Domino’s (NYSE: DPZ) was a revolutionary company in the restaurant industry. Founded in 1960, the company didn’t have a restaurant where you could sit down – Domino’s had a kitchen and that was it. The pizza will be delivered to you.
At the end of the 20th century, another revolutionary company was born, one that would radically change the retail industry: Amazon (NASDAQ: AMZN). This business also did not have a physical store that you could visit. Instead, you would go online and shop on the company’s website. At first, you could only buy books. And the books would be delivered to you.
What do Domino’s and Amazon have in common? Delivery. The key innovation is that you don’t have to leave your home to shop. You order things online and they are brought to you. And consumers seem to like this arrangement.
Delivery is transforming the restaurant industry
Now we see a whole bunch of companies, like DoorDash (NYSE: DASH), Uber Eats, Postmates and Grubhub (NYSE: GRUB), in the running to be the Amazon of the restaurant business. All of these businesses want to be that one food site on the Internet. These websites are the digital equivalent of visiting a food court in a mall and selecting a restaurant.
Internet restaurant delivery is a huge challenge. Even Amazon has not tried to achieve this. Amazon is happy if your stuff is delivered within 24 hours. But the food gets cold quickly. It must therefore be delivered quickly. Domino’s set the standard many years ago with the goal of delivering in 30 minutes or less.
A few years ago, SeeLevel HX, one of the nation’s largest mystery shopping companies, conducted a secret speed test with the four delivery companies. A total of 1,400 detective buyers in five cities (Atlanta, Boston, Chicago, Dallas and Los Angeles) ordered food to be delivered. According to SeeLevel HX, Uber Eats won the speed test.
|Delivery company||Delivery speed|
|Uber eats||35 minutes, 31 seconds|
|Postmates||40 minutes, 12 seconds|
|DoorDash||42 minutes, 1 second|
|Grubhub||50 minutes, 22 seconds|
Olo is the software stock for online ordering in restaurants
While these restaurant delivery stocks may or may not be good investments, I think the company that will benefit the most from this move to restaurant delivery (and takeout) is Olo (NYSE: OLO). The name of the company actually means ordering online. And the analogy I would make with Olo is not Amazon but Shopify. Shopify is not a retail site. But it has been a huge success providing backend solutions to retailers who want to sell things online.
This is what Olo hopes to do in the restaurant industry. Unlike DoorDash and other food delivery services, Olo is not a food ordering website and has no interest in being like Amazon. Instead, Olo’s solutions will help all giant restaurant chains (and family-owned restaurants) switch to online ordering for delivery and take-out.
This is very popular with restaurants who want to manage the customer experience themselves. Olo partners with DoorDash and Uber Eats, and it also helps restaurants that want to handle delivery themselves. Olo has won many renowned clients including Five Guys, Chili’s, Subway, Applebee’s, Cheesecake Factory, Jimmy John’s, Wing stop, Cracker Barrel, Showmar’s, Qdoba’s, Denny’s, IHOP and Shake Shack (NYSE: SHAK). Outback Steakhouse, owned by Thriving brands, recently discontinued their in-house software solution and started subscribing to Olo instead.
The restaurant industry is huge
In the company’s S-1, Olo estimates its total addressable market (TAM) in the United States to be $ 20 billion. And the company says there are about 700,000 restaurants in the United States (Olo has already captured about 10% of that market.) If we divide $ 20 billion by the number of American restaurants, we see the calculations of Olo when estimating his APR – each restaurant will pay Olo an annual membership fee of about $ 28,000 per year. (Some of this income is transaction income, and Olo does not disclose its pricing structure.)
Maybe I’m wrong, but I think Olo is reducing its global market opportunity. In their S-1, the company says the rest of the world is “at least as big” as the US market. The company therefore doubles its estimate of the American market and offers us a global opportunity of 40 billion dollars. At present, Olo is focused on large restaurant chains in the United States, corporate clients. So they don’t really think about the foreign opportunity.
However, the number of restaurants in the rest of the world appears to be much larger than the number of American restaurants. Olo estimates that there are 700,000 restaurants in the rest of the world. This number can actually be 20 times greater. According to the WebMiner blog, there are around 15 million restaurants around the world. This number includes pubs and cafes.
If we’re careful and say there are maybe 10 million restaurants, bars, and cafes around the world that could adopt Olo’s solution, at $ 28,000 a year (not expensive for what this company provides) , the ultimate number of TAMs I get is $ 280 billion in annual revenue.
Olo is currently a small business, with just $ 100 million in revenue and triple-digit revenue growth. But if Olo becomes the Shopify equivalent of the restaurant industry, its stock will generate fantastic returns for early-stage investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.