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NYC 19 Conference Report May 14 - 15 | #TechonomyNYC

What You Don’t Know About Food Delivery and Tech

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  • James Cakmak with Noah Glass of Olo. Photo credit: Rebecca Greenfield

Speaker

James Cakmak
Techonomy

Noah Glass
Founder & CEO, Olo


Eating Matters Noah Glass, founder & CEO, Olo; You haven’t heard much about food delivery giant Olo because it works in the background enabling all the ones you have heard of. Glass explains how eating is changing.

The following transcript has been lightly edited and condensed for ease of reading.

 

David Kirkpatrick: I just want to quickly introduce James Cakmak who is now writing a lot for Techonomy. He’s a long time Wall Street security analyst who has got his own startup called Snailz, which is an Uber for nail salons. But that’s not what the subject is about, that’s just his thing. And Noah Glass, who is the CEO of Olo, which is probably one of the most important companies most of you have never heard of. And we know that the food industry is being transformed. What you don’t realize is how much he has had to do with making that possible. When did Olo first start?

Noah Glass: 2005.

Kirkpatrick: It’s been around since 2005. It is roaringly successful right now. He’s going to explain what’s happening with the food delivery industry and James is going to interview him, so go for it.

James Cakmak: Awesome. Thanks, David.

Glass: Thanks.

Cakmak: So good to have you.

Glass: Thank you, man.

Cakmak: How’s everyone doing? Thank you for sticking around after this with my man Noah here. America’s favorite topic is food. So I was telling Noah backstage before we started that this is going to be an incredibly engaging audience, not just because all of you love food, but because I’m also prepared to bribe you guys. So I come bearing gifts. So I’m going to give you guys a special gift for your attention.

Now, as David was saying, Olo is a company that likely all of you either indirectly know about or have used but don’t really know in practice. They do two of our most favorite things, which is bring us food and also save us time. Noah here is the CEO and founder of Olo, and it’s also his birthday today, so happy birthday to Noah.

[APPLAUSE]

Glass: Thank you, it’s an honor to spend it with my 400 close friends.

Cakmak: Some statistics before I get into the first question. Fifty-five thousand restaurants, over 50% of the public restaurants in the nation, approaching $5 billion dollars in food sales. Now that’s going to put it bigger than Grubhub. About 200 million, on pace for 200 million transactions this year. The biggest names you hear about in food, Shake Shack, Sweetgreen, Delivery Side, Postmates, Door Dash. So this company, as David was mentioning, around since 2005. So really, you know, you really took the tortoise and the hare to heart, you know, on pacing yourself. It actually started five years to the day before Uber.

So as my first question, everybody here knows Uber Eats. We all know Grubhub. Obviously you’re massive in terms of reach and scale and transactions. How would you kind of describe and distinguish Olo, the Olo mission versus kind of the household names that we know?

Glass: Yeah, thank you. So I think you all, being New Yorkers, or most of you being New Yorkers, have heard of Seamless or you’ve heard of Grubhub over the years. And then more recently, Uber Eats and Door Dash and Postmates, all of the kind of B to C delivery marketplace names in the food space. We are not B to C. We’re B to B, or we think of it more as really B to B to C, meaning that our customer is the restaurants and helping the restaurants to better serve their consumers. So the core business is helping our restaurant chains build out their own direct digital channels, their apps, and websites that let customers order ahead, pay ahead, and then get their food faster or skip the line, as we like to say, at the restaurants. And then we’ve also added more recently, over the last three years, delivery capabilities that enable the restaurant, even if they don’t have their own delivery fleet, to offer delivery to those consumers and say you can place an order and, for a small fee, get that order picked up and delivered to you by a third party. So being B to B, or B to B to C, we spend zero on consumer acquisition. That is financially a huge differentiator from all the names that you mentioned who are spending tens, hundreds, or have even raised over $1 billion in funding mainly to fuel that customer acquisition growth.

Cakmak: Cool. It’s fascinating how we’ve seen kind of our changing behavior. I would just be curious, like how many of you guys order food every week, or multiple times a week, even? All right. So our culture is changing, you know, to one of convenience. And your financial metrics totally reflect that. So obviously, you know, grocery used to be a predominant thing but the smartphone has kind of turned things on its head. You have on the one side the Amazons of the world, the Walmarts of the world going all in on grocery, and then you have these multibillion dollar companies going after the prepared food market. Can you just talk about kind of the trends that we’re seeing in terms of consumption patterns and kind of where you see that going?

Glass: Yeah, I mean, the historical trend line is pretty fascinating. If you compare the grocery industry or what I think the census and the National Restaurant Association like to call food at home versus the restaurant industry, which is called food away from home, it used to be that the grocery industry represented I think about 85% of food spending in the US—that was about 50 years ago—and restaurants were just 15%. For the first time really in I think 2017, it was 50/50 between restaurants and grocery. And so each was about an $800 billion industry in the US. And really when you look at kind of what’s happening inside the restaurant industry, when you zoom in, you can understand that trend and it is a trend towards convenience and the ability to save time by taking some of the food prep out of making your meal. Prepared meals is a fine term for it.

If you think about the restaurant industry, it really is an industry that’s built on that idea of convenience. Yes, there are very high end restaurants that are kind of more entertainment, but most of the day in, day out restaurant occasions that we have are built around outsourcing your food prep to someone else, a chef or a cook inside of a restaurant. If you look at all of the transactions in the restaurant industry, it’s oftentimes a surprise even to people inside of the industry that 63% of all transactions, the majority, are not consumed inside of the restaurant.
Sixty-three percent are consumed outside of the restaurant. And people think about that and say, oh, okay, well it’s drive-thru. Drive-thru is the big explanation behind that. Drive-thru overall is 21%, and delivery, which is now the rage that everybody is talking about, that’s only 3%. Thirty-nine percent of overall transactions are takeout transactions. That’s going to the restaurant, picking up the food, and then taking it somewhere else to consume it, whether that’s at home, or at work, or in your car. But that’s an amazing thing to think about, that the plurality of all transactions are takeout transactions. And that sort of explains that people are looking to restaurants for convenience, and it also explains this trend towards digital ordering, or the kind of Amazon-ification of the restaurant experience. Because if you’re already going to consume the food somewhere else, why not order it, have it ready when you arrive, and pick it up faster? Or even better, order it from that other place, have somebody else pick it up, and then take it from the restaurant to you.

Cakmak: It’s amazing, like all these brands that you hear—Uber Eats, Postmates—raising billions of dollars, but at the end of the day, it’s still a fraction of the overall engagement with the restaurant in terms of delivering.

Glass: Yeah, $800 billion dollars. It’s a huge industry and the last stat that I heard, again, from the National Restaurant Association was the restaurant industry didn’t have a huge growth year for its history last year, but it still grew more in the last year than all of the Hollywood box office combined. So it’s just a massive $800 billion space. And overall food is a $1.6 trillion space.

Cakmak: It’s huge. Obviously, the size of the market is why all of these companies are going after it so aggressively, including you guys. When you look at it, you know, these marketplace business—restaurants are inherently a low margin business. You know, especially franchises, then you’re paying franchise fees on top of that. But these marketplaces are coming in, the Uber Eats, Grubhub, they’re kind of gouging a lot of these restaurants, charging 20%, 30% commission rates on every single order. You know, so the question is are they serving the restaurants or are they serving the actual consumer, kind of what is balancing act of that and is it really sustainable? Because right now Uber just went public. You know, is that a part of their business that’s going to allow them to excel or is this a model that’s not sustainable because inherently restaurants won’t be able to afford it, you know, as the mix goes in that direction.

Glass: So this hits on the big question happening in the industry right now, which is are these orders coming from third party delivery marketplaces incremental, would they have not come in anyway, or are they cannibalizing the existing business. And the economics of that answer are really important. So if a restaurant thinks about that truly incremental order, where the only variable costs are the cost of goods sold and maybe labor, they think about that as a 40% margin sale. So then in giving away 20% or 30%, okay, well we’re just keeping a lot less of the profit but this is incremental. It’s when they think this could be cannibalizing an existing sale and my business is like a 5 to 10% margin business if run perfectly, that that 20 to 30% is really scary. And indeed, you see a lot of restaurants going out of business. You see a lot of franchises of large franchise brands closing their doors. And not all of that is because of this impact of high commissions from third party delivery marketplaces, but some of it certainly is.

So I think over time what we’ve tried to do is make it possible for our restaurant brands to meet the consumer’s need of saying you’re a consumer, you want everything on demand, whether that’s picking up the food just in time at the restaurant yourself or getting someone else to do that and deliver it to you, I’m going to meet that need directly through my own website, my own app versus having that need met by a third party, an indirect sales channel. And I think the history of that—and you can see other industries that have been through that same shift. You see in the hotel industry, the rise of the online travel agents as an indirect sales channel, and kind of the war that hotel brands have been engaged in with third party online travel agents, Priceline, Expedia, Travelocity, over the last 15 or so years. The same thing is now happening between large restaurant brands and the restaurant delivery marketplaces. They’re in a war, but if you look at what’s happened to the commission rates—just looking at Grubhub, which is up until recently the only public example that you have many quarters of reporting, you see their commission rates have been climbing up and up and up steadily each quarter, and I don’t think that’s sustainable. Yes, there’s an extra cost involved in delivering the food to the consumer. Somebody has to pay that cost. I would argue, we would argue that the consumer should be willing to pay for that convenience. But the commission rates, what the third party marketplace is charging for driving that transaction, that’s the piece that’s been increasing over time and I don’t think that’s sustainable. I think we’re going to have to reach a better equilibrium.

Cakmak: Right. So it’s going to be a lot of tough questions for Uber to answer as well as Grubhub. You talked about the delivery networks. Now Postmates is, you know, setting to go public. Door Dash raising a lot of money. You work with these guys, you know, they integrate with you. And I’m sure as consumers, we’ve tried them potentially at some point. But when you look at these delivery marketplaces, and as we all evaluate them, how would you say they are differentiated? You know, is the space getting too crowded? Are they essentially commodities, you know, between—because, with the coming to the market, you know, how can we distinguish, you know, the quality of the networks between each other?

Glass: Yeah, it’s getting kind of hard to distinguish one from the other. They’re all starting to sound similar in the way that they talk about their business. And I will say, I don’t want to sound overly harsh on third party delivery marketplaces. There is a benefit to the restaurant in having these players out there funding a lot of delivery and funding a lot of consumer awareness that delivery is an option. So there are certainly discrete cohorts of consumers that are choosing to go to Postmates or choosing to go to Door Dash and it’s good for restaurant brands to be there when they’re searching for the kind of food that that restaurant serves. The restaurant wants to be found there. So there is incremental sales volume on these marketplaces.

I’d say they have different orientations kind of based on what they emerged out of. If you look at Grubhub, which is probably the oldest delivery marketplace in the space, you know, that’s the combination of both Grubhub and Seamless, based here in New York, under the banner Grubhub, and that started out as purely a marketplace business. So they did not serve the restaurant in terms of picking the food and delivering it to the consumer. It was only restaurants that did delivery themselves or through some other third party that were listed on the Seamless or the Grubhub sites and apps. That’s a very different orientation than Uber. Uber started out with a lot of driver capacity and kind of no marketplace component whatsoever. And still different from the hybrid of Postmates and Door Dash which came into the market saying we’re going to provide both services, we’re going to be both the delivery courier and also the marketplace, driving your orders to the marketplace and then picking up the order and delivering it through our delivery couriers. And they took different approaches to how they did that. Door Dash was the first to really start to forge partnerships at the brand level with large restaurant brands. Postmates was much more scrappy and startup-y and would just start delivering the food. And a lot of the times the brands didn’t even know about it, but their food would be on the Postmates site and Postmates would just send a courier to go and place the order in person and then take it from the restaurant to the guest without any sort of official relationship with the brand.

Now if you fast forward to today, they all kind of do all of those things. They all have sanctioned marketplaces and delivery service providers, and they’ve all built out significant kind of delivery service provider networks of couriers that more or less have a national footprint. There are some that are stronger in some markets than others. There are other players that we haven’t mentioned that are really specialists and we do secondary and tertiary markets. What we’ve tried to do with our dispatch platform is to put all of those different networks together into one and provide the restaurant with a single API they can tap into all the delivery availability that’s out there nationwide for the large national brands that we work with that might have, you know, restaurants all over the country and working with any one of those providers might not give them the full coverage they need.

Cakmak: Interesting. We have about a minute left, but I’m sure you have a lot of interesting statistics about how we consume food and how we deliver food. I just wanted to end with any of that. And then ideally, if we could provide David something here for Techonomy, a “you heard it here first” kind of thing as far as what could be in store for Olo going forward.

Glass: Okay, well, I think an interesting and time-relevant update is that Mother’s Day was this Sunday and it was our largest sales day that we’ve ever had. Thank you. I’m both happy about that because it’s good for business, but also sort of sad for what it means about America that a lot of dads woke up probably on the morning of Mother’s Day, and thought, “You know what would be really romantic?”

Cakmak: Applebees.

[LAUGHTER]

Glass: Applebees for takeout. You said it, not me. But not even eating inside a restaurant. This is taking out the food and eating it at home. So a lot of dads that don’t know how to cook out there I guess. But yeah, I mean, what’s in the future for us, I mean we just continue to see our business doubling year over year. We plan to do well over 200 million transactions this year and over $5 billion dollars in GMV. And it’s exciting for us to be growing as fast as we are at a time when you see some slowdown in the growth rates of some large players like Grubhub. I think they’re growing somewhere between 20 and 30% and we’re growing 100% year over year in terms of the sales volume going through our platform. And I think that’s in large part more restaurants coming on to do digital ordering and delivery, but also just a lot more volume going through those restaurants that are using the platform, up 50% year over year. So we’re thrilled to see that trajectory and see this industry really go digital.

Cakmak: Awesome. Thank you so much.

Kirkpatrick: I’ve got one last question for you. Uber thinks Uber Eats is going to be its salvation. Does that make sense to you? I mean one of its—it needs multiple salvations, but there’s a lot of hope that delivering food could make up for the fact that the basic business economics may not work in the basic business.

Glass: Yeah, I think it’s a, as I said, a really big industry, and I think it’s one where there is margin to play with on truly incremental business. And I think it’s one that, you know, serves the core Uber business really well of they have all these drivers, they can do passenger trips, that’s their core business. But they can also deliver food and there’s a lot of food that people want delivered to them. And certainly the 55,000 restaurants that use Olo are clamoring for more delivery options and more delivery liquidity, so I think that works really well—

David: Do you partner with Uber at all?

Glass: Haven’t announced anything publicly with Uber, but there’s opportunity for us to work with a group like Uber as part of our delivery network, for sure.

David: Interesting. Well thank you so much for being here.

Glass: Yeah, thank you.

[APPLAUSE]

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