We’ve often been asked why Incanto is not listed on OpenTable.com. For those of you not familiar with the service, OpenTable is the most successful online restaurant reservation portal on Earth; a place on the Web where diners can search for and make reservations at leading restaurants, via a browser or smartphone. Restaurants like Incanto that chose not to offer their seats through OpenTable find themselves in a shrinking minority.
Let me start by stating the obvious: the convenience and immediacy of booking a table online anytime day or night is beneficial to both diners and to restaurants. This was my belief nine years ago, when we first approached OpenTable to inquire about becoming one of its early customers. It’s also why we have found a way to offer Web-based reservations, through our own website, since we opened and why we’ve kept current and revisited OpenTable’s offerings each year, to re-visit our decision.
It’s possible, however, for convenience to come at too dear a price. I don’t mean that only as it relates to the short-term economic price, but also in the sense that sometimes, what may at first seem like a straightforward benefit can in fact require the sacrifice of something much more precious over the long run. That judgment has always been at the core of our concerns about OpenTable, which has to its credit done such a masterful job building its business that it now holds the dominant position here in the U.S. among providers of online reservation services, with a market share estimated at greater than 90%. Whether or not your restaurant is an OpenTable customer, it’s impossible not to feel its impact.
But the question isn’t about whether or not online reservations are themselves a good idea; OpenTable’s many accomplishments are proof enough that they are a great idea. OpenTable is a hugely successful multinational corporation, constructed over 12 challenging years, during which its management has skillfully out-executed and out-maneuvered its competitors to create a valuable business. How valuable, you ask? Well, OpenTable went public in 2009 (NASDAQ: OPEN) and as of September 30, 2010 it was priced at more than $1.5 billion. That translates to more than $100,000 for each contract it holds with the approximately 14,000 restaurants listed on OpenTable.com. Sadly, many small neighborhood restaurants may themselves not be worth as much as the value that has been placed on their future business with OpenTable.
The more important question is whether OpenTable’s role, as the Web’s nearly exclusive gatekeeper to this country’s restaurant seats, is a good thing for restaurants and their customers. Have the ascent of OpenTable and its astronomical market value resulted from delivering $1.5 billion in value to its paying clients, or by cunningly diverting that value from them? What does the hegemony of OpenTable mean both for restaurants and for the dining public in the long run?
Not being entirely sure of my own hypothesis – a few months ago I took an informal survey of several other restaurateurs here in San Francisco and in New York, all of whom offer seats through OpenTable, asking them about the value of OpenTable from the restaurateur’s perspective.
Only one of the dozen or so I spoke with said he felt that OpenTable increased the value of his restaurant and that he wouldn’t imagine opening a new project without it. The rest were less than happy. The recurring themes were the opinion that OpenTable took home a disproportionate (relative to other vendors) chunk of the restaurants’ revenues each month and the feeling of being trapped in the service, it was too expensive to keep, but letting it go could be harmful. The GM of one very well known New York restaurant group, which spends thousands of dollars on OpenTable each month, put it to me this way, “OpenTable is out for itself, the worst business partner I have ever worked with in all my years in restaurants. If I could find a way to eliminate it from my restaurants I would.” Another high-profile, 3.5-star San Francisco restaurateur told me he feels held hostage by OpenTable. For the past several years, his payments to them have been substantially more than he has himself earned from 80-hour workweeks at his restaurant. But he believes that if he stops offering it, his customers will revolt and many would stop coming to his restaurant. So he keeps paying, but carries a grudge and wishes for something better.
What are the actual economics of listing your restaurant on OpenTable? First and most importantly, the restaurant pays all the fees. Diners not only don’t pay any fees directly, they earn rewards for showing loyalty to OpenTable. This is the crux – and brilliance – of OpenTable’s business model: OpenTable has convinced restaurants to pay it substantial fees while it takes the customer relationship out of the hands of the restaurant and places control into OpenTable’s hands. Then, after having lent their names to the service, enabled OpenTable to attract online diners, and funded the construction of a powerful database of customers loyal to OpenTable, restaurants find that they themselves no longer own the customer relationship. Restaurants that want continued access to those diners now have to pay OpenTable for the privilege. This may be at the core of why many restaurateurs quietly resent OpenTable.
The access fees can be substantial, particularly for restaurants operating on thin margins. One independent study estimates that OpenTable’s fees (comprised of startup fees, fixed monthly fees, and per-person reservation fees) translate to a cost of approximately $10.40 for each “incremental” 4-top booked through OpenTable.com. To put that in perspective, consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%. This means that a table of 4 spending $200 on dinner would generate a $10 profit. In this example, all of that profit would then go to OpenTable fees for having delivered the reservation, leaving the restaurant with nothing other than the hope that that customer would come back (and hopefully book by telephone the next time).
In truth, the actual fees incurred for an “incremental” table may be higher than the $10.40 figure, which assumes that every reservation booked via OpenTable.com is an incremental reservation, i.e. composed of guests who would not have otherwise visited the restaurant and were seated on a table that would otherwise have sat empty for the evening. It’s easy to imagine that, had a restaurant not been listed there, at least some of those booking on OpenTable.com would have otherwise gone to the trouble to find that restaurant some other way.
OpenTable’s pitch to restaurateurs is that the 5% average restaurant profit margin applies only to schmucks who don’t offer reservations through their service. If you sign on with OpenTable, goes the pitch, you will fill more of those empty tables and see an increase in business, the marginal profits of which will more than justify OpenTable’s fees. Your restaurant will be more profitable than the measly 5% to which you have grown accustomed. This pitch is perfectly tuned to the psyche of the independent restaurateur; we always believe we can find a competitive advantage that will enable us to do it a just a little bit better than the guy across the street.
However, once everyone’s restaurant is listed on OpenTable.com, does it still provide that leg up over the guy across the street? Under the old conventional wisdom, restaurateurs considered OpenTable a competitive advantage, in which OpenTable would pay for itself by tapping into a new source of business. Under the new conventional wisdom, however, OpenTable is now considered a gateway to a desirable set of customers (you savvy online diners know who you are). Anyone wanting access to these customers must now pay this new per-customer tax, or risk failure. This is the hard-edged reality of the role OpenTable now plays within fine dining. By controlling access to a growing population of diners, it’s increasingly rare when an ambitious new restaurant decides it can forgo being a part of the service.
We live in the Golden Age of Google, in which Web-based services have transformed many consumer and business functions by making them easier, more accessible, and drastically less expensive. That’s ultimately the most perplexing thing about OpenTable: unlike so many other Web services, this one has actually driven up operating costs, not reduced them.
I am not yet convinced the current approach is healthy either for restaurants or for diners as a whole, over the long term. It is simply not credible to argue, on an industry-wide basis, that a solution that materially increases the operating costs of every restaurant (and therefore the cost of dining out) will also stimulate customers to eat out more frequently, on the whole. My suspicion is that it will actually have the opposite effect. OpenTable’s hefty fee structure (and resulting billion-plus-dollar market capitalization) may have something to do with its dominant market share in online restaurant reservations; there is not yet a strong, fully viable competitor to challenge its grip on its 14,000 customers. On the other hand, perhaps the high cost of doing business with OpenTable merely reflects a harsh reality for which restaurateurs have no one to blame but themselves: the truth that by permitting a third party to own and control access to the customer database, restaurants have unwittingly paid while giving away one of the crown jewels of their business, their customers.
In a perfect world, this situation would matter to you, the diner. It’s yet one more thing adding a hidden, substantial, and not-entirely-necessary cost to the act of dining out. If my unscientific survey is any indication, restaurants are starting to care deeply about this, because as costs beyond our control continue to rise, it means that that our guests’ annual dining budget purchases less value and affords fewer and fewer visits to our establishments. As guests dine out less frequently – for whatever reason – more restaurants will fall victim to what will be blamed on the “economy.” And being listed on OpenTable.com alone is not itself any guarantee that your restaurant won’t be the next to go under.
In the meantime, the next time you’re planning to dine out, consider picking up that 19th-century device, the telephone, and calling. I know I speak for many restaurateurs when I say that we’d love to hear your voice.