’s door. The service has three main stakeholders: merchants (restaurants), customers who order food and delivery partners whom DoorDash call “Dashers”. The business started in 2013 as three Asian Americans wanted to help local restaurants. The CEO, Tony Xu, migrated to the US at the age of 5 and worked in his mom’s kitchen in his earlier years. It is that background that inspired him to start this business. 7 years later, these entrepreneurs and their team are about to reap the fruits of their labor after the business has grown leaps and bounds and is on the verge of going public. Let’s take a look at how DoorDash makes money

How DoorDash makes money

This is the graphic DoorDash included in its S-1 to explain where its revenue comes from

Source: DoorDash

As you can see, DoorDash generates its revenue from charging customers fees which include typically include delivery and service fees, as well as taking a cut from the merchant side. In 2018, DoorDash introduced DashPass, a subscription that is worth $9.99/month. The subscription will remove per-order delivery fees and reduce service fees for customers. At the same time, DoorDash hopes this subscription will help increase the stickiness of the service and keep the customer churn low.

DoorDash has gone a long way and become increasingly…less unprofitable

According to its S-1 filing, DoorDash grew its market share from 17% in January 2017 to a market-leading 50% in the US in October 2020, besting other contenders such as Uber Eats, Grub Hub and Postmates. Compared to the same period last year, DoorDash tripled its order count and the Marketplace Gross Order Value (dollar amount of all orders) in the quarter ended September 2020. In Q3 2020, the delivery company generated more than $7.2 billion in GOV and received 236 million in total orders. In the last two years, an average order on DoorDash has stayed largely consistent at $30. Since these numbers were recorded after the introduction of DashPass, I wonder what has been the effect of the subscription on the average ticket.

The company grew not only on the top line, but also on the profitability side. Gross margin has steadily increased from 23% in Q1 2019 to a sweet 53% in Q3 2020. Contribution margin, which represents the result when you divide the difference between revenue and variable costs by revenue, went up from -74% in Q1 2019 to 24% in Q3 2020. In other words, for each order, DoorDash didn’t had to spend as much on acquisition and promotion as it had had. In fact, DoorDash reported that existing customers on the platform have increasingly made up the majority of the business, reaching an overwhelming 85% of the total GOV. This is a very good sign for DoorDash as it shows customers love what they sell and stick around more. In business, we often say it costs 5-6 times more to acquire a new customer than to retain one.

While its competitor Uber Eats never sniffs profitability, DoorDash achieved the feat in Q2 2020. While its revenue grew almost 7 times between Q1 2019 and Q3 2020, DoorDash’s operating loss has shrunk 6 times during the same period. To highlight the increased efficiency of the business, Sales & Marketing, which is usually the biggest expense for a multi-sided platform like DoorDash, has been lower than Cost of Revenue for 4 straight quarters through Q3 2020 and stood at 33% in the lastest quarter.

Source: DoorDash

As the business grows, so does DoorDash’s legal trouble. The company spent a few pages only on legal lawsuits, most of which concern its labeling Dashers as independent contractors, instead of full-time employees. The company repeatedly warns investors in its filing about regulations which could adversely harm its business. That’s because if DoorDash has to change its classification, it would mean the company has to pay higher wages and employee benefits. California introduced AB5, a legislation that would force gig economy companies like DoorDash to alter its operating model and classify workers as employees. However, DoorDash got a victory when Californians passed Proposition 22, which essentially stayed AB5. However, I don’t think the legal challenges will end there for DoorDash and they are something that prospective investors should pay attention to.

My thoughts on DoorDash

Clearly, things have been going well for DoorDash. The past few months have seen a substantially positive impact by Covid on the business. More order, more business and higher odds at profitability. Even though DoorDash indicates that their customer base makes up only 6% of the US population, I am pretty doubtful whenever companies cite the Total Addressable Market. First of all, not all the US population will use DoorDash. Second of all, the company has fierce competition from the likes of Uber Eats, Postmates and Grub Hub. I am confident that DoorDash will grow its top line in the next year or two, but the magnitude that the company hints in its filing is not really realistic. On the other hand, DoorDash can grow internationally. The company recently debuted in Canada and Australia. There is no doubt it will make inroads into Uber Eats’ market share, but at the same time it will require more resources from the management.

Recently, we have seen DoorDash strike partnerships that are not food related such as the one with Walgreens to deliver drugs and health products. In the future, I expect to see DoorDash develop to be a delivery platform, not just a food delivery machine. The logic is simple: the more orders there are, the more revenue DoorDash can generate and the happier it can keep customers and drivers. I didn’t see this piece much from the filing, but don’t be surprised if it comes up more in the next couple of years.

Additionally, some people wonder the sustainability of this model as restaurants have to relinquish a significant amount of margin to DoorDash. In the example above, restaurants have to give up 18% ($4 out of 22%) to the delivery service, while it was reported that in some case, the commission could go up to 30%. While it is indeed concerning as some restaurants may resist working with DoorDash and lawmakers may intervene, the fact and the matter is that a commission rate of 15%-20% seems to be the industry standard. Plus, restaurants may find that developing their own delivery muscle and marketing ability won’t be that much cheaper. As we are going through the worst phase of this pandemic so far and the weather is getting colder and colder, diners may favor delivery to in-dining, a huge tailwind for DoorDash.

Some interesting facts from DoorDash’s S-1

  • Dashers’ age ranges from 18 to 55. 45% of Dashers are women
  • As of September 30, 2020, there are 5 million DashPass subscribers
  • DoorDash has 390,000 merchants, 18 million customers and 1 million Dashers on its platform
  • “In 2019 alone, merchants as a whole experienced 59% year-over-year same store sales growth”
  • DoorDash’s list of 3rd party partners include AWS, Stripe, Salesforce, Twilio, Wavefront, Snowflake, Olo, Salesforce, Twilio, Wavefront, Snowflake, Olo and Google Maps

Weekly readings – 23rd May 2020

The ingredients of a long life. Drinking coffee/tea every day, eating in moderation are nurturing the spiritual life are common in areas where people tend to have a long life

How Facebook Could Use Giphy to Collect Your Data

How Etsy Became America’s Unlikeliest Breadbasket

Inside Trump’s coronavirus meltdown

Politico’s profile of Facebook’s new Head of Policy and Communications

How GrubHub ripped off restaurants even though customers intended not to use it

A Spectacularly Bad Washington Post Story on Apple and Google’s Exposure Notification Project

Doordash and Pizza Arbitrage

Why is New Zealand so progressive?

The hidden toll of lockdown on rainforests

Microsoft announced a new competitor to Airtable

Two monetary systems in Yemen

Source: Grab

DON’T CONSUME HYDROXYCHROLOQUINE! A new study published on the renowned The Lancet proved that the drug and some other similar had harmful effects on health

The healing power of proper breathing

The story of cheaper batteries, from smartphones to Teslas

‘How Could the CDC Make That Mistake?’. CDC and some states inflated the number of tests to drum up the testing abilities and make it impossible to know the exact infection rate.

Weekly readings – 18th Jan 2020

Japan’s Sacred Island

Can a color be trademarked?

Google’s questionable efforts in getting into healthcare

Tesla and Apple Valuation Questions

Unfortunate accidents caused by Amazon’s quest to conquer the last mile challenge

When talking about low unemployment rate, we should also talk about whether the jobs pay enough.

App tracking alert in iOS 13 has dramatically cut location data flow to ad industry

Do DoorDash workers make enough to make ends meet?