Online restaurant reservations company OpenTable filed for an IPO on Friday, revealing their finances for the world to see.  The SEC filing contains all the financial figures you would expect: revenue, expenses breakdown, details of the public offering, and also operational data. 

Brett Emerson wrote a fantastic blog post a few months ago (Behind the Curtain: Open Table) which gives a thorough evaluation of OpenTable from a restaurateur’s point of view.  Emerson is in the process of opening Contigo, a new restaurant in San Francisco and he lays out the pros and cons of OpenTable and shares his cost and volume expectations from the service.  Viewed from a restaurant’s pespective, the operational data in OpenTable’s finances gives an amazing amount of insight into the OpenTable system, especially when some analysis and number crunching is applied.

OpenTable Web Traffic and User Behavior

OpenTable makes their money from restaurants that pay a one-time installation fee for reservation software/hardware, a monthly subscription fee, and a fee for each restaurant guest seated through the service.

It’s public knowledge that OpenTable charges $0.25/diner booked via the restaurant’s website and $1/diner booked directly through opentable.com (the higher charge reflects opentable.com’s value as a customer referral tool).  The SEC filing tells us that these fees resulted in $17M of reservation revenue from 25M diners.  Pulling out my trusty TI-83 and solving this linear equation  ( 1*a+ .25*b = $17M  and  a + b = 25M diners) leads to the conclusion that 57% of diners book via opentable.com, and the remaining 43% book via the restaurant website. This tells us about the value of OpenTable as a marketing tool: being part of the OpenTable network yields roughly twice as many online reservations as a stand-alone solution.

Per-Restaurant Data

Excluding one-time installation revenues, total North American revenues for the first nine months of ’08 were $37.5M across 8,090 member restaurants, so the average restaurant pays OpenTable $515 each month (N.B. 8,090 restaurants is the midpoint figure across the reporting period: OpenTable began 2008 with 7,391 restaurants and grew to 8,788 restaurants.  I assume linear growth).  Broken down, this $515 consists of $281 in monthly subscriptions charges and $234 in monthly reservation booking fees.

For the reporting period, one-time installation revenues were $1.7M and there were 1,397 new restaurants.  Each new restaurant therefore pays an average of $1,240 in installation fees (this assumes no churn, that all growth is from new customers).

Does OpenTable deliver?

OpenTable seated 25M diners across 8,090 restaurants in the reporting period which means for the average restaurant, OpenTable fills 345 seats monthly or 14 daily (assuming the restaurant is open six days a week).

One of Emerson’s main concerns is the high cost of reservation fees:

Let’s assume most of the other two thirds of the restaurant’s guests book through Open Table. If successful, a 60-seat restaurant like Contigo could easily pay $1,000-1,500 a month to Open Table in cover charges.

Let’s examine this concern in detail.  Contigo has 60 seats.  Assuming tables can be flipped twice, 120 diners can be served each night.  We know OpenTable on average fills 14 seats a day, so OpenTable would be filling about 12% of the restaurant.  Earlier it was calculated that the average restaurant pays $234 in reservation fees.  Emerson’s figures (66% fill rate, $1000+ monthly fee) therefore probably overestimates OpenTable’s ability to fill tables.

International Figures

OpenTable has mainly concentrated their international efforts in Germany, Japan and the United Kingdom and so far international business represents a mere 5% of total revenues.  For the reporting period, an average of 696 restaurants were signed up, producing $1.7M in subscription revenue, $282K in reservation revenue, and a mere $76K in installation revenue.

Dividing the installation revenues across the 451 added restaurants shows an average installation fee of $155 which is significantly lower than the $1,240 that domestic restaurants pay.  This likely signifies that OpenTable heavily subsidizes equipment and installation costs in an attempt to gain traction overseas.

The monthly subscription charge that each restaurant pays is comparable ($270 internationally versus $281 domestically), but as you might expect given the early stage of international adoption, monthly reservation charges are significantly lower ($45 versus $234) and fewer diners are seated through the service (60 diners per month versus 345 diners.)

When both subscription and reservation charges are factored in, it’s revealed that although the average international restaurant spends less with OpenTable per month ($315 versus $515), they pay substantially more for each customer ($5.29 versus $1.49).

OpenTable has emerged as the leader in the US market, surviving the first dot-com bubble, gaining traction with restaurants, and beating out the competition (DinnerBroker.com, Foodline.com, Ireserve.com, iSeatz.com, and RestaurantRow.com and others).  It should be noted that OpenTable operates very profitably within the US — $6.7M profit on $39M revenue, a 17% margin.

Is another victory in the cards?  It’s certainly going to be a tough fight.  OpenTable lacks the first-mover advantage and faces intense competition.  There’s also a strong network effect working against them.  Already OpenTable has conceded Spain and France, closing their offices which had only recently opened in 2007.  OpenTable appears to be pouring every dollar they can into their international expansion and heavily subsidizing equipment costs which is the reason why the company as a whole appears to be unprofitable (and I suspect is the reason for filing for an IPO — to raise more money for their international push).  Looking at their international business, OpenTable posted losses of $6.5M on $2M revenue in the first nine months of 2008.  OpenTable, I wish you luck!

Market Sizing and Market Saturation

OpenTable includes some interesting estimates about the size of their market:

We believe based on our internal estimates that there are approximately 30,000 reservation-taking restaurants in North America that seat approximately 600 million diners through reservations annually.

Considering that OpenTable has signed up close to 10,000 restaurants, they have captured roughly 1/3 of the possible restaurant market — pretty impressive!

Extrapolating through the end of 2008, OpenTable seated 33.5M diners which means that 6% of all restaurant reservations are made through OpenTable — also really impressive!

Quantifying OpenTable’s Marketing Power

Advertising a restaurant in an effective manner is a difficult task.  Press, buzz, and word of mouth recommendations are great, but these aren’t something a restaurant can control.  Besides buying ads on Citysearch or Yelp, there’s not much to be done online (although Russ & Daughters did recently join Twitter!).  Unfortunately launching a search marketing campaign around the keyword “restaurant” doesn’t work too well.  OpenTable clearly realizes the tough position that restaurants are in:

Cost-effective marketing opportunities are limited. Typically, restaurants promote themselves through magazines and newspapers as well as online dining guides and directories. However, restaurants generally do not have the ability to track the number of people who ultimately dine in response to their advertisements, nor are the costs of these advertisements tied to the number of diners they attract. Therefore, restaurants usually are unable to measure or compare the effectiveness of these marketing channels.

Is OpenTable’s $1/diner fee fair?  Emerson suggests that it’s too high:

When a diner pays $40 to eat at Contigo, that dollar [fee per diner] equals about 2.5% of the cost of the meal. That’s significant in an industry where the average profit margin is less than 5%.

Interesting point.  But if you bought a $300 newspaper advertisement which caused 300 new customers to walk into your restaurant, wouldn’t you consider that a phenomenal return on your advertising spend?

The average restaurant spends $515 with OpenTable and gets 345 diners each month, so when all is said and done the true cost of the service is closer to $1.50/diner.  But keep in mind that 43% of the OpenTable bookings come through the website of the restaurant — these 148 diners have already decided to eat at the restaurant!  These customers exist regardless of whether the restaurant is subscribed to OpenTable.  The real value that OpenTable delivers, therefore, is the 197 NEW customers generated due to the marketing exposure on opentable.com.  Restaurants are really paying $515 to gain 197 new customers, which comes to $2.61 per customer.

Concluding his blog post, Emerson writes:

In my mind, the question of whether or not to sign up for Open Table boils down to whether or not I feel Contigo needs to take advantage of Open Table’s substantial marketing power.

The question restaurant owners should therefore ask themselves is this: Is acquiring customers at $2.61 per head a worthwhile investment?  And is there another method that can acquire customers for less?

Well there you have it!  A fascinating look at the business of online restaurant referrals and the insights derived from very basic operational data.

I’ll leave you now with this amusing quote from the SEC Filing about OpenTable’s competition: “Currently, our primary competitors in North America are the pen-and-paper reservation book used by most restaurants and the phone used by diners.”

As always, readers, I’d love to hear your comments and thoughts!

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Trick or Treat!

Our block consists of brownstones packed side-by-side, each about 18 feet wide.  As I watched the trick-or-treaters make their way down the block from house to house, the following occurred to me:  I was witnessing the most efficient candy collecting operation imaginable. Most homeowners were waiting on the bottom step with candy for the trick-or-treaters.  The rate of candy collection must have been upwards of 30lbs/hour!

Would you accept candy from these people?!

Most of my childhood Halloweens were spent in suburban Pennsylvania where the houses are spread far apart.  The amount of candy collected on Halloween Night was constrained by a limited window of opportunity (typically from 5:30pm to 8:30pm) and the maximum distance we were able or willing to walk before we started getting blisters on our feet!  We probably collected candy at about 1/5th the rate that I witnessed last night in Brooklyn.

The main limiting factor in Brooklyn, or any residential neighborhood with tightly packed residential units, is essentially the size of the candy bag or the willingness of the child to carry the increasingly heavy bag.  Perhaps Brooklyn trick-or-treaters stop at home throughout the night to empty their candy bags?

Late in the evening, the candy started running low. Why don’t I “take a quick trip around the block and restock our dwindling supplies?” half-joked my miserly landlord…a brilliant strategy, but one that certainly wouldn’t work in suburbia!

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