What I meant about chains is that they only take software and not the other parts of the ISV bundle: Payments & VAS. I agree that unit economics on the software can be positive, but ARPU is much lower where the "U" means location. Payments is where most of the profit is in single-location restaurants and bigger chains generally pay much lower per transaction rates. On VAS, the biggest one is Lending (Merchant Cash Advance) and chains won't use that as they can borrow at lower cost from a bank (MCA APRs are very high).
So management is being honest, but not addressing the full picture.
I'm not sure chains necessarily have worse economics for someone like Toast. It's true they don't have the payment processing aspect but the software spread across more locations seems to lead to attractive unit economics - or at least that's what management stated repeatedly on their call post the Applebees announcement.
It's indeed a competitive market, and Square, GPN and Fiserv are all re-focusing on hospitality specifically, so the competition should increase (if they can execute). This should lead to a shrinking TAM for each or alternatively slower sales cycles/lower prices... However, like you mentioned they're still trying to catch up on feature parity with Toast/Shift4 and due to their newer stack they should be able to stay ahead with AI features and newer value add.
I think this is a market that has almost endless niches of value add for small restaurants (interesting to see that a startup named Owner just secured a large funding round from the same investor who led Toast's series C), so the growth potential and the competitive dynamics keep changing.
What I meant about chains is that they only take software and not the other parts of the ISV bundle: Payments & VAS. I agree that unit economics on the software can be positive, but ARPU is much lower where the "U" means location. Payments is where most of the profit is in single-location restaurants and bigger chains generally pay much lower per transaction rates. On VAS, the biggest one is Lending (Merchant Cash Advance) and chains won't use that as they can borrow at lower cost from a bank (MCA APRs are very high).
So management is being honest, but not addressing the full picture.
Great analysis!
I'm not sure chains necessarily have worse economics for someone like Toast. It's true they don't have the payment processing aspect but the software spread across more locations seems to lead to attractive unit economics - or at least that's what management stated repeatedly on their call post the Applebees announcement.
It's indeed a competitive market, and Square, GPN and Fiserv are all re-focusing on hospitality specifically, so the competition should increase (if they can execute). This should lead to a shrinking TAM for each or alternatively slower sales cycles/lower prices... However, like you mentioned they're still trying to catch up on feature parity with Toast/Shift4 and due to their newer stack they should be able to stay ahead with AI features and newer value add.
I think this is a market that has almost endless niches of value add for small restaurants (interesting to see that a startup named Owner just secured a large funding round from the same investor who led Toast's series C), so the growth potential and the competitive dynamics keep changing.
I don’t think Block reports it in their 10k, but they do break out Square volumes by vertical in their investor presentations (see page 26): https://s29.q4cdn.com/628966176/files/doc_financials/2024/q4/Block_Investor-Presentation-4Q24.pdf
fascinating thank you