As if the online food-delivery industry wasn’t convoluted enough, it turns out there is yet another intermediary.
Unlike
DoorDash
and
Grubhub,
15-year-old Olo isn’t a name known to your average eater. From a consumer’s perspective it mostly exists on the back end of their experience ordering online from a restaurant, helping chains with things such as third-party order integration and fulfillment. It competes with online delivery platforms in some facets of its business, but counts them as significant customers in others. It also boasts another key distinction: Its business is designed to be more like a software-as-a-service company.
Food delivery, but make it SaaS, essentially. In its initial public offering filing last month, Olo gave investors a taste of the profits that most food-delivery platforms haven’t been able to sustainably achieve. Even DoorDash, which grew revenue by 226{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} in 2020, still lost money for the year. But Olo said it made just over $3 million of net income in 2020 on revenue that grew at less than half the rate of the leading U.S. food-delivery platform.
It is unclear, however, how easily profits can recur. Unlike a typical SaaS model, where a business has significant visibility into future revenue thanks to contracts that pay up front, Olo calls itself a “transactional SaaS” model, with revenue coming not only from subscriptions but also from fees per transaction. The latter revenue source is important because it is now the majority of its business: While Olo says less than 7{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} of its revenue came from transactions in 2018, that percentage grew to nearly 57{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} in 2020.
That mix of business alone should have SaaS investors biting their nails. But things get even more dicey when you consider that the very food-delivery platforms which expect to see significant moderation in their pace of growth over the next year are some of Olo’s largest customers. According to its filing, Olo provides DoorDash access to its order fulfillment, aggregator and channel management solutions. Transaction revenue from DoorDash accounted for at least 19{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} of Olo’s overall top line last year, up from 2.6{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} in 2018. That likely means DoorDash’s pandemic-driven surge in business was a key factor in Olo’s ability to turn profitable—Olo lost money in the two years before 2020.
Slowing growth isn’t the only risk related to DoorDash. Olo also discloses in its public offering filing that it is being sued by the company, which is alleging a breach of contract relating to fees. While Olo says the allegation is without merit, the more than $7 million DoorDash is seeking wouldn’t be insignificant if awarded. Further, the suit could threaten to injure what is clearly a significant financial relationship for Olo.
Olo may be the latest food-commerce-technology company to come to the public markets, but it is hardly new. Predating DoorDash, Uber Eats and even Grubhub, the company says its name is actually an acronym for “online ordering,” which back in the dial-up era used to be three words.
Olo began its business well ahead of the times, sending text message orders to printers before the world had iPhones. Investors now have to wonder whether it has gotten ahead of itself.
Write to Laura Forman at [email protected]
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