What happened
Shares of restaurant technology company Toast (TOST 3.42%) plunged on Wednesday morning after the company eliminated a controversial fee on transactions. As of 9:45 a.m. ET, Toast stock is down almost 11%. But I believe the market is reacting wrongly to this news. Here's why.
So what
In June, reports surfaced that Toast was adding a $0.99 processing fee on all online orders over $10. This fee wasn't for the roughly 85,000 restaurant locations that use Toast's technology but rather for the customers of the restaurants. Needless to say, Toast's customers were infuriated.
The fee went into effect on July 10. But the uproar was so great that Toast today announced that it's taking the fee away. I believe Toast management said it best in its apology letter to customers: "We made the wrong decision."
Even Toast's management says the fee was a mistake. Therefore, getting rid of it is the correct choice, even though the stock is down today.
Now what
There's a simple explanation for the drop in Toast stock today. Consider that the company processed $26.7 billion in gross payment volume in the first quarter of 2023 alone. We don't know how many online orders over $10 this includes. But a simple $0.99 fee on those transactions was potentially worth hundreds of millions of dollars in annual revenue. And since it didn't require anything extra on Toast's part, the gross margin on this fee would likely have been close to 100%.
In other words, Toast stock is down because it just said goodbye to a lot of money. That said, the company can't afford to lose disgruntled customers to competitors like Shift4 and Block. Therefore, it had to make this decision for the long-term health of the business.
Toast's shareholders just hope that it didn't already do too much damage to its customer relationships. Investors will find out more when the company reports quarterly financial results next month.
