Why OpenTable Might Get Diced and Burned

Restaurateurs hate OpenTable (NASDAQ: OPEN  ) . Complaining of high fees, restaurant owners have yearned for an alternative to the popular reservation platform. Lucky for them, they've found a viable, new partner in Scripps Interactive (NYSE: SNI  ) over the past few months. Is it too late for OpenTable? Not yet. OpenTable's network and technological strides may help it stay at the head of the table.

Why OpenTable reigns
OpenTable is far and away the market leader in the online reservation space. Since its launch in 1998, the company has built a network of approximately 25,000 restaurants across the world, with 17,000 located in North America alone.

OpenTable helps restaurants streamline operations. David Steele, owner of Flour + Water in San Francisco, says that OpenTable has reduced the time needed to schedule reservations, but it has also helped him gather diner preferences and email addresses of over 5,000 diners. Recognizing the increasing trend toward mobile, OpenTable has just announced that it will offer restaurants mobile-friendly websites for free until Jan. 31, 2013. After that period, sites will cost only $108 a year.

OpenTable has further strengthened its market position by creating an incredible ecosystem for consumers. Since September, the company's iPhone app is the only reservation app that interfaces with Apple's Siri to function by voice. Moreover, the company teamed up with mobile-app start-up Foursquare to provide easy in-app reservations -- no phone call necessary. Finally, OpenTable restaurants have garnered 15 million reviews in about four years; for comparison, Yelp (NYSE: YELP  ) has 30 million reviews in eight years. As OpenTable continues to grow its reviews, users will have even more reason to use its service.

In all, OpenTable seems to provide the full course of options for both businesses and consumers. The company continues to get stronger financially as well.

Metric

2011

2010

2009

Revenue

$139.5 million

$99.0 4million

$68.6 million

Operating margin

23.45%

18.34%

13.16%

Net margin

15.45%

14.22%

7.39%

Free cash flow

 $32.4 million

 $24.0 4million

 $11.7 million

Source: 10-Ks for 2009-2011.

Although net margin increases have slowed a bit, the company is still in its growth stages. OpenTable's revenue and free cash flow show that the company has found plenty of dining rooms to serv, while continuing to eke out operating efficiencies.

Why restaurants are switching to competitors
Surprisingly, OpenTable -- the company that made the online reservation industry -- has captured only 30% of the market. That may owe to the four fees OpenTable charges its restaurants:

Fee Type

OpenTable

Rezbook

CityEats

Installation fee

Yes, $1,000

No, but requires an iPad

Yes, $1,500

Monthly fee

~$200

~$199

$150-$250

Per-diner fee (in-network)

$1

$1

$0.75

Per-diner fee (homepage)

$0.25

$0

$0.10

Sources: MonkeyDish, Quora, and The Motley Fool. Reported prices are general and subject to discounts.

Make no mistake, these fees add up. Just ask Dean Gold, a chef and owner of a Washington, D.C. restaurant. The Washington Post reports that he pays OpenTable $2,000-plus a month during his busiest seasons. For years, restaurant owners like Gold were unable to find an alternative booking system. Not until Rezbook and CityEats entered the market did restaurateurs take notice.

Rezbook entered with a significant competitive advantage -- it's part of Urbanspoon, which is, in turn, owned by IAC/Interactive Corp (NASDAQ: IACI  ) . With these internal partnerships, Rezbook can claim its stake as a legitimate competitor. Moreover, Urbanspoon boasts that it is more diner-focused. By drawing users to its aggregated 20 million reviews -- which includes blog posts from around the web -- Rezbook helps restaurants find curious foodies unsure of where to dine. Combined with its own smartphone app, Urbanspoon's slight differentiation has helped Rezbook seat 1 million diners per month.

Under the umbrella of Scripps Networks Interactive's (NYSE: SNI  ) The Food Network, CityEats may be the best dish. Though the company hopes to build a multimedia site that seems just as focused on diners as it is on restaurants, CityEats wants to take on OpenTable directly. In less than a year, the company moved beyond its two-city test to operating in five.

Of course, there may be more options soon. Recently, Groupon  (NASDAQ: GRPN  ) acquired reservation site Savored. And LivingSocial, which received a $150 million investment from Amazon, has moved into the food space as well. Although Dean Gold ultimately stuck with OpenTable, he nonetheless tried out and found CityEats' capped his monthly fees enticing (he'd pay at most $750 a month)."

Can OpenTable take the heat?
OpenTable is about to get served if it doesn't put its best plate forward. IAC/Interactive's Rezbook and the Scripps Network's CityEats have done a great job stealing OpenTable's customers by leveraging their brands and dictating cheaper pricing terms. Still, OpenTable has a bit of wiggle room. Unlike its competitors, OpenTable is a pure online reservation company. The result is a more focused organization that can better anticipate changes like mobile and make the strategic decisions needed to help drive more customers to its restaurants.

Together, the company's top-dog status and ecosystem should help OpenTable remain seated at the helm. If OpenTable's margins begin to slip, then it may be time to unseat this investment from your portfolio.

In the meantime, watch out for those competitors. One company I'm especially wary of is Groupon. Although the company shares have fallen over 80% over the past year, the company has achieved phenomenal growth in the past. With its connections in the restaurant industry, Groupon is ambitious and anxious to turn this opportunity into huge profits. The Motley Fool has compiled a premium research report with in-depth analysis on whether you should buy or sell Groupon right now, and why. Simply click here now to get started


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On November 24, 2012, at 11:23 AM, NexTable wrote:

    Kevin - Great Article! ....INVESTORS BEWARE - Opentable , City Eats & Urbanspoon are going after the same market (very limited market - only 20% of full-service restaurants in U.S) that are upper-scale to fine dining that require reservation intensive...like BLT steakhouse to local fine dining. This market is very saturated and dominated by Opentable Network.

    Kevin - The next article should be how tablets or iPad technology can improve restaurant operational efficiency, reduce costs, and increase revenue. The biggest problem in our restaurant industry right now ...there are over 275K full-service restaurants from independent to chains in U.S. are still using manual reservation book, laminated plastic table management and costly pagers or system. Even today technology from independent to national chains restaurants that are generating $2 to $5 million dollar annual revenue and still using manual system. One of the BIG reason is there are not an affordable, intelligent front-of -the house and ease of use system on the market today....Welcome to NexTable (The Next Generation Intelligent Reservation & Table Management iPad Cloud-Based App).

    NEXTABLE MARKET OPPORTUNITY (30% costs of our competitors) - we provide the best complete restaurant management system on the market today that goes after 80% of full-services restaurants (cannot afford Opentable, CityEats or still on manual system). For Example, these Primary Walk-ins or Accepted Some Reservation (Ruby Tuesday or Firebirds -regional chain) to restaurant that does not take reservation (OutBack Steakhouse or California Pizza) ...but do high volume of Walk-ins that really needs NexTable technology to maximize their seating capacity, increase revenue by reducing fewer walk-away guests, reduce labor costs and improve over all operation efficiency. NexTable will revolutionize online restaurant reservation system like sabre, Amadeus or Galileo reservation system do for travel industry like Airlines and Hotels Inventory Management (provide consumers interface for priceline, expedia, kayak or orbitz). NexTable (patents Pending Technology) can aggregate any online reservations from any platforms like Opentable, Urbanspoon (Rezbook), and soon Yelp, Google, Facebook, Foursquare, even Groupon..seamlessly converted into NexTable system for our restaurant partners. www.nextable.com or contact Phong@NexTable.com

  • Report this Comment On November 24, 2012, at 11:46 AM, Bdoc2b wrote:

    What a terribly sad and shameless plug by Phong above on NexTable. Rule #1 in business... Never speak poorly about your competitors especially if you do not have all the information on what market they are targeting. CityEats is not going after the same market genius.

    To the author... The range for set up fees is $0 to $1500 depending on the account for CityEats. Not sure where your information came from but it would also be great if you edited that and include that we have monthly caps unlike our competitors. Thanks.

  • Report this Comment On November 26, 2012, at 12:02 PM, Gordogato wrote:

    I'm not an expert in this area, but two things stand out to me as a Scripps Networks investor:

    1) CityEats (or any other competitor) doesn't have to steal OpenTable's existing customers to win. The restaurant business has very high turnover. New restaurants open as old restaurants fail all the time. CityEats just has to be the best option for new restaurant owners, and they can take market share over time.

    2) Scripps has a lot less to lose here. They can start a pricing war and race to the bottom, and it will only slightly impact their bottom line since digital ventures make only a small portion of their overall earnings: $27 million in digital business revenues out of $566 total million last quarter, and I bet very little of that $27 million is from CityEats. Profits from their cable networks will make losses from CityEats get lost in the balance sheet noise. OpenTable, on the other hand, has everything riding on this, and losing the battle puts them out of business.

  • Report this Comment On November 26, 2012, at 3:10 PM, TMFKang wrote:

    Hi Bdoc2b,

    Thank you for your comment. Could you direct me to an reputable article online that details CItyEat's fee structure?

    I do mention Dean Gold's quote that he is looking at a capped monthly fee of only $750 (Washington Post).

    Best,

    Kevin

  • Report this Comment On November 26, 2012, at 5:33 PM, NexTable wrote:

    First, The market is huge and should welcome more company with innovative products to continue improve restaurant operation and marketing. Opentable is like Google online restaurant reservation for diners and great marketing platform for restaurants. It took Opentable over fourteen years to get where they are at today. It will take years for anyone try to compete with Opentable (unless someone want to fork up $1 Billion plus for the company). For those up-scale casual to fine dining restaurants that do take reservations or to maximize your table capacity (revenue per table -RevPAT) ...should consider allocate their marketing dollars to be on Opentable(OTConnect option - No monthly Fee) , Urbanspoon or CityEats (if available) Marketing Network platform for pay-performance model and use NexTable system. The restaurants can control when and how many customers they want each night or shift. They all provides a great discovery and close-loop marketing that deliver a Real Diners...Real Reservations....Real Revenue to restaurant partners. Therefore, the results are a lot better than Pay Per Clicks, Calls or Ad Impressions. At NexTable, we can bring more independent restaurant partners (that cannot afford Opentable or other with huge monthly fees or outdated technology) on to Opentable, Urbanspoon, Groupon Marketing Platform.

    To the author (Kevin)... I would be wary not only Groupon, Google or Facebook to jump into this arena of restaurant reservation to capture big data. I would be MORE wary of Apple or Amazon and their ecosystems.

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