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.
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.
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.