Todd Coupland , Amy Dyck - Oct 11, 2018
Canadian Restaurant Technology
One goal for our technology and innovation blog is to expose our readers to emerging technologies, companies and their founders and leaders. Here we highlight the founders of Toronto’s TouchBistro and Ritual.
Many consumers have become accustomed to checking restaurant reviews online, ordering meals in advance via mobile, having multiple payment options, and receiving favourite dishes delivered right to the doorstep. The growth in smartphones, changing consumer preferences, market competition, and needs to differentiate and/or disrupt have led to massive growth for restaurant tech, despite a soft outlook for the overall restaurant industry. This disruption, innovation and growth in the restaurant technology sector have not gone unnoticed by investors and venture capitalists (VCs). Since 2014, there has been over $11.2 billion invested across 944 deals in the space, and a handful of unicorns are now in view. Investment and interest are not just limited to the U.S., as there are several high-quality, private restaurant technology firms based in Canada.
This week’s blog looks at what we call the ‘technology food chain’, which touches areas from delivery to the back-end business management for restaurants. We see opportunity across the entire sector, but of particular interest to us are those companies with exposure to more than one piece of the ‘chain’ to streamline and enhance customer experience or improve business operations. This week we feature two private, Toronto-based companies that have direct exposure to two different parts of this restaurant 'technology food chain’.
We recently interviewed the founders of “Inside the Restaurant”, high-growth restaurant cloud-POS company TouchBistro and “Outside the Restaurant” order-ahead app Ritual. Both companies have earned considerable attention this year, as Ritual and TouchBistro had the third and fourth largest raises in Q2 of USD$70MM and USD$54MM, respectively. The interest in the space is clear. This has continued as we heard Ritual, UberEats and Chefs Plate present to a packed room at the Elevate Conference in Toronto. These companies are helping to improve the eating experience, executing well and are interesting places to work. We discuss how and why that is happening.
The Need For Restaurants To Be Different
The National Restaurant Association reported restaurant industry sales were nearly US$799B in 2017, and represented almost 4% of the U.S. GDP and nearly 48% of total food dollars spent in the U.S. Despite this, PwC claims the U.S. restaurant industry is now at an ‘inflection point’, as the top 500 American restaurant chains saw stalled growth in 2017 in almost all market segments, particularly in casual-dining where sales grew only 0.1% in the year.
Up to this point, the overall industry has excelled from an expanding economy and changing demographics, along with consumer expectations. The National Restaurant Association found that 56% of adults would rather spend money on an experience than in-store purchases. But now with growth expected to slow, a competitive market requires differentiation. One of the most well-known methods to do so includes investing in technology, especially to connect with guests or enhance the experience. These trends include mobile ordering, picking up without waiting in line, or the ability to speed up or enhance orders in-store through tablets. For restaurateurs, technology is also used to help control food and labour costs. Home delivery also continues to gain momentum, with third-party delivery platforms in most metropolitan areas. McKinsey estimates that the online penetration of the food-delivery market broke 30% in 2016, and is expected to eventually reach 65% per year.
Generally, the restaurant industry is still considered to be early in the adoption of new technologies. Hospitality Technology’s annual POS Software Trends Report found that 49% of restaurant operators plan to add new functionality and features to POS software and 37% plan to deploy mobile POS in 2018 (compared to 28% in 2017). 32% of operators plan on switching POS vendors in the year.
Exhibit 1. Geographic Breakdown Of Number Of Restaurant Technology Companies
While the category can be broad, we use Pitchbook’s guidance to split the restaurant technology market into its four defined categories in the ‘food chain’ as shown below. These can be further split into subcategories, though we see some overlap between each. Pitchbook’s Q3 report filtered down to 87 private restaurant tech companies that have raised over $15MM in capital in the last four years. Of this 87, five are located in Canada: Hootsuite (social media management), Lightspeed POS (cloud-based POS for restaurants, retail and e-commerce), TouchBistro (POS for restaurants), ChefHero (online wholesale food ordering platform), Platterz (online catering marketplace) and Ritual (social food ordering app).
Exhibit 2. The Restaurant Technology Food Chain
Source: Pitchbook and CIBC World Markets Inc.
“Outside Restaurant” companies include search, reserve and order operations. These companies offer products for customers to interact with restaurants without needing to step through the door. The most well-known example of this is food ordering, which has evolved from the traditional usage of yellow pages or takeout menus to finding menus, placing orders and paying from a desktop or mobile device. Well known customers in this space include Ritual, Deliveroo, Postmates, Doordash, or Mealpal, along with larger competitors like Uber Eats. Toronto’s Ritual has a total of $127.5MM in venture funding raised to-date. In the last four years, Pitchbook estimates almost $6B of investment (out of $11.2B) across 45 deals in this space, with the majority in the Ordering & Delivery submarket. In Delivery, expected unicorns include Postmates and DoorDash, and larger, private competitors like Uber Eats. Public companies include Square’s Caviar or Amazon Restaurants. Given that it is by far the most crowded subsector, it’s reasonable to assume the Ordering & Delivery market is likely to see further consolidation.
Companies in the “Inside Restaurant” segment involve the inside customer experience, with the goal of making the experience more enjoyable, convenient, or efficient for restaurateurs. These include point-of-sale (POS) platforms, which can speed up or improve the dining process, or loyalty companies that provide incentives for repeat visits. Guest experience companies include the amenities and services provided to improve the experience. Within this segment, there has been just over $1B invested in the last four years, across 19 companies. Of the nine identified POS platform companies, two are located in Canada.
The “Kitchen Operations” segment includes companies focused on activities in the kitchen, usually including inventory management, like Bevspot or Orderly. Kitchen Operations also includes robotics (Chowbotics, Creator), food safety and sustainability (Entouch, FoodLogiQ) and B2B food marketplaces (ChefHero, GFresh). The smallest segment to-date, it has seen roughly $500MM invested in four years.
Lastly “Business Management” companies are focused on managing or optimizing core restaurant business functions including hiring and scheduling or business management. The segment includes Marketing and CRM (Canada’s Hootsuite, Sproutsocial), Management Software (Upserve, Toast) and Employee Management (Planday, Shiftgig). Just over $1B has been invested in this space.
Most of the companies in these categories have separate offerings within the ‘food chain’, but some integrate several features into one product or platform. We can see integration across all four, with products offering features like inventory management, third-party deliveries, employee management, scheduling and more, all in one. In an industry facing slow growth and a digital disruption, we expect those that can integrate more than one feature to be appealing to evolving, low-margin restaurants and technically-demanding consumers.
Exhibit 3. Financing Across The Four Areas of Restaurant Technology
Inside The Restaurant: TouchBistro
TouchBistro And Its Founder Alex Barrotti
Toronto’s TouchBistro was founded in 2011 by serial entrepreneur Alex Barrotti, when he was approached with a dilemma by a local sushi shop. At the time, Alex was living in Turks and Caicos after selling his last e-commerce company INEX Corporation in 2000 for $45MM. The sushi shop owner found that tourists preferred to eat outside, while locals would rather dine inside, making it difficult for staff moving in and out while preparing the cold sushi. Seeing a technology opportunity to optimize the service, at the time Barrotti found there was no device on the market that would work until the iPad was introduced in the spring of 2010. Barrotti viewed the iPad as the perfect device for servers to take orders at tables and streamline operations, but no software was available for the iPad to provide restaurants with POS functions. He saw a market opportunity to develop this software as there were very few native iPad apps at the time. As a clever entrepreneur, Barrotti solved the ordering dilemma by developing TouchBistro’s easy to use software specifically for Apple’s iPad hardware.
Exhibit 4. TouchBistro's Founder Alex Barrotti
Initially, uptake was a challenge as most restaurants viewed the iPad as a gimmick, and it took up to six months to sign the first 35 customers. Since its inception, TouchBistro has focused solely on the restaurant market, creating a ‘best in breed’ solution. It streamlines and simplifies all aspects of running restaurants from order taking, payment processing, menu management, accounting, reporting, inventory management, and staff scheduling to customer loyalty. TouchBistro now serves over 15,000 venues including cafes, bars, breweries, food trucks, QSRs and full service restaurants, with over 28,000 terminals and close to $8B processed annually in transactions.
TouchBistro has four revenue streams: its SaaS subscription revenue, a payment processing revenue share, training fees, and hardware. As “dining is universal”, Barrotti sees a large, global market opportunity as the company has learned it is not limited to just the U.S. (70% of sales) and Canada (20%). Its Mexico City office is now in its third largest market. TouchBistro has found there are many advantages to its Canadian base. For example, when the U.S. switched to Chip and Pin payments in 2015, TouchBistro already had this capability from Canada’s implementation in 2008. This proven expertise served as a U.S. sales boost. With Mexico, the biggest challenge was integrating the Mexican tax reporting system. While each market varies, TouchBistro still sees plenty of opportunity, with a focus on Europe and South America in the near term.
Barrotti maintains TouchBistro has four competitive advantages: cost, commodity off-the-shelf hardware, a SaaS model and an open API platform. TouchBistro’s pricing ranges from $69/month up to unlimited access for $399/month, while its hardware costs start from $47/month, on its Apple-only hardware. The second advantage is that the off-the-shelf hardware provided by Apple is easier and more appealing than using reseller hardware as it is much lower cost than traditional legacy terminals. The SaaS based model also allows for easy updates or software rollouts. Lastly, its open API platform allows for easy connectivity with other best-of-breed applications a restaurateur might utilize, including integration with payroll solutions and accounting systems that are often unique, depending the country.
TouchBistro prioritizes the customer experience first. It is growing fast, with plans to add 300 staff to its group of 325 in almost all areas. While TouchBistro’s financials have not been disclosed, its monthly recurring revenue grew 58% Y/Y. TouchBistro has goals of $100MM in revenue by 2020 and has been doubling sales in recent years. It’s certainly reasonable to assume its recent growth should at the very least be maintained.
To support its growth, TouchBistro last raised CDN$72MM in Series D financing in June, led by OMERS Ventures and JPMorgan Chase, with participation from its existing investors Napier Park, Recruit Holdings, BDC IT Venture Fund and Relay Ventures. To-date, the company has raised a total of CDN$117MM. We were pleased to hear that the original sushi shop is still a current customer of TouchBistro, and it’s clear that the company has experienced high levels of growth with plenty of opportunity ahead.
Exhibit 5. TouchBistro's iPad POS System
How It’s Used:
In Chicago, The Ogden is a chef driven sports bar that serves the United Center crowds before and after big sports events with a large menu of food and drink.
The Ogden chose TouchBistro after the server crashed on the older POS system, requiring an $8,000 replacement. As the Ogden services rush crowds of up to 250 at a time, each Ogden server uses an iPad and TouchBistro’s solution to serve the large crowd with a low margin of error. This tableside ordering means more efficient orders, as servers can clean tables and send orders, while drinks are ready to pick up once getting to the bar. The Ogden estimates gaining an extra minute on the drink order, the food order, and closing the table can amount to 3-4 minutes saved that can lead to an extra turn on the table.
In Wilton, Maine, Calzolaio Pasta Company is a popular Italian and Seafood restaurant in a town of 4,200 people that serves up to 4,000 meals a month.
Calzolaio uses TouchBistro to take remote tableside orders on an iPad, eliminating the need for servers to run back and forth to wait stations. The reporting and credit card processing are done in the cloud, while system operations are run in–house. Calzolaio’s owners used TouchBistro’s reporting to discover that only 90 pints were drinkable from the keg amount of 120 pints due to temperature issues. The owners lowered the temperature on the beer to increase usage to the maximum.
Calzolaio has experienced an increase of 12%-14% in profit, which the owner attributes to the improved efficiency from TouchBistro’s iPad POS.
Outside The Restaurant: Ritual
Ritual And Its Founder Raymond Reddy
Also based in Toronto, Ritual is an order-ahead app that connects restaurants with customers to offer a simple, time saving tool to place, pay for and pick up lunch orders for themselves and their workplace teams. Ritual works with more than 3,000 restaurants and serves customers in 10 cities across North America including Boston, Chicago, Houston, Los Angeles, Minneapolis, New York, San Francisco, Santa Monica, Washington D.C., and Toronto. Its mission is to help local restaurants to transition through the same digital transformation that is occurring in retail.
Ritual was founded in 2014 by Raymond Reddy, Larry Stinson and Robert Kim. Reddy previously built mobile commerce platform PushLife Inc., which he sold to Google in 2011. Reddy continued to work at Google, leading mobile product management for shopping and e-commerce. It was at Google that he saw the potential to better leverage a social application to unlock mobile commerce, leading him to then create Ritual.
The third-party food delivery market was estimated to be $13B in 2018, set to grow at a 13.5% annual rate, according to food industry strategy firm Pentallect. This is comparable to the overall U.S. food industry, expected to grow at only 3%. An increasing amount of this food spend is shifting to digital channels, specifically through mobile. As a different type of delivery model (consumer to restaurant), Ritual considers its biggest competition to be any service that makes the food ordering experience more seamless. Indirect competitors include food delivery apps and in-store payment and loyalty programs. Reddy argues that Ritual’s biggest competitor is the ‘old fashioned way’ of ordering – walking in, waiting, and paying. Changing behavior remains the company’s biggest challenge.
One of the biggest advantages for its restaurant customers is this delivery alternative, which reduces traditional delivery costs and helps to reduce congestion. Ritual’s revenue is generated through its restaurant customers, as it charges restaurants ~10% of each order’s total. This is much less than typical third-party delivery and ordering apps, which usually charge ~30% or more to restaurants. And interestingly, when a Ritual restaurant signs up its own customers, it will never pay fees on orders from these customers, which is a unique marketplace feature. Ritual also offers restaurants a large network of corporate customers, along with data and operational insights.
Ritual believes its network effect exists with each customer, turning one customer into an advocate for its brands and driving additional lunch orders and deliveries. For corporates, Ritual provides offices of all sizes lunch, after-hours dinner and wellness programs. Employers set a budget and schedule, such as giving employees Ritual credits on certain days of the week, and Ritual issues credits to employees for use at Ritual restaurants. Employees then order their meals with the credits.
Ritual’s feature ‘Piggyback’ allows others to join in on an order, and connects users with teams based on their workplaces and locations, adding a social element to ordering and picking up lunch. There are currently more than 44,500 teams from companies including Goldman Sachs, Oath, Spotify and SpotHero that have all formed on Ritual. Overall, the company has found that with Ritual, restaurants on the platform experience repeat customer visits and size orders increase 3-4 times, due to the ease of use, social features and transparent pricing structure.
Ritual’s network success was affirmed by its recent Series C investment round of US$70MM, led by Georgian Partners with participation from existing investors Greylock Partners, Insight Ventures, and Mistral Venture Partners. This was to expand engineering teams in Toronto and San Francisco. To-date, Ritual has raised $127.5MM in venture funding. The company continues to experience increases in the number of orders processed on a weekly basis. Year-over-year, Ritual added 2x growth of restaurant partners and expanded into eight new cities. It is currently tracking towards international expansion and to looks to repeat success in new cities and countries.
As a category, the restaurant technology ‘food chain’ represents a large opportunity for well-positioned companies. Delivery, along with well-integrated SaaS cloud platform offerings are being adopted around the world and attracting investment. Canada also has a number of important, innovative companies and founders in this fast-growing market. We look forward to following their progress over time.
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