There's a backlash building against market darling OpenTable
In his Digital Domain column, Randall Stross initially skewered OpenTable. The article kicked off with comments from a San Francisco restaurateur, comparing OpenTable's fee-cornering ways to Live Nation's
Stross thankfully ran that shot by OpenTable's CEO. "Ticketmaster raised its fees relentlessly," Jeffrey Jordan noted in response. "We've lowered ours."
OpenTable is charging restaurants the same $1 per seated patron that it's been charging since its 1998 debut. As individual eatery websites improved, OpenTable lowered the rate per seated patron -- from a buck to a quarter -- for reservations that originate from the actual restaurant's site (instead of from OpenTable.com).
Earlier this year, in a move to kill IAC's
Ironically, the restaurant owner profiled in the article -- Mark Pastore, owner of San Francisco's Incanto -- has never been an OpenTable customer. He's spurned overtures to join the foodie collective for nine years.
That alone doesn't invalidate Pastore's criticism. For starters, his establishment is doing just fine. With 464 mostly glowing reviews on Yelp, his own platform for online reservations must be working well.
Pastore is also well-connected in the industry, and he claims that just one of the dozen or so of his peers who are using OpenTable couldn't imagine opening a new project without it.
When, then, are the other restaurants still on a platform that they feel doesn't increase the value of their business relative to its cost? Are restaurateurs stupid? Gluttons for punishment? Or are they just living in denial of the true power of the incremental business that OpenTable generates for its participants?
Good riddance to bad math
According to OpenTable's pitch, the average restaurant is seating more than 300 diners a month through its platform, and all it takes is 12 incremental patrons to cover the platform's cost.
Pastore offers up a different calculation. He leans on an independent study by Jonathan Wegener that pegs the value per seated patron at $2.61 for each new referral through OpenTable.com, after factoring in all of the related costs. Pastore then puts that over a reservation for four that generates a tab of $200, at a restaurant making the industry average of 5% in pre-tax earnings. In other words, that $10 pre-tax profit gets swallowed up by the $10.44 going to OpenTable.
This would be shocking if it were accurate. Thankfully for OpenTable, this math has more holes than a block of Swiss cheese:
- Wegener's $2.61 figure ignores all of the reservations that originate from a restaurant's own website. It also dismisses the value of an electronic reservation book that merges online reservations with call-ins, as well as the service's data-mining advantages over phone appointments.
- Wegener's original post is nearly two years old, leaning on financials from 2008. In OpenTable's latest quarter, participating restaurants, company revenue, and seated diners grew by 31%, 44%, and 54%, respectively. In other words, the cost per seated diner is decreasing (seated diners growing faster than revenue) and the average restaurant is filling even more of its tables through OpenTable. A year earlier, the number of seated patrons also grew faster than both revenue and participant growth. In short, the already unfair $2.61 figure has dropped in 2009, and again in 2010.
- Even if a restaurant itself did take a wash on an initial lead, if new diners were impressed, they might begin their next outing through the eatery site itself for the latest menu -- a move that would only cost an eatery $0.25 per diner under Open Table's system.
- Restaurants using OpenTable might also retain more tip-based wait staff, who gravitate to eateries where tables turn often. And restaurants that appear busier and more successful than they would be without the OpenTable bookers might also draw greater walk-in traffic.
The new reality is on the menu
"Nobody goes there anymore," Yogi Berra once famously said. "It's too crowded."
By the same token, OpenTable is so bad for restaurants that there are now 15,246 restaurants using it -- 31% more than last year, and 57% more than two years ago.
Quite frankly, its system works. Restaurateurs may not appreciate OpenTable's ability to offer listings for hundreds of local restaurants on a single screen, but wielding power in exchange for incremental business appears to be good strategy for the company.
If restaurants were hogtied to the 5% pre-tax margin average -- a figure that I doubt is accurate for higher-end OpenTable restaurants that lean more on high-margin bar tabs than most eateries -- how would any promotional activity be justified? Why join Rewards Network
If Pastore wonders whether OpenTable is worth its current $1.7 billion market cap, I wonder how he feels about Google's alleged (and failed) $6 billion bid for Groupon?
In fact, OpenTable's stock has been on fire in recent months in large part because it has joined Travelzoo
OpenTable isn't the enemy. Its valuation may be getting up there in the stratosphere -- a problem for investors, not restaurateurs -- but even those multiples will be justified if OpenTable is able to exploit its growing Rolodex into creating new revenue streams in ways that keep its clients and customers happy.
Oh, that's right. OpenTable's eateries aren't happy. They stick around only because it's the right business decision. Fine. That still works for me.
What are your experiences with OpenTable as either a diner or restaurateur? Share your thoughts in the comment box below.
Google is a Motley Fool Inside Value selection. Google, The Knot, and OpenTable are Motley Fool Rule Breakers picks. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Longtime Fool contributor Rick Munarriz is a fan of new stocks, and has even recommended several fresh IPOs to newsletter readers in the past -- including OpenTable. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
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